Does a national sales tax amount to double taxation?

If you’ve been paying attention to campaign ads this election season, there’s a good chance that you’ve come across a Democratic attack ad built around a proposal for a 23 percent national sales tax.

The proposal — called the “Fair Tax” by its conservative supporters — would eliminate the federal income tax, employment tax, and estate and gift taxes and replace them with a national sales tax. Supporters say it would reduce the cost of compliance and close loopholes. Critics counter that it would be regressive and would actually require a higher rate than the advertised 23 percent.

Whatever the truth of these claims, Democrats clearly consider it a winning issue: They’ve used the Fair Tax as the basis for many ads against Republicans this year, one of which we recently rated Half True.

We noticed the issue crop up once again in a close House contest between incumbent Democratic Rep. Baron Hill and Republican attorney Todd Young to represent a swing district in southern Indiana. An Oct. 20, 2010 ad, placed by the political arm of the Service Employees International Union, said that Young “supports a 23 percent national sales tax on everything you buy — food and clothing, even medicine. You worked hard for your money and you paid your taxes when you earned it. Now, Todd Young wants to tax it again when you spend it. Attacking Social Security and taxing seniors twice? Indiana can’t afford Todd Young.”

The issue in the ad that most intrigued us is the notion of double taxation. After watching a variety of ads about the Fair Tax, we had yet to see one that explicitly called the Fair Tax double taxation. And that set off alarm bells for us, since the Fair Tax, whatever you think of it as a policy, is definitely not designed to be layered on top of the current tax code. It is explicitly designed to replace the current tax code.

But after talking to an ideologically diverse group of economists, we concluded that the SEIU makes a legitimate point — that seniors, the group that is specifically singled out for mentions in the ad’s narration and in its visuals, would face what amounts to double taxation of their savings if the Fair Tax were to pass. On balance, we gave the ad a rating of Half True. You can read our full Truth-O-Meter item here.