August 17, 2004

Some Arguments in Favor of a National Sales Tax

I exchanged a few e-mails with a good friend the other day about the idea of a national sales tax. I was trying to explain to her why it’d be the best thing to come along since 1913. Here I’ll attempt to not only correct some misconceptions & outright fabrications circulating about the idea, but to try to explain why a national sales tax is a better idea than any form of tax. As she occasionally reads this blog hopefully I’ll do a better job of explaining my views than in a rushed e-mail.

Our current system involves an employer taking X% of your money before they give you your pay. In addition said employer must pay X% of the tax on your labor, as well as paying taxes on the company's profit.

I'm going to throw some numbers out which may not be accurate. Keep in mind it's the principle I'm alluding to & not so much the actual dollar amount, so be gentle when you comment that $1 should really be $0.74 & try to look at the big picture to see if I'm making cents sense.

If you make $10 per hour you get roughly $2 taken from your pay before you even see it. The employer also has to pay $1 for every $2 of your tax. In addition he has to pay X% of his profits in taxes.

Now if I owned the company what I would do is estimate the percentage of tax I was paying to have you as an employee as well as the percentage of tax I was paying because I made a profit & adjust the price of my goods or services accordingly. In short I wouldn't pay the tax - you would. & you'd do it with no idea that you were paying it. The next time the Dems or Repubs push a tax increase (they might call it rescinding a previous tax cut) through; please observe that the price of your groceries will rise.

So you as a consumer pay a company’s taxes right now through artificially inflated prices. As an employee you make a certain amount in part because of the employer’s tax considerations. & the consumers pay for the company's share of taxes on your labor.

This is called hidden taxation & it is dangerous simply because not many people are aware of it.

Also, keep in mind that your employer takes taxes from your pay before you get it. At the end of the tax year you either pay a small sum or get a small sum back depending upon how successful you are at converting your time & energy into dollars. This is another form of hidden taxation in that it takes some effort on your part to figure how much you paid in taxes in a given year. Hell, you'll find plenty of people who think they didn't pay any taxed because they're getting a few hundred dollars back.

There's a reason that taxes are taken per paycheck with the balance due almost 6 months away from the elections: if everyone had to write a check to cover their entire tax two weeks before voting only a fool would try to raise taxes & get re-elected.

In addition to the above there's the requirement to fill out forms which can & will be used to incriminate you. Record keeping is also required & those records can be demanded by a tax court or a real court. Those two things bitch slap the 4th & 5th amendments to the Bill of Rights since they're supposed to protect us from unreasonable searches & seizures of our property & from being compelled to testify about ourselves.

Throw in the talk of the 16th amendment's ratification being questionable at best as well as the truth about taxation movement's claims of the tax being legally suspect with or without the 16th amendment & I'd say that completes the picture of our current progressive income tax.

Just look here for some examples of how well the current system is working.

& just to make it plain the current system is based on the premise that your property does not solely belong to you. The government must get their cut right off the top. The government thinks it owns 17% to 35% of your labor & acts accordingly.

Now on to the idea of a flat tax:

It does absolutely nothing for any of the concerns above. Its sole benefit is in simplifying the paperwork involved. Instead of people basing their taxes on a sliding scale based on income they pay a straight percent of what they make.

The Value Added Tax:

This is simply a progressive sales tax. It taxes each step of production. The problem with it is the ending price of something that has been taxed at each step from raw material to finished product. While it would be better from almost every aspect that a progressive income tax, it still is lacking in that it would inflate prices more than necessary.

Companies would have to pay slightly inflated prices for partially finished materials, which in turn would add onto the tax itself as companies do not pay taxes – they adjust their prices to cover those taxes. The result is a less intrusive means of funding government than the current system, but one that still contains hidden taxes which adversely affect the consumers.

The National Sales Tax:

The tax only applies to the finished product, which differentiates it from the value added tax. Further it requires a minimal amount of record keeping on the part of retailers. The government doesn’t operate under the delusion that your labor belongs at least in part to it, nor is the government justified in snooping through your private affairs. It imposes no burdensome & constitutionally questionable paperwork on the tax payer & it eliminates any excuse for the government to know how much money you make per year. It also eliminates the hidden taxation.

Let’s go back to our employee working for a company for a minute. Under a sales tax system he would not have that $2 taken out of his pay. Neither would his employer have to pay $1 for every $10 his employee earns. Neither would the company pay taxes on its profits. So the goods or services the company sells would not have the hidden tax from payroll & profits. They would also not have little taxes added up at each step until they reach a certain level at the check out stand.

What they would have is a flat sales tax tacked on at retail. It’s a fixed percentage of the retail price with nothing hidden about it. If the rate is 23% then that’s the rate. A company has no costs due to taxation to pass onto you. Likewise an employer has no costs due to taxation to figure into your pay scale. & you as an employee have no money stolen from you prior to your receiving it.

A sales tax replacing the income tax does have some downsides. For example if you bought a house or SUV or some other property with the idea that it would give you a hefty deduction on your taxes you’d be out of luck. Then again you wouldn’t have any taxes on your income to draw deductions from so it’s not really a valid disadvantage.

It would tax purchases. That provides an incentive for people to save – especially poor people who in theory have trouble saving. Of course a person saving money is always a tricky thing no matter what income level or tax plan is at work. The thing is no matter how good it is for people to save money once they accumulate enough to pay their bills & necessities anything left over becomes a temptation to spend. Having their purchases tax but not their earnings will increase the likelihood of saving, but not so much that it would deter it. In fact I would wager that the economy would actually see a boost in discretionary spending simply because people would have all of what they make & the prices of goods & services would not be hit with the hidden taxation we have currently. Prices of goods & services will either fall or stay where they are, & the same with wages. But they’ll likely stay where they are or decline for a longer period than normal, because companies will have a big burden taken off their shoulders. Making profits will be easier & they won’t need to pass off the cost of taxation on consumers.

As long as the rate is right, the economy as a whole will see a boost. You & I as individuals won’t notice that much of a change except for the lack of the burdens of the progressive income tax & slightly higher prices (with the tax added on) than we’re used to. Sticker shock will happen, but it’ll be offset when someone realizes that they’re making & bringing home $10 per hour.

So if our fictional employee is now making $10 per hour & pays $8 for a T-bone, under the new system he’d be making $10 an hour & paying $9.84. But since he’d actually be bringing home $10 per hour he’d actually be paying less than he does under the current system. & that’s assuming prices don’t drop. If the T-bone goes from $8 to $7.25 as a base price then we’re talking $8.91 instead of $9.84.

In any case it would have its downsides. Chiefly the tax industry would crumble. As would many financial services geared up to exploit the progressive tax system. Unemployment would go up a little as the H&R Block types hit the job market, but I think the growth in the economy would quickly absorb them.

But the downsides being what they are, it’s a much preferable system to the progressive income tax, a flat tax, or a value added tax. It’s not a perfect solution by any means, but a better one than any others I have heard about if we intend to fund a central government.

Now if you want to talk about eliminating the feds altogether that’s another story & I can’t say as I’d disagree with you. But for now I think our best bet is to back the idea of a national sales tax.

& supporting it will be difficult as the mainstream media, the tax industry, & lovers of intrusive government will fight it tooth & nail.

Posted by Publicola at August 17, 2004 04:59 AM

Another bonus, at the international level, would be a large influx of business seeking to base their operations in the U.S.. Currently the federal government actually penalizes companies who are headquartered in the U.S. by imposing corporate taxes on income generated from both foreign and domestic operations. While many countries only levy an income tax on the incomes actually generated in their territory. If I'm mistaken, please correct me. The U.S. is the largest consumer/economic power in the world, with a favorable tax scheme corporations should jump at the chance to relocate their H.Q.'s, and the related high level positions and income would be in-sourced to the U.S..
That's an economic plus, but more importantly the citizens would have a direct check on the growth of government. If individuals happen to think the government is to big (HELL YES IT IS), they can reduce their discretionary spending and starve it.
Saving money and retarding, perhaps reversing, the growth of the gov't, why is furhter discussion even necessary? Georgia congressman John Linder has advocated this plan for years; casting a vote for this man is nearly reason enough to move to GA.

Thanks for keeping this issue on the forefront,

Posted by: Jasen at August 17, 2004 09:54 PM

Somehow I have a problem with a tax scheme that raises the price of everything 20% and encourages hoarding. Besides, the first thing to get passed after the national sales tax would be a law adjusting the rates on certain favored or disfavored items.
Imagine food in a grocery store tax free "to help the poor" but food in a restaurant taxed at 30% (don't worry, it falls mostly on "the rich"). How about a complicated formula to figure the tax on cars, with many factors, jiggered annually to favor tiny sardine cans, and penalize SUVs. Or pickups. Or big sedans.
In no time at all I can see this being more complex than what we have now. I vote for a flat tax. Yes, this can be jiggered too, bu adjusting the threshold below which you don't pay it, but that could be fixed as "below the lowest quintile of earnings determined by the census or something" so the bottom 20% don't pay any.
The best part of any new tax code would be the part making it hard to amend so as to increase anyones tax burden.

Posted by: Billll at August 19, 2004 09:24 PM
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