Watson says that the NST’s non-taxation of income and investments would seriously undermine the value of tax shelters and offshore investments. “A simpler tax code with lower rates would get rid of all the shenanigans going on right now,” he says. “It’s one of the goals of tax reform.”
The impact of an NST is the subject of some debate. The current income tax system is graduated, meaning that those who earn more pay higher rates. According to the Cato Institute’s Edwards, the average tax rate (taxes paid divided by adjusted gross income) for those earning more than $200,000 a year was 26 percent in 2002. By comparison, the average tax rate on households earning between $50,000 and $100,000 was 11 percent. Consumption taxes like the NST would close this gap by taxing everyone’s purchases at the same rate. “The wealthy would get a big tax cut,” Edwards says, because the plan would tax neither salaries nor investment income. Opponents of the plan argue that middle-income and poor taxpayers spend a greater percentage of their income on basic goods and services than do the affluent, and would therefore end up paying more on a relative basis. The poor and middle-class would also get less of a break, in terms of the percentage of their total purchasing power, from the elimination of income tax. Because of these issues, critics often portray the NST as regressive and unfair.
NST advocates counter that gains in overall efficiency would lead to a streamlined, expanding economy, and thus benefit everyone. Michael Boskin, former chairman of the Council of Economic Advisors, has projected that a national sales tax would promote a 10 percent increase in gross domestic product over a 10-year period.
“A national sales tax has a lot of momentum in Congress,” Edwards observes. “There were 54 cosponsors in the House for the FairTax. However, the Bush administration does not seem that radical. Bush has already said that he wants to keep deductions for mortgage interest and charitable giving.”
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