Temporarily Suspend the Sales Tax

With the near-constant discussion of what should go into Obama's stimulus package (tax cuts? infrastructure spending?), it's disappointing that this proposal from Laurence Kotlikoff and Ed Leamer, which is the best idea I've heard yet, hasn't managed to get any traction:

A better way to spur consumer spending is for Uncle Sam to run a six-month national sale by having a) state governments suspend their sales taxes and b) the federal government make up the lost state sales revenues. The national sale could be implemented immediately.

Here’s how it would work. Uncle Sam would pay each state a fixed percentage — say 5 per cent — of the 2007 consumption of its residents. States would be required to reduce their retail sales tax rates by enough to generate a six-month revenue loss (calculated using 2007 data) equal to the amount they’ll receive from Uncle Sam.

For states with low or zero sales tax rates, implementing this policy requires making their sales tax rates negative, ie subsidising purchases. Shoppers would see a negative tax on their sales receipts, lowering their outlays. State governments would reimburse businesses for paying the subsidy and, in turn, be reimbursed by the Feds.

States would be free to broaden their sales tax bases to apply the National Sale to all retail sales, not just the sales currently covered in their sales tax systems. To make the policy progressive, states could also reduce sales tax rates by more for goods and services that are disproportionately consumed by the poor.

This is a great idea. The government could even mount an ad campaign promoting the National Sale—because if there's one thing we know, it's that Americans love a good sale.