TAXFOUNDATION

TAX FEATURESMarch 1996 Volume 40, Number 3

National Sales Tax Proposal Adds Variet yto Debate Over Extent of Tax Reform

The flat tax and Uniform Savings Allowanc e(USA) tax bills in Congress must now share th ereform spotlight with a new plan that goes fa rbeyond what either of the earlier proposals rec-ommend. The National Retail Sales Tax Act, in-troduced by Reps . Dan Schaefer (R-Colo .) andBilly Tauzin (R-La .), would replace the federalincome tax system, the estate and gift tax, andall non-trust fund federal excise taxes with a

sales tax on all goods and services . In an effortto offset the tax burden on low-income taxpay-ers, the Act proposes a refund mechanism (ad -ministered through the payroll tax system)based on officially designated poverty levels fo rfamilies of different sizes . The tax rate is set at15 percent.

In the Tax Foundation's latest Special Re-port, "Analysis and Summary of the National Re -tail Sales Tax of 1996," Senior Economist Arthu rP. Hall demonstrates that if the Schaefer-Tauzi nsales tax plan were the law in 1997, it could re -duce the tax-related burden for the average tax-payer by an estimated 37 percent — from$8,399 to $5,276 (see Chart 1) . The reductio nresults from both a lower tax bill and the tax -payer savings that would result from reducin gthe high paperwork cost associated with the in-come tax . The lower tax bill results from th efact that government expenditures would besubject to the sales tax under the Schaefer -Tauzin plan .

A major element of the tax reform debate ingeneral, and the Schaefer-Tauzin sales tax planin particular, is the desire for a more simple, les sIRS-intrusive tax system, and the reduced com-pliance costs that would accompany such a sys-tem. Dr. Hall has estimated that the Schaefer-Tauzin sales tax plan could reduce the curren tcost of compliance — estimated to be abou t$157 million for the federal income tax — byabout 95 percent, to $8 .5 billion. The bill

Sales Tax continued on page 6

Chart 1 : Total Individual Tax Burden under Current Incom eTax System and Proposed National Sales Tax System

C urrentSystem Sales Ta x

Source : ] axFoundation.

$9,00 0

$8 ,000

$7,000

$6 ,00 0

$5,000

$4 ,000

$3 ,000

$2,000

$7,000

$0

Democratic Principlesof Tax Reform

Rep. Jiang McDermott (D-Washington) 4-5

2

Tax Foundation Increases Outreach with New Web Sit e

http://www.taxfoundation.org marks the spotAlmost six decades ago, th e

Tax Foundation was launched tohelp disseminate useful informa-tion about tax and budget polic yto the American public . Distribut-ing publications and relying onmedia publicity were the Founda-tion's primary methods of educat-ing the public, along with occa-sional conferences and seminars .

Now a new era in the organi-zation's history has beenlaunched, with the introductionof the Tax Foundation's first offi-cial World Wide Web site on theinternet . While the internet-which links millions of personalcomputers around the globe—may in decades to come com-pletely alter the way information is disseminated ,for the time being it provides a practical supple-ment to the way the Tax Foundation publicize sits research .

The address for the Tax Foundation's we bsite is http://www.taxfoundation.org . The Foun-dation's e-mail address is taxfnd@intr .net .

For those unfamiliar with this new area o fcommunications, the World Wide Web is thegraphic portion of the internet, which provides the publicdirect access to information directly over computer lines

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from public and private organizations . Organization slike the Tax Foundation establish "web sites," whic hhave permanent addresses .

Visitors to the Foundation web site will immediatel ybe greeted with last year's Tax Freedom Day, feature dprominently on the home page . (The 1996 date will no tbe posted until after the annual April 15 Tax Freedo mDay announcement .) A briefoverview of who we are follows ,and then the home page pro-vides visitors with five options :

• An "Information" page, of-fering general information abou tthe Tax Foundation for visitorswho are not especially familiarwith the organization . This in-cludes sections explaining "TheTax Foundation Story," "Why isthe Tax Foundation unique?" ,and "What does the Tax Founda-tion stand for?" This last sectionincludes a listing of the Founda-tion's long-established "Princi -ples of Taxation ."

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• A "How to Help" page, which provides visitor sinformation about how contributions can be made tothe Tax Foundation, to further our educational ef-forts . Included on this page is a list of publicationswhich can be purchased individually or by subscrip-tion . (Each publication cite is "linked" to the "Publi-cation List" page, discussed below .) The page also in-cludes a form, which — for individuals interested inmore information about how to help — can be fille d

out and e-mailed instantaneously t othe Tax Foundation .

• A "Tax Bites" page, whic hprovides the latest and most re -quested research data published bythe Tax Foundation . For example ,visitors can pull up the Founda-tion's latest information about suchissues as Tax Freedom Day, th e

typical family' stax burden, and

W tax reform bysimply clickingon a highlightedphrase. Each ofthese issuescomes with it sown set of color-ful graphs, whichcan be instantlydownloaded .The Tax Bite spage also featuresrecent news re -leases . For indi-viduals seekin ginteresting andinformative dataon how taxes af-

fect Americans, this particula rsite will prove very useful .

• A "Publications List "page, which features a com-prehensive listing of the vari-ous Tax Foundation publica-tions available, from Tax Fea-tures to Facts & Figures an dBackground Papers .

• A "Subscribers Page, "which — though currently

under construction — will allow people to subscribeto Special Reports and Tax Features . Then, instead o fwaiting for their delivery via the mail, the publication scan be pulled right off the internet, as soon as they ar epublished .

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3

Federal Tax Compliance Costs Climb to $225 BillionTax Foundation Testifies Before House Ways & Means Committee

Complying with the federal tax system will cost theAmerican public almost $225 billion in 1996, according to theTax Foundation's latest analysis of the nation's tax compliancecosts . The rules and regulations for the federal income ta xalone account for about $157 billion of this .

In testimony before the House Ways & Means Committe eon March 20, Tax Foundation Senior Economist Arthur P . Hal lobserved that the cost of compliance is tantamount to a ta xsurcharge on all taxpayers . "One way to comprehend th emagnitude . . .of the $157 billion federal income tax surcharg eis to imagine wantonly destroying every vehicle produced b yFord Motor Company and more than one-third of the vehicle sproduced by the Chrysler Corporation," Dr. Hall told mem-bers of the committee .

Dr. Hall's calculations show that two-thirds of the federalincome tax compliance costs are borne by U .S . businesses .Relative to asset size, small corporations (those with up to $ 1million in assets—90 percent of all U .S . corporations) bear acompliance cost burden at least 27 times greater than the larg-est U .S . corporations (those with $10 billion or more in as -sets) . In fact, in 1992, the most recent year that complete in-come tax revenue data is available, small corporations on av-erage had to pay at a minimum $724 in compliance costs fo revery $100 they paid in income tax . (Dr . Hall notes that, forthose small corporations that did not end the year in the red ,the figure was $377 for every $100 .)

Dr . Hall told the Ways & Means Committee that replacingthe federal income tax with any one of the three predominan talternative tax systems being discussed — the Armey-Shelb yFlat Tax, the USA Tax System, or the National Retail Sales TaxAct — would dramatically reduce America's tax-related bur -den without necessarily sacrificing any federal revenue . (Seechart. )

The flat tax that Rep . Dick Armey (R-Texas) and Sen . Ri-chard Shelby (R-Ala .) introduced could reduce complianc ecosts by 94 percent, to $9 .4 billion, according to Dr . Hall .The USA Tax System, sponsored by Sens . Sam Nunn (D-Ga . )and Pete Domenici (R-N .M.), could lower the surcharge by 7 7percent, to $36 billion . And a national sales tax such as tha tintroduced by Reps . Dan Schaefer (R-Colo .) and Billy Tauzi n(R-La .) could reduce compliance costs by about 95 percent, t o$8.2 billion — although the entire burden of this sum woul dfall on retail and service businesses . (As written, the Schaefer-Tauzin bill would compensate businesses for over half thi scost .)

Dr . Hall's testimony detailed how compliance costs stemdirectly from the complexity of the tax system . For example ,in 1954 the federal income tax law comprised 103 code sec-tions . Today, that law comprises 698 code sections, a 57 8percent increase . More to the point, the number of wordsdetailing income tax laws has grown 370 percent since 1954 ,and the words detailing income tax regulations — which pro -vide taxpayers with the guidance they need to calculate thei rtaxable income — have grown 753 percent .

On the other hand, the Flat Tax and the USA Tax elimi-nate the timing-related complexities associated with determin-ing when to recognize business income and expenses for taxpurposes . Both plans accomplish this by moving to acashflow tax base, rather than an accrued income tax base .This simply calls for the totaling of business receipts and the nsubtracting off purchases from other businesses .

Average Costs of Tax Compliance for Smal lBusiness Relative to Taxes Paid, 1992

Source : Tax Foundation .

$9 ,00 0

$8,00 0

$7 ,00 0

$6,000

Projected Compliance Costs fo rCurrent Income Tax System andAlternative Tax Systems, 1996

$157 .0

Source : Tax Foundation .

$1 60 . 0

$140. 0

$1 20 . 0

$100 , 0

$80. 0$ 60. 0$40 . 0

$20 .0

$0 .0

4

DemocraticPrinciples ofTax Reform

By Rep. Jim McDermott (D-Wash.)

FRONT &CENTER

No one in Congress disputes theneed to reform our current tax cod eand everyone wishes their taxes weresimpler and fairer . But, Congres sshould not rush to replace our curren ttax system just because it's notperfect . We should not let perfectio nbe the enemy of the good. Our taxsystem works reasonably well fo rmost Americans. The changes whichneed to be made can be done withou tdestroying the integrity of the systemor resorting to election year politics .

The Chairman of the House Waysand Means Committee, Rep. BillArcher (R-Texas), recently announcedthat the Committee will hold as manyas 20 hearings this year on the nee dfor fundamental tax reform . I hopethese hearings will be conducted withbipartisan support and will be anunbiased evaluation of all the taxreform options and issues . AlthoughI believe that there is a need for tax

reform, irresponsibly trashing ourcurrent tax code by holding hearing swhich pander for political votes coul dbe dangerous .

Our current tax system has an86 percent rate of voluntary compli-ance — a level that is the envy of therest of the world . A congressionall ycreated atmosphere of hostilitytoward the Internal Revenue Serviceis misguided and may lead to poten-tially harmful consequences . Wemust remember that for any ne wtax system to be successful, it wil lalways need to rely upon the volun-tary compliance of individuals an dbusinesses .

Tearing our current tax codeout by the roots and replacing i twith a new system is easier saidthan done. Comprehensive reformof the tax code should aim t oachieve a set of principles that wil lcreate a new tax system that i ssimpler to administer, fairer to allwho pay taxes, and invigorates theeconomy. The four principles o ftax reform that any new tax syste mmust embrace are : revenue neutral-ity, distributional neutrality ,simplicity, and competitiveness .Any new tax system that does notadhere to these four basic prin-ciples cannot honestly be called taxreform .

In debating tax reform, weneed to remember that this is adebate about how to raise taxdollars and not aobut the appropri-ate size of government . As theongoing budget negotiations haveillustrated, Congress and thePresident cannot even agree onhow to eliminate the deficit i nseven years with our curren trevenue stream. Tax reform shouldnot be misused as a vehicle t oreduce the size of government b ydecreasing the revenue available torun the government .

Not one Republican tax reformproposal has been introduced thatis revenue neutral . The Treasur yDepartment estimates that Rep .Dick Armey's (R-Texas) flat taxwould add $186 billion per year tothe deficit . Congressional propos-als calling for a national sales taxalso offer false promises . A recentreport released by Senator ConnieMack (R-Fla .), Chairman of the JointEconomic Committee, states thatfor a national retail sales tax to b erevenue neutral, it would require ,at a minimum, a tax rate of 3 2percent to 50 percent on all goodsand services . Senator Mack's reportdirectly contradicts the claims ofMembers of the House of Represen-tatives who have introducedNational Retail Sales Tax legislatio nwith a 15 percent tax rate on allgoods and services .

Even more important tha nrevenue neutrality for tax reform i sdistributional neutrality . Democratsfirmly believe that each incom e

in debating tax reform, we need toremember that this is a debate abouthow to raise tax dollars and not aobu tthe appropriate size of government.Tax reform should not be misused asa vehicle to reduce the size of govern-ment by decreasing the revenue avail-able to run the government.

5

interest, which may no longer b edeductible, and businesses will needtransition relief to deal with thetrillions of dollars of unused taxcredits and loss carryforwards . Inaddition to being very costly, transi-tion rules by their nature are any-thing but simple . Inadequat etransition relief for any one segmentof the economy has the potential t odoom any effort to adopt a new taxsystem .

The final principle that any newtax system must embrace is competi-tiveness . Our current tax systemdoes nothing to enhance the com-petitiveness of American companiesin global markets . Under the rules ofthe World Trade Organization, onlyindirect taxes, like a value-added tax(VAT), can be adjusted at the border .As the U .S . economy becomes mor eclosely linked with the globalmarketplace, only a border-adjustabl etax system will promote the competi-tiveness of American companies andinvigorate American exports .

Under a flat tax, U .S . export swould be disadvantaged oversea sbecause they would bear the costs ofthe flat tax in addition to the foreig nVAT. Some proponents of the flattax have argued that the currenc yexchange rates would adjust them -selves to avoid disadvantaging U .S .products . Whether or not this wouldin fact occur is anyone's guess, but inmy view, it is not good public policybecause it assumes a decline in th evalue of the dollar .

Real tax reform is possible, but itwill involve a lot of hard choices andnot political gimmicks . I am confi-dent that if Congress embraces thefour essential principles of taxreform—revenue neutrality, distribu-tional neutrality, simplicity, andcompetitiveness—we can all worktogether to successfully reform thenation's tax system in a way which i sbeneficial to both taxpayers and ou rnation's economy .

The Tax Foundation invites a nationalleader to provide a "Front and Center "column each month in Tax Features. Theviews expressed in these columns are notnecessarily those of the Tax Foundation.

category should continue to pay thesame proportion of taxes under an ynew tax system as they do now .The concerns about distribution o fthe tax burden are particularlysensitive since middle-incom etaxpayers have seen an 11 percenterosion on their real wages since th elate 1970s . Any proposal whic hwould exempt all interest, dividend sand capital gains from taxation isunfair to working Americans wh oare supported by salaries, wages, o rtips . Even Senator Bob Dole (R-Kan.) has stated that tax reform willnot be used as a vehicle to redistrib-ute the tax burden among incomeclasses .

The third required element ofany new tax system is simplicit .Although many of the tax refor mproposals embrace simplicity, theydo so by eliminating all of thepersonal adjustments, deductions

Democrats firmly believe that eachincome category should continue topay the same proportion of taxes un-der any new tax system as they donow. Any proposal which would ex-empt all interest, dividends and capitalgains from taxation is unfair to work-ing Americans who are supported bysalaries, wages, or tips.

and credits currently in the taxcode. Furthermore, under a flat tax ,all simplicity vanishes unless thestates adopt a similar flat tax . Theunlikeliness of this happeningmeans that taxpayers will still haveall of the complications of thecurrent federal income tax to dea lwith, plus two new federal taxes :the flat tax on individuals and th eflat tax on businesses .

Adoption of any new tax systemwill require a set of complicate dtransition rules in order to provid erelief for both individuals andbusinesses. To avoid huge losses ,individual taxpayers will needtransition relief for home mortgage

6

What GeneratesGoodwill?New StudyExamines Roleof Advertising,Research andDevelopment

A newly published Ernst & Young/Tax Foundation Visiting Professo rstudy concludes that advertising an dresearch expenditures contribute sig-nificantly to goodwill of companie sacquired in purchase transactions . Foracquired firms that do not spend onthese items, however, the source o fgoodwill remains unknown .

In their study-titled "What Gener-ates Goodwill?"--Professors Frances L .Ayres of the University of Oklahomaand Betty R. Jackson of the Universityof Colorado examine the relation be-tween purchased goodwill and ac-quired firms' expenditures on advertis-ing and research and development .

The authors recognize that the problemwith goodwill, from both a tax and a fi-nancial accounting perspective, stem slargely from the fact that the transac-tions leading to recognition of goodwil lare limited to those in which an exist-ing company is purchased in its entire-ty. From a tax perspective, the issue srelate to whether the current rules re-garding amortization of goodwil lachieve an economically efficient resul tas measured by tax rates on goodwilland other intangibles relative to rate son other assets . Determination of theappropriate tax treatment depends in -

Goodwill continued on page 7

Sales TaxContinued from page 1

would reimburse businesses for over50 percent of their compliance costs .

The estimated 1997 sales tax baseunder the Schaefer-Tauzin bill amount sto $6.4 trillion . With this tax base, a13 .82 percent sales tax rate could re -place the revenue generated by the indi-vidual and corporate income tax, the es-tate and gift tax, and all non-trust fun dexcise taxes, assuming that there wa sno refund mechanism associated wit hthe sales tax system . However, th eSchaefer-Tauzin includes a refund mech -anism that increases the revenue-neutral

sales tax rate to 16 .42 percent . Reps .Schaefer and Tauzin chose a flat rate of15 percent .

The national sales tax proposal pro-vides for a rebate for individuals an dfamilies, calculated by multiplying thesales tax rate by the official poverty lev-el for families of different sizes . For ex-ample, a family of four would earn a re -bate of $2,410 - the 15% tax rate mul-tiplied by the estimated $16,070 pover-ty level for a family of rour. In all, wageearners would receive a total refund ofan estimated $153 billion if the planwere in effect in 1997 .

The intent of the Family Consump-tion Refund is to generate a progressivedistribution of the sales tax burden .

Chart 2 demonstrates the result . TheSchaefer-Tauzin sales tax plan has a pro -gressive tax burden distribution, but i tis far more proportional than the distri-bution of the current system, whic hmainly represents the income tax system .

The most striking aspect of Chart2, however, is the reduction in the indi-vidual tax burden under the sales ta xsystem. The key reason for this reduc-tion is the fact that the tax on govern-ment expenditures accounts for almos t20 percent of the revenue generated bythe sales tax plan. This result implie sthat the purchasing power of the gov-ernment is reduced by 20 percent . I f

Sales Tax continued on page 8

Chart 2 : Comparison of Total and Average Tax Burdens Under Current Tax Syste mVersus Schaefer-Tauzin National Retail Sales Tax Pla n

Adjusted Gross Income

CurrentSystem :

Tota lTax Burden *

($Million)

Sales Ta xSystem :

Tota lTax Burden* *

($Million)

Curren tSystem :Averag e

Tax Burden

Sales Ta xSystem :Averag e

Tax Burden

CurrentSystem :Averag eTax Rate

Sales Ta xSystem :AverageTax Rate

$1 under $25,000 $60,519 $61,422 $939 $953 6.7% 6.7%$25,000 under $50,000 175,386 141,544 5,616 4,532 13 .0 9 . 6$50,000 under $75,000 162,092 129,475 10,445 8,343 14 .2 10 . 3$75,000 under $100,000 106,472 78,305 17,144 12,609 16 .5 10 . 7$100,000 under $200,000 131,636 94,290 29,513 21,140 18 .3 11 . 4$200,000 or more 242,046 143,099 174,440 103,130 27 .5 12 . 9

All Taxpayers $886,847 $647,054 $7,136 $5,207 15 .9% 10.4%

* Llcludes income taxes, estate and gift tax, non-trust fund excise taxes, capital/labor split distribution of business tax burden .** Includes tax liability net of Family Consumption Refund . Government consumption expenditures account for $162,958 million in sales tax revenue .Source : Tax Foundation .

7

Goodwill

trinsically upon the tax treatment giv-en to the expenditures that create in -tangibles . From a financial accountingperspective the issues relate to deter-mination of an appropriate amortiza-tion period for goodwill .

Using mergers from the 1975-1992period, the authors examined the rela-tionship between purchased goodwil land preacquisition expenditures by thepurchased firms on advertising and re -search and development . Intangibleassets generally are ignored during de-velopment, say Professors Ayres andJackson, because the conservatism bia sreflected in financial reporting, cou-pled with a desire to find tax write -offs, provides little incentive for a com-pany to try to value or report in anyway self-developed intangibles . Thisbias causes management to be largelyunaware of the level and value of acompany's intangible assets until it be -comes involved in a potential busines scombination . Goodwill often is attrib-uted to a variety of factors, includinglocation, management quality, and pro-prietary knowledge, which may or maynot relate to costs that are typically ex-pensed for tax purposes .

The results of this research strong-ly suggest that advertising and R&D ex-penditures are a significant source ofpurchased goodwill . The authors alsofound many firms that report no ex-penditures on either advertising orR&D report significant goodwill .

From a tax perspective the find-ings support the assumptions that al lcosts that create and maintain intangi-ble assets are tax deductible as in-curred, at least for some firms . It maybe appropriate to examine the sourceof purchased goodwill in determiningthe tax treatment to the purchasin gfirm. Goodwill generated by other ex-pendituress should be evaluated andperhaps treated differently .

The results also indicate that capi-talization of advertising and R&D maybe theoretically superior to existing ac-counting practices . The issue then be-comes one of determining the appro-priate amortization period. A third is-sue, observe the authors, is whethe rthis suggests alternative tax treatment sof advertising or R&E .

Riding the Tax Reform Fence

Assorted groups are deciding at this early datewhether they favor tax reform or not . This, before theyear's hearings in the tax writing committees have oc -curred, before any proposal has enough flesh on thebones to assess its effects even provisionally. With solittle information available, deciding yea or nay on ta xreform is either Medal of Honor courageous or very premature .

This rush to judgement is all the more amazing when positions are develope dbased on transition issues about which next to nothing has been said by most tax re -form proponents .

Most, though certainly not all, of the current crop of tax reformers barely pay lipservice to transition . This is a mistake. Transition is important politically and econom-ically . Even if the basic outline of the current system is maintained and reform occurswithin that framework, transition will still be vital to thousands of taxpayers . If thenew system is radically different, the transition will likely be that much more compli -cated and that much more important .

Many opponents of tax reform have latched on to the absence of transition rule sas their cause celebré . They choose to characterize the absence of transition as oppo -sition to transition by the flat tax's advocates . Flat tax advocates have said little abouttransition for two main reasons—they're still trying to explain the benefits of the basi csystem, and they don't have the expertise to identify problems and solutions . Even inthe case of the USA Tax proposal, which makes an honest attempt to deal with impor-tant transition issues, the imperfections in the suggested transition rules and the ab-sence of others are deemed by some to be sufficient reasons to oppose the plan .

A lack of proper transition rules could impose great and capricious hardships o nboth individual and business taxpayers . Of course, these rules are often expensive ,but to the greatest extent possible taxpayers should be protected against significan tand unexpected tax burdens based on previous transactions . It would be wrong t openalize one group of taxpayers solely on the basis of prior transactions .

Some transition rules are fairly easy, and cost less than you might expect . Othersare going to be a real problem . An example of the former is the interest expense onpreviously incurred debt, whether issued by a business or individual . Even with a flattax that prospectively exempts interest income and denies a deduction for interest ex-pense, is there really any question that home mortgage or business interest expens ewon't be grandfathered? Of course not . Fortunately, as interest income on previouslyissued debt would probably continue to be taxable even under a flat tax, the revenu ecosts of this transition would probably be slight .

Likewise, transition relief will be available to taxpayers who haven't yet taken al lthe depreciation available on existing plant and equipment . Past tax reforms have al-lowed taxpayers to continue to use the system in place when the asset was pur-chased. Is there any reason to believe businesses won't be able to continue to tak ethese deductions on existing assets? Of course not . And yet, opponents of the flat taxin particular, and tax reform in general, have used the lack of explicit transition i nsome proposals to scare groups of taxpayers into opposition to tax reform overall .

There is a strong tendency, particularly among the experts who make their livingsorting through the details, to focus on the details at the expense of the big picture .The devil is in the details, but it's too early for an inquisition . Economic growth ha sbeen stunted for decades. Our national saving rate is low. We must invest more an dmore wisely to remain competitive in the world economy . Our tax system costs anunreasonable amount to administer and comply with . A sensible tax reform bill won' tsolve these problems, but there may be no other single change in public policy tha tcan have a more beneficial effect sooner.

JD. FosterExecutive Director& Chief Economist

8

TAX FEATURES

Tax Features (ISSN 0883 -1335) is published monthlyby the Tax Foundation, anindependent 501(c)(3 )organization chartered inthe District of Columbia .Annual subscriptions to thenewsletter are $15 .

Co-ChairmanDominic A . Tarantin o

Co-ChairmanThe Honorable Jim Mille r

Chairman, ProgramCommitteeE . Noel Harwerth

Distinguished FellowThe Honorable Bill Frenze l

Executive Directorand Chief Economist

J .D . Foster

Administrator and Director,Foundation DevelopmentC . Gaye Bennett

Adjunct FellowCharles E . McLure, Jr .

Tax CounselLynda K . Walke r

Director, CorporateDevelopmentReneé Nowlan d

Editor andAssociate Director/Communications DirectorStephen Gold

Tax Foundatio n(202) 783-2760 Te l(202) 942-7675 Fax

Sales Tax

Continued from page 6

taxpayers became dissatisfied by the resultingreduction in government "services" and de-sired to hold government purchasing power a tcurrent levels, the result would be like exempt-ing the government sector from taxation . Suchan outcome would mean a 25 percent increase inthe sales tax rate to 18 .8 percent .

The current system includes the burden sof the individual and corporate income taxes ,estates and gift taxes, and non-trust fundexcise taxes. In order to make distributionalcomparisons between the income tax-dominat-ed current system and the sales tax, Dr. Hallhad sales tax burden calculations start with tax -payers' income. Rather than estimating con-

sumption expenditures directly, income tha twould be used for consumption was estimat-ed instead . The tacit assumption underlyin gthis estimation approach is that taxpayers wil luse all of their income for consumption onc ethey have put some of their income into sav-ings and made certain untaxed payments .The primary list of untaxed payments in-clude: federal payroll taxes, state and loca lincome taxes, state and local property taxes ,mortgage interest payments, and charitabl econtributions . (Mortgage interest payment sand charitable contributions are explicitly leftuntaxed by the Schaefer-Tauzin legislation .Home purchases are subject to the sales tax .But the legislation specifies that the tax o nhome purchases may be amortized over a 30-year period . )

TAX BIT E

Source : Tax Foundation .

Effective Total TaxRates for FourTypical AmericanFamilies, 1995

45,o%

4 0 .0 %

35.0%

30.0 %

25.0 %20.0%

10.0%

5.0 %

0 .0 %

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