The American retail sales tax: considerations on their structure, operations, and potential as a foundation for a federal sales tax

- Americans are familiar with the retail sales tax. Therefore, it is not surprising that Congress would consider such a tax as a way to tax consumption expenditure, should it choose to shift from the present federal structure that emphasizes income taxation. While the sales taxes are impressive revenue producers for state and local government, the taxes are poorly designed as consumption taxes: they tax too few household services, they exempt too many household purchases of goods, and they tax too many business inputs, especially capital asset purchases. State and local sales tax rates are relatively low, so compliance appears not to be a major problem, and economic distortions, while real, have not been a great difficulty. The much higher rates needed to replace the federal income tax would create many more problems. Most national governments choose the credit-invoice value-added tax if they seek substantial revenue from an indirect consumption tax. That is almost certainly a better option than the retail sales tax for a national indirect consumption tax in the United States as well. INTRODUCTION Retail sales taxes have been an American fiscal success. The tax that Mississippi initiated in 1932 by converting its fractional rate general business tax into a two percent tax on retail sales gave the state a tax that produced considerable revenue at low statutory rates and could be easily collected in relatively painless amounts on each transaction.