WOULD TAX EVASION AND TAX AVOIDANCE UNDERMINE A NATIONAL RETAIL SALESTAX

A national retail sales tax has surfaced as a potential replacement fo r the current system of federal income taxation. A primary concern is that the revenue-neutral required tax rate may easily exceed 30 percen t, leading to tax base erosion through widespread avoidance and evasio n. This paper examines specific avenues for avoidance and evasion for both firms and individuals under a comprehensive national sales tax an d discusses implications for the underground economy. The analysis sho ws that opportunities for avoidance and evasion will be sustained, not eliminated, by a change in tax structure. Unfortunately lack of exper ience in administering a high-rate, indirect tax system precludes defi nitive statements regarding the likely extent of tax base erosion unde r a national sales tax.