National Sales Tax Vs. Federal Income Tax

Business owners pay significant amounts of money in income taxes, as individuals and sometimes also as a corporation. The federal government depends heavily on the revenue it obtains from income taxes, but processing millions of income tax returns is a costly enterprise. Some people propose replacing the current system of federal income taxes with a national sales tax.

A national sales tax would be a consumption tax, meaning that people would pay it every time they make a purchase. Retail stores, for example, might add a 30-percent charge to every purchase and then forward what they collect to the federal government. The major advantage of the national sales tax is decreased tax collection costs. The federal government must handle collecting and processing many income returns under the current system, as well as prosecute tax dodgers, all of which adds up to billions of dollars in administrative costs, according to the book “Economics for Today,” by Irvin B. Tucker.

A national sales tax would apply to all purchases, so theoretically the national sales tax could bring in more revenue. For example, under the current federal income tax system, savvy millionaires can use loopholes to lower their taxable income. But a national sales tax wouldn’t have such loopholes. Those millionaires would pay their share of taxes every time they made purchase. However, that creates a potential problem for small and large businesses alike: they would now be responsible for collecting federal taxes during each purchase, which is an administrative burden they wouldn't get paid for.

Poor people pay disproportionately more for basic living expenses than rich people do. For example, paying for bread makes up a larger percentage of a poor family’s budget than it does a wealthy family’s. That means a national sales tax would disproportionately impact poor people. The same holds true for the owners of small businesses -- their overhead for basic business expenses, such as office supplies or raw materials, makes up a greater percentage of their companies' spending than it does for large businesses. In other words, a national sales tax could put smaller businesses at a relative disadvantage to larger competitors. In comparison, the current federal income tax system assigns different tax rates based on income level. Low-income people pay a lower percentage than wealthy people, which helps equalize the tax’s impact across different income levels.

Another possible disadvantage of a national sales tax is that unscrupulous people might start selling products in black markets, and the lower prices would undermine honest sellers, such as retail stores. On the other hand, tax evasion is also a problem under the current federal income tax system. People can work off-the-books, for example, and not report the income to the federal government.