Would Tax Evasion and Tax Avoidance Undermine a National Retail Sales Tax?

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