A national retail sales tax is a consumption tax collected as a flat-rate tax on all sales from businesses to households.
Retail sales are business sales to households; neither business-to-business nor household-to-household transactions qualify. For example, the sale of a newly constructed home to a family that will occupy it is a retail sale. But the sale of that same home to a business that intends to rent it to others is not a retail sale, nor is the sale of an existing home by one occupant to another.
A pure national retail sales tax would represent a sharp break from the current tax system, shifting the tax base from income to consumption. Rates would be flat; no goods or services would be exempted or favored; and tax administration, enforcement, and points of collection would be radically altered. In practice, those retail sales taxes that do exist in the United States at the state and local level exempt most services and many goods, including in most of them food sold for home consumption.
No country in the history of the world has enacted a retail sales tax rate anywhere near as high as what would be required to replace the US tax system. Whether such a tax could be implemented effectively remains an open question.
Updated January 2024
Gale, William G. 2005. “The National Retail Sales Tax: What Would the Rate Have to Be?.” Tax Notes, May 16.
Gale, William G., and Kyle Pomerleau. 2023. “Deconstructing the Fair Tax.” Tax Notes Federal, March 27, 2023.
President’s Advisory Panel on Federal Tax Reform. 2005. “National Retail Sales Tax.” In Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, 207–22. Washington, DC: President’s Advisory Panel on Federal Tax Reform.