Flirting with a national sales tax

DSN Retailing Today, Feb 28, 2005 by Ken Rankin

The president's plan for private Social Security investment accounts--a proposal he outlined during the State of the Union address earlier this year--created a firestorm of controversy that seems likely to continue on for months.

In contrast, however, the public, the press and the politicians have all but overlooked a separate and potentially even more far-reaching initiative that was advanced during that same speech: the president's proposal to overhaul the current federal tax system.

Retailers concerned that they may be saddled with a new federal sales tax have reason to worry about the administration's flirtation with tax reform. Although he hasn't specifically endorsed the establishment of a national consumption tax as a replacement for the federal income tax, it's pretty clear that's the direction the president is tilting.

If anything, the president leaned even further in that direction during his State of the Union address by describing the income tax as an "archaic and incoherent" system and continued on by saying that it was "created to meet the needs of an earlier time."

The White House has already taken action to back up that rhetoric. A new presidential task force on tax reform has already been appointed, and that group is under orders to issue recommendations for streamlining the tax system no later than July.

The recommendations from that bipartisan task force may well provide the White House with enough political cover to advance legislation calling for the creation of a national tax on retail sales.

While the administration has decided to wait for the task force report before pushing for tax reform, some consumption-tax supporters in Congress are not showing the same patience.

Sen. Saxby Chambliss, R-Ga., has already introduced legislation aimed at creating a stiff new federal consumption tax to replace all personal and corporate income taxes, as well as all payroll taxes, estate and gift taxes and capital gains taxes.

The price tag for this massive streamlining of the federal tax code: a whopping new 23% federal tax on the sale of all goods and services--a plan that would trigger overnight increases in the cost of everything from haircuts and housewares to golf clubs and girdles.

Supporters of the Fair Tax Act of 2005 contend that the changes mandated by this legislation would be "revenue neutral"--the government would wind up with the same amount of tax income that it currently receives. At the same time, they maintain that the typical taxpayer will come out ahead under this approach because the cost of administering and complying with a consumption tax would be considerably less than under the current system.

The problem for retailers is that even if consumers wind up with as much (or even more) disposable income under Chambliss' national sales tax system, chances are they won't be quite as willing to part with it.

A consumption tax rewards consumers for not buying goods and services, while penalizing them for doing so.

Nobody knows for sure how much of a spending disincentive would result from a national sales tax. But it might not take much to create a tidal wave of red ink for much of American retailing.

Even now, thousands of retailers--from mom-and-pop storefronts to giant national chains--are hanging on to profitability by their fingernails. It wouldn't take more than a stiff breeze to blow them over.

And for these retailers, a 23% national sales tax would be a Category 4 hurricane.