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March 19, 1996
The Tax That Wasn't: Mid-Century Proposals For A National Sales Tax.
Joseph J. Thorndike

Full Text Published by Tax AnalystsTM

As tax mavericks on Capitol Hill trumpet calls for a national retail sales tax, they open yet another chapter in the long-running saga of federal sales tax proposals. The United States has never had a national sales tax (although it did have a very comprehensive system of excise taxes during the Civil War). But lack of experience hasn't prevented would-be reformers from suggesting sales taxes as the basis for a federal revenue system.

One of the most sustained periods of interest in a national sales tax came during the early 1940s. As Europe spiraled into war and the United States faced the rising costs of its own involvement, policymakers began to mull ways to raise new revenue. The sales tax emerged as a leading contender, at least in some policy circles. In contrast to today, mid-century champions of the sales tax viewed it as a supplement to the income tax, not a replacement. Many of their arguments, however, bear a strong resemblance to today's debate.

Franklin Roosevelt's Treasury Department never found much to like in the idea of a national sales tax. Indeed, the department's tax specialists repeatedly weighed in against such plans, generally deriding them as regressive and administratively burdensome.

The halls of Congress, however, proved more fertile ground for the idea. Many Republicans liked the principle of taxing consumption, and more than a few Democrats were at least willing to listen. Faced with this political reality, Treasury officials dutifully prepared a series of reports on various sales tax plans, including taxes at the retailer, wholesaler, and manufacturer levels. (Citations to these reports appear below.)

The Administration's View

Treasury officials evaluated sales tax plans according to several criteria, including revenue yield, equity, and administrative concerns. In addition, resurgent inflation during the early war years prompted officials to consider what effect sales taxes might have on rising price levels.

Generally speaking, Treasury tax specialists consistently attacked federal sales taxes as regressive. As one report put it, "All general sales taxes apply the principle of ability to pay in reverse; they are regressive instead of progressive." Moreover, officials insisted, sales taxes would likely create "very unequal economic effects among taxpayers." As one report put it, "the general application of a constant formula must necessarily induce haphazard and undesirable results."

Treasury also cited various administrative problems as impediments to a national sales tax, including the need for a new collection mechanism. Furthermore, efforts to craft a list of exempted items were certain to prove nettlesome. Some studies saw a future clouded with protracted wrangles over very specific exemption lists.

As World War II made revenue needs more acute, Treasury opposition to the sales tax took on a more muted tone. Increasingly, the department's studies adopted a more pragmatic approach, setting out plans for what looked like an ever more likely addition to the federal revenue system.

Treasury also began to view sales tax proposals as useful tools in the battle against inflation. Proponents had long cited the role sales taxes might play in stemming price increases, and Treasury officials gradually came to grant the validity of such arguments.

Eventually, however, plans for a federal sales tax withered on the vine. Opposition from organized labor played an important role in killing the idea, as did a host of administrative hurdles. More important, however, neither Treasury Secretary Henry Morgenthau, Jr., nor President Roosevelt ever really liked the idea. As late as 1942, Roosevelt was still reading to reporters from a briefing sheet entitled "Evils of the Sales Tax." Equity concerns made a federal sales tax unpalatable, Roosevelt insisted. The levy, he said, "violates the ability to pay. It falls more heavily on the poor; it is, in fact, a 'spare-the-rich' tax."

Full Text Available

The full texts of the following documents are available from Tax Analysts:

o "Federal Retailers', Wholesalers' and Manufacturers' Sales
Taxes," by Treasury Division of Tax Research. Doc 96-6645 (17

o "Federal Manufacturers' Wholesale and Retail Sales Taxes: A
memorandum prepared by the Treasury at the request of the
Committee on Ways and Means," Doc 96-6646 (23 pages)

o "The Sales Tax Controversy," by Treasury Division of Tax
Research (Mar. 17, 1942). Doc 96-6647 (41 pages)

o "Outline of the Important Desirable Characteristics of a
Federal Retail Sales Tax," by Treasury Division of Tax
Research (Apr. 17, 1942). Doc 96-6648 (6 pages)

o "A Scheme for a Progressive Sales Tax," Treasury Division of
Tax Research (Apr. 30, 1942). Doc 96-6649 (2 pages)

o "Evils of the Sales Tax," briefing paper for the president by
Treasury Division of Tax Research (Apr. 14, 1942). Doc 96-6650
(1 page)

o "Federal Retail Sales Tax," conference recommendations for
Treasury Division of Tax Research (May 1942). Doc 96-6651 (16