The tax reform revolution: "the four approaches to tax reform—flat, USA, national sales, and value-added—all are variations on the same theme. All would shift the base of Federal taxation from income to consumption while simplifying the process of complying with tax law."

USA Today (Society for the Advancement of Education), Jan, 2005 by Murray Weidenbaum

In the case of the USA tax, transition rules are provided to avoid taxing consumption that is paid out of income previously taxed. Such a short-term complication--like some others contained in the proposed tax--are designed to maintain fairness among different categories of taxpayers. Although consumption-based taxation is designed to replace rather than supplement the existing income tax, it could increase Federal revenues over a period of time. This would come about from the higher rate of economic growth that could result from the encouragement given to savings and thus to investment. Bottom-up types of sales and value-added tax likely would generate similar effects.

An expenditure or consumption tax, as explained above, can be calculated via a top-down approach, building on the records that already are available to provide the data needed for enforcement of existing corporate and personal income taxes. In contrast, sales and value-added taxes (VAT) represent a very different way of collecting a general tax on consumption.

National Sales Tax. On the surface, a national retail sales tax seems like a very simple device for collecting revenues in place of the complicated income tax structure. However, because consumption tends to be a smaller share of income as we go up the income scale, many supporters of the sales tax recognize the need to soften the regressive impact on the poor. The required modifications inevitably introduce complications. The most widely used approach, at the state level, is to exempt categories of purchases on which the poor spend a larger proportion of their income than other citizens, such as food, housing, and medicine. Another proposal is to provide each taxpayer with a "smart card" (similar to a credit card), with credit for sales taxes based on family size. Yet another alternative is to give every taxpayer an automatic standard refund, also based on family size.

A national sales tax levied at the retail level may present special problems for small businesses. Unlike larger companies, which buy from wholesalers or directly from manufacturers, smaller enterprises often make their purchases from the same retailers as do consumers and, therefore, would have to pay the retail sales tax. Situations such as this led France and other Western European nations to move from relatively simple sales taxes to the more sophisticated but complicated VAT.

Because any sales tax (including VAT) is included in the price of purchases, it registers in all of the price indexes and, hence, exerts an inflationary force on the economy. The counter-argument is that this is a one-time effect only, occurring when the tax is enacted or increased and that the inflationary impact could be offset by appropriate changes in monetary policy (albeit at times with an adverse effect on the levels of production and employment). A study of 35 countries that introduced a VAT revealed that in only six did the new tax contribute to a faster rate of inflation.

Opponents also charge that either a national sales tax or VAT would invade the traditional area of sales taxation, that of state and local governments (46 states impose a sales tax). However, most states have come to rely on income taxes, despite heavy use of the same tax base by the Federal government.