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Imagine -- no IRS
Ideas on how to fix the tax code are plentiful. A look at life without the dreaded income tax.
March 15, 2005: 11:55 AM EST
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - Imagine a world where April 15 is just another spring day.

In this new world there would be no income taxes and no Internal Revenue Service. Instead, there would be a national sales tax on everything you buy.

Sound far-fetched? It's not.

A bipartisan panel convened by President Bush earlier this year is studying ways to reform the federal income tax code. The panel has until July 31 to issue what is expected to be a few ideas, one of which could be a radical sales-tax proposal. (Other ideas may focus on reducing the complexity of the current income tax code and instituting a combination of income and sales taxes.)

Bush on the campaign trail last year said the idea of a sales tax is worth considering. Powerful Republicans, including House Majority Leader Tom DeLay and Speaker of the House Dennis Hastert, support the concept.

DeLay, along with 27 other Republicans, have so far signed onto a bill, dubbed the "Fair Tax" by its backers, that would institute a national sales tax on all retail purchases and get rid not just of federal income taxes for individuals but also corporate income, capital gains, payroll and estate taxes.

Proponents argue it's possible to set up a sales tax that would generate the $2 trillion in tax receipts the government collects every year while also achieving the two other key criteria that Bush wants: not shifting the tax burden and stimulating economic growth.

So what would life in a sales tax-only regime look like?

But what does it mean?

Here are key components of a sales tax-only scheme:

  • One tax rate The bill pending in Congress that would establish a sales tax-only system sets a single nationwide rate of 23 percent which, including existing state and local sale taxes, would actually come to about 30 percent. Critics counter that the rate would have to be closer to 60 percent in order to keep government tax coffers full. So the new $99 iPod Shuffle that costs about $105 in Michigan today? It would cost an additional $23 to $59, depending on the federal sales tax rate used.
  • No withholding....Though each purchase would cost more, you wouldn't have money taken out of every paycheck for Social Security, Medicare and federal income tax.
  • What gets taxed? It wouldn't be just clothes and cars. The services provided by doctors, lawyers, barbers and others comprise a big part of consumer spending. To keep the government funded at current levels, hospital visits and hair cuts would be taxed. Not taxed: existing home sales and other second-hand items as well as corporate purchases.
  • Provisions for the poor To protect low-wage earners who are excluded from income taxes today, a national sales tax would have an exemption for all taxpayers to offset the taxes on spending equal to or higher than the federal poverty level, now about $9,800 for an individual and $19,500 for a family of four. How would consumers get the rebate? The "Fair Tax" legislation envisions monthly rebate checks, about $188 for a single taxpayer or $375 for the family of four.
  • Bye-bye IRS A world without income taxes means no more Internal Revenue Service. Ensuring tax collection would fall instead to the states, a new federal agency or some combination of the two.
  • Speaking of states Forty-three states levy income taxes -- including four that don't collect sales tax at all. Since most rely on the federal code to work, these states would have to make some choices. Most likely they would abolish their own income tax code and institute a sales tax. For those that don't, April 15 would live on.

There are plenty of other issues to figure out in a sale tax-exclusive world. Among them: President Bush has said he wants a revamped income tax system that preserves charitable giving and home ownership incentives, both of which are now embedded in the current code.

As Mark Luscombe, the principal federal tax analyst for CCH Incorporated, points out: "The devil is always in the details."

Critics say the national sales tax proposal is doomed.

Retailers oppose the idea because they don't want to become the nation's tax collectors. Democrats don't like it because they say it hurts lower-income workers.

Low-wage earners spend most, if not all, of their income on basic necessities and a few nonessential items and so most, if not all, of their income would effectively be taxed under a sales tax-only scheme. The rich, on the hand, arguably buy more and so would pay more taxes in absolute dollars, but not as a percentage of their overall income.

Despite the heavy opposition, even skeptics are loathe to underestimate the "Fair Tax" -- or some variation of it.

After all, notes Chris Edwards, the director of tax policy studies at the Cato Institute, the libertarian think tank: "Social Security reform started off 20 years ago as a radical, loony idea."  Top of page

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