National Sales Tax Would Hurt Small Businesses

While several U.S. representatives propose eliminating the IRS and the federal income tax system and replacing it with a national sales tax, many small business owners argue that they would be adversely affected by a national sales tax.

(PRWEB) November 19, 2004 -- Small business leaders and retail store owners argue that adopting a national sales tax would hurt the U.S. economy and their businesses.

Representative Gil Gutknecht (R-MN) and more than 50 other representatives have recently cosponsored legislation, called the "Fair Tax Act," to abolish the federal income tax and replace it with a national sales tax which would tax all goods, including food, housing, and medical care. The representatives claim the tax rate would be 23 percent.

"For many small business owners and entrepreneurs, a national sales tax would be devastating. The small business owners would need to collect the tax and it would increase the cost of their products substantially driving sales away," says Peter Hupalo, author of "Thinking Like An Entrepreneur" (Hupalo also operates a website for small business owners: http://www.thinkinglike.com)

The National Retail Federation (http://www.nrf.com) also opposes the tax and argues that 23% is an unrealistic tax rate.

Economists argue that, if passed, the national sales tax rate could be as high as 60% to make the tax change revenue neutral. This means that for every $100 in groceries or prescription drugs, the purchaser would need to shell out an extra $60 in national sales tax.

"It's an extremely regressive tax. The middle class would be hit hard because they need to spend most of their income on things like food and health care. People who thought they were upper middle class would also find themselves hurting. Luxury sales would be killed. Exercise equipment, video camcorders, consumer electronics, books, CDs, and DVDs would all see drops in sales," commented Hupalo.

Hupalo does see some potential winners in a national sales tax. "Well, of course, the very rich would come out way ahead. If you earn $2 million a year and only spend $300,000 to live, even a 60% sales tax rate is only $180,000. That's less than a 10% federal income tax rate on the income," notes Hupalo.

"There might be a few odd winners here and there. For example, eBay businesses which sell used stuff online would probably see prices increase, because the newer stuff would seem much more expensive," says Hupalo.

Hupalo observes that Indian reservations might be the biggest beneficiaries of all. "In the current scheme, the states would be responsible for collecting the sales tax. But, look at cigarette taxes and Indian reservations. Indian reservations are sovereign nations. Taxes can't be collected there. In New York, for example, cigarette taxes used to be about $1.50 per pack. Off reservation, a carton might cost $50. On the reservation, it might cost $10 to $30. About a billion dollars a year was collected in cigarette taxes. But it was estimated that at least $500 million went uncollected due to sales on Indian reservations. The same thing would happen for other products," says Hupalo.

A national sales tax wouldn't remain simple. "Taxes are complex because of all the special interest groups which lobby for tax loopholes. A national sales tax wouldn't change that. Years ago, a luxury tax was passed on yachts, and the industry was badly hurt. But, in the late 1990s, a representative from Rhode Island proposed a 20% tax credit for anyone who purchased a new, custom, luxury yacht of at least 50 feet in length. You purchased a $1 million dollar boat and the IRS was supposed to give you $200,000. That was the idea at least," recalls Hupalo.

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