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Tuesday, October 26, 2004

National Sales Tax Hits the Big Time

I'm heartily sick of the Presidential election. So let's talk about the South Carolina Senate race instead, where a major issue has been the Republican candidate's support for a national sales tax.

Democratic attack ads against GOP House candidates who support a 23 percent national sales tax are causing a stir in several states, with Republicans demanding that TV stations drop them.

The ads, running in seven House districts, target Republicans who support HR 25. The bill would eliminate the federal income tax, estate tax and payroll taxes and replace them with a 23 percent sales tax. The issue has been a mainstay in the Senate race in South Carolina, but the Democratic Congressional Campaign Committee's ads have expanded it to three House districts in Texas and one each in Georgia, Indiana, Kansas and North Carolina.

Indeed, if you look at Inez Tenenbaum's web page (she's the Democratic candidate for Senate in SC), most of the ads criticize her opponent for supporting a national sales tax. Here's a typical excerpt:
My opponent, Jim DeMint, has a big idea. A new 23 percent federal sales tax on just about everything we buy. Like milk, bread and groceries. Clothing, new tires, going to the movies. Even prescription drugs. What we really ought to do is cut taxes on middle class families.
DeMint, along with Tom DeLay and over 50 Republican members of Congress, has endorsed a national sales tax that would replace almost all federal taxes. Tenenbaum's ads are a little misleading, because they don't mention that DeMint envisages eliminating other federal taxes. (she has a press release that's more accurate). On the other hand, she doesn't challenge DeMint's 23% figure, even though most experts say a rate of 50-60% would be needed for a "revenue-neutral" replacement tax.

Also, her implication that the sales tax really amounts to a tax increase is basically correct. According to the Institute on Taxation and Economic Policy, a revenue-neutral sales tax would amount to a 16% average tax increase [pdf] for South Carolinians, an additional of $1,731 per year. The ITEP is a liberal-leaning think tank, but this conclusion is hard to dispute. The sales tax is regressive, and South Carolina is a relatively poor state. So even if taxes stayed the same on average in the country as a whole, South Carolina and other low-income states would be pay a bigger share.

The regressivity of the Republican consumption tax proposal is truly breathtaking. According to the ITEP, the poorest 20% of families would see their taxes rise from $455 to $4,432, almost a 10-fold increase. The wealthiest 1% would see their tax bill fall by almost two thirds (from $213,000 to $77,000). The increase for the poorest 20% is almost literally breathtaking -- taking your breath away is ultimately suffocating, after all -- since the poorest 20% in South Carolina currently get by on an average of $8,245 after federal taxes. Under the Republican's sales tax plan, they'd have to squeeze by with $4,268.


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