Taxes

Cons:

Even if a sales tax or VAT covered every kind of transaction, with no exceptions, administrative costs would be high because some verification process would be needed to make sure taxes were paid in full on all sales. At high sales tax or VAT rates, the potential would be strong for a large ?underground? economy where vendors would offer off-the-books, tax-free sales.

If Congress were to exempt particular goods and services from tax, as most state sales taxes do, administrative challenges would become more complex. For example, applying sales taxes to groceries other than food would greatly complicate the task of assuring proper implementation of the system. Moreover, some grocery store owners might try to attract more customers by, say, recording the sale of toothpaste as a can of soup.

Some advocates of a national consumption tax, recognizing that it would be far less favorable to low-income taxpayers than the current system, propose offering some sort of a subsidy to those who would be hurt the most. Such a program, however, would inevitably involve complexity: Who would receive payments and who wouldn?t? How much would they be paid? How would false claims for subsidies be avoided?

Virtually every country that once had a national sales tax eliminated it due to insurmountable administrative problems. A 30 percent rate for such a national tax would be more than three times as high as the largest sales taxes that have proven to be administrable. At that level, tax evasion would be lucrative and difficult to monitor. Even at lower levels of taxation, countries with VATs face significant tax avoidance problems and administrative costs.