http://blogcritics.org/archives/2004/10/25/164856.phpThere are different national sales tax proposals floating around, but I will try to give an overall summary. The national sales tax plan would set a flat sales good purchased. There are different ideas of what this would like - do services get taxed? What about homes? Healthcare? Used goods? But generally, we would expect to pay a percentage on everything that we purchased. Fairtax.org states that a 23% rate on all goods would be necessary to meet the nation's current budget. Along with this tax rate, most proposals include a rebate. In the Fairtax.org plan, the rebate would be a flat amount based on the poverty level, which would mean a family of four would receive a $361 monthly rebate, regardless of your income.
The system would supposedly eliminate tax loopholes, plus it would also enable to the government to collect taxes from undocumented workers and other black market industries. Because you do not need to see income, the black market incomes still need to pay taxes on the good that they purchase, though one theory on this says the opposite. That a large sales tax increase would drive more industries into the black market and create more under-the-table deals. The first problem with this system is the 23% tax-inclusive rate. This rate is actually somewhat misleading:
It turns out that the group's purported 23 percent tax rate is misleading and hypothetical. It came up with that number by dividing the sales tax by the cost of a purchase plus the tax. So if the tax on a $100 purchase is $30, the group prefers to call it a 23 percent "tax inclusive rate" ($30 divided by $130). Ever hear of computing a sales tax like that?
The rate is really a 30% tax-exclusive rate, which is a much more accurate way to look at it. The next problem with this rate is that many feel that it is way too low. First, this rate would include the government paying a 30% rate on everything that they buy. That would mean that the government would be paying taxes to itself, which in turn would really boost the necessary rate to over 40%. But even this is too low by many estimates. Some say that the rate would be as much as 56%.
http://www.ncpa.org/pi/taxes/jan98g.htmlAmericans for Fair Taxation has kicked off a campaign for a national sales tax to replace federal income taxes and other taxes. But how high would the sales tax rate have to be? Higher than sales tax supporters claim, says Robert S. McIntyre of Citizens for Tax Justice.
The AFT says it would take a 23 percent sales tax rate to raise the same amount of federal revenue. However, McIntyre contends:
At 1995 levels, a new sales tax would have to raise $1.36 trillion to replace all federal income taxes, payroll taxes and estate and gift taxes.
Under its plan, taxable spending would be $4.6 trillion -- after accounting for a partial family rebate of the tax.
Thus the sales tax rate would have to be $4.6 trillion divided by $1.36 trillion -- which yields a tax rate of 30 percent, not 23 percent.
AFT came up with the 23 percent rate by dividing the sales tax by the cost of a purchase plus the tax -- which yields a "tax inclusive rate." This is not the usual way of calculating sales taxes, says McIntyre.
Furthermore, almost one-third of the projected revenue is supposed to come from taxes paid by government on its purchases -- taxes it would pay to itself. Without those "phantom" tax payments, claims McIntyre, the rate would have to jump to 42 percent to break even.
Finally, a quarter of the remaining sales tax revenues come from hard-to-tax items, such as free checking accounts -- and setting aside taxes on those items, claims McIntyre, the rate would have to be 56 percent.