The incidence of the tax burden under this reform depends in important ways on the measure of household well‐being. If annual income is used to rank households, the tax reform looks very regressive. If lifetime income is used to rank households, the tax reform continues to look regressive, though much less so than when the annual income approach is used. If a universal rebate tied to poverty thresholds is coupled with the national sales tax, as is the case in the Schaefer‐Tauzin bill (H.R. 2001), the sales tax is about as progressive as the current income tax. Alternatively, if a payroll tax rebate is provided to low‐income families, the new system is only slightly less progressive than the current income tax system.
There are two essential messages of this paper. First, how we rank people–by annual or lifetime income–makes a big difference when we measure the progressivity of a national sales tax. Second, a national sales tax replacement for the income tax is not inherently regressive; it is relatively easy to construct a sales tax that protects the poor from paying any tax and is roughly as progressive as the current income tax. The universal rebate option is a good example of how one could adopt a non‐regressive national sales tax.