The national sales tax: avoiding the zero-sum scenario.

• Author: Lugar, Richard G.

Editor's Note: As part of The Tax Executive's continuing effort to keep its readers informed of emerging tax policy issues, the journal is pleased to publish the following article by Senator Richard Lugar on a proposed national sales tax. This article complements Paul McDaniel's piece in the November-December 1995 issue, which highlighted the issues involved in taxing consumption only. As the debate on fundamental tax reform moves forward, The Tax Executive will publish descriptions and critiques of various alternatives to the current system.

Stagnant wages caused by a low-growth economy are a primary reason for our national discontent. With the recent release of the report by the National Commission on Economic Growth and Tax Reform -- the Kemp Commission -- there is a growing body of evidence that our income tax system is; a major impediment to economic prosperity. I agree with the report's conclusion that the current income tax code should be scrapped in its entirety. The report fails to recommend, however, the bold steps that are required to generate strong economic growth: The income tax must be eliminated and replaced with a broadbased consumption tax.

Significant increases in income elude most Americans, denying them the kind of hope for a prosperous future that stimulates investment, risk-taking, and entre reneurial energy. The Labor Department recently reported that wages are growing at their slowest level since the department began tracking the data in 1981. And even more disconcerting, from March 1994 to March 1995, the average real wage of Americans actually decreased 2 percent. We must decisively change our economic system.

Replacing the income tax with a national retail sales tax will dramatically boost savings and investment, which will in turn increase wages and create jobs. Economist Dale Jorgensen of Harvard University has concluded that if a consumption tax like the national sales tax had replaced the current system in 1986, the United States would have experienced $1 trillion in additional economic growth. Under this scenario, income levels could be as much as 20 percent higher, providing the typical American family with $4,000 to $6,000 of additional income annually.

With this sort of dynamic growth, Congress could better address many of the fiscal problems we face -- declining standards of living, balancing the budget, and preserving the long-term financial stability of Medicare and Social Security. Unfortunately, the present level of economic growth dims any hope of solving these predicaments. In a low-growth economy, there are far too few resources for all competing interests. The economy becomes a zero-sum game in which no one gains unless it comes at the expense of another.

This zero-sum scenario is exemplified by the continuing budget negotiations between Republican Congressional leaders and President Clinton. One of the major issues of contention has been whether the economy would grow at 2.5 percent, the President's position, or at a more conservative 2.3 percent, as Republicans contend. This argument, however, is misguided. Neither one of these rates of growth will make a difference. If we do not aim higher, for the first...