A new critique argues that while the White House Council of Economic Advisors (CEA) is right about the benefits of shifting from income to consumption taxes, their math on the cost is dangerously optimistic.
The CEA suggests states could replace individual and corporate income taxes with a broad-based sales tax at an average rate of just 6.23%. Walczak’s analysis, however, puts that figure closer to 17.51%.
Where the CEA Got It Right
Walczak agrees with the CEA’s fundamental economic premise: consumption taxes are more efficient than income taxes. The report accurately notes that moving away from income taxes can:
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Boost GDP (estimated 1.44% to 1.56% increase).
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Increase wages and encourage startups.
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Enhance state tax competitiveness.
Where the Math Fails: The “Phantom” Tax Base
The primary issue lies in what the CEA considers “taxable.” To reach a low 6.23% rate, the CEA assumes a tax base that includes almost all personal consumption. Walczak points out that much of this base is legally or practically impossible to tax, including:
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Government-Funded Healthcare: Medicare and Medicaid cannot be taxed by law.
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Non-Market Consumption: “Imputed” values, such as the value of free banking services or nonprofit/charitable work (like church operations), where no money actually changes hands.
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Legal Prohibitions: Items like internet access and U.S. Postal Service purchases.
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Compliance Realities: The CEA assumes 100% tax collection, ignoring the reality of tax evasion and administrative leakage.
The True Cost of “Pro-Growth” Reform
The CEA also recommends removing business inputs (B2B transactions) from the sales tax. While Walczak agrees this is sound policy—as it prevents “tax pyramiding”—he notes that these inputs currently make up 40% to 50% of many states’ tax bases. Removing them creates a massive revenue hole that a tax on final goods alone struggles to fill.
Comparison of Estimated Replacement Rates
| Source | Estimated Rate | Key Assumption |
| CEA Report | 6.23% | Includes non-taxable services; assumes 100% compliance. |
| Adjusted Estimate | 12.08% | Adjusts for legality and 89% compliance. |
| Full Recalculation | 17.51% | Uses latest data and removes non-transactional consumption. |
The Bottom Line
Replacing income taxes with consumption taxes is a viable pro-growth strategy, but it isn’t a “free lunch.” By overstating the size of the taxable economy, the CEA paints an unrealistic picture of how low tax rates could go. For states to achieve real reform, they must work with figures that reflect legal and economic reality, not theoretical ideals.