Funny Numbers


Reps. Billy Tauzin (R-La.) and Dan Shaefer (R-Colo.) want Americans to exchange the income tax for a 15 percent tax on "gross receipts" from the sale of goods and services. Under the Tauzin-Shaefer bill, if you purchase a $100 outfit for your spouse, you would pay $117.60.

Wait, you say, a tax of $17.60 on a $100 purchase is a rate of 17.6 percent. Not if Congress enacts the Tauzin-Shaefer sales tax bill (H.R. 2001), which defines "gross receipts" as a consumer's total out-of-pocket expenditures, including the sales tax itself: The tax rate on the outfit is 15 percent, according to this view, because $17.60 (the tax paid) is 15 percent of $117.60 (the price of the clothing plus the tax).

A spokesman from Shaefer's office says this calculus maintains "intellectual integrity," since it allows an easier comparison with flat tax proposals. Under a 15 percent income tax, for example, you would have to earn $117.60 to buy a $100 outfit. While this position may be defensible, it looks a lot like an attempt to lowball the rate and make the Tauzin-Shaefer bill more politically palatable, since most people assume a 15 percent "sales tax" would add $15 to the price of a $100 purchase rather than $17.60.

This point is not lost on Brookings Institution Senior Fellow William Gale. "It's fine to calculate the rate this way for comparison with the income tax," says Gale. "But they should tell people their 15 percent sales tax means people will pay 17.6 cents on the dollar. This they never do."