National Sales Tax?

George Will has an interesting column today arguing why a national sales tax would be preferable to the current income tax.

The power to tax involves, as Chief Justice John Marshall said, the power to destroy. So does the power of tax reform, which is one reason why Rep. John Linder, a Georgia Republican, has a 133-page bill to replace 55,000 pages of tax rules. His bill would abolish the IRS and the many billions of tax forms it sends out and receives. He would erase the federal income tax system — personal and corporate income taxes, the regressive payroll tax and self-employment tax, capital gains, gift and estate taxes, the alternative minimum tax and the earned income tax credit — and replace all that with a 23 percent national sales tax on personal consumption. That would not only sensitize consumers to the cost of government with every purchase, it would destroy K Street.

“Street” is shorthand for Washington’s lawyer-lobbyist complex. It exists to continually complicate and defend the tax code, which is a cornucopia from which the political class pours benefits on constituencies. By replacing the income tax — Linder had better repeal the 16th Amendment, to make sure the income tax stays gone — everyone and all businesses would pay their taxes through economic choices, and K Street’s intellectual capital, which consists of knowing how to game the tax code, would be radically depreciated.

Under his bill, he says, all goods, imported and domestic, would be treated equally at the checkout counter, and all taxpayers — including upward of 50 million foreign visitors annually — would pay “as much as they choose, when they choose, by how they choose to spend.” And his bill untaxes the poor by including an advanced monthly rebate, for every household, equal to the sales tax on consumption of essential goods and services, as calculated by the government, up to the annually adjusted poverty level.

Today the percentage of taxpayers who rely on professional tax preparers is at an all-time high. The 67 percent of tax filers who do not itemize may think they avoid compliance costs, which include nagging uncertainty about whether one has properly complied with a tax code about the meaning of which experts differ. But everyone pays the cost of the tax system’s vast drag on the economy. Linder says Americans spend 7 billion hours a year filling out IRS forms and at least that much calculating the tax implications of business decisions. Economic growth suffers because corporate boards waste huge amounts of time on such calculations rather than making economically rational allocations of resources. Money saved on compliance costs would fund job creation.

Corporations do not pay payroll and income taxes and compliance costs, they collect them from consumers through prices. So the 23 percent consumption tax would allow taxpayers to stop paying the huge embedded cost of corporate taxation. Linder says the director of the Congressional Budget Office told him it costs individuals and businesses about $500 billion to remit $2 trillion to Washington. And studies show that it costs the average small business $724 to collect and remit $100.

All very interesting, although there is serious dispute as to how high the tax rate would need to be to accomplish this. More importantly, though, it is simply a non-starter politically.

As the current debate over Social Security reform has aptly demonstrated, political debates aren’t about coming up with the perfect plan but rather about the marginal impact. If we were to come up with a tax system from scratch, we would surely not come up with the current monstrosity. We are not, however, starting with a blank slate but with the status quo. Some people will “win” and others will “lose” as compared to the current baseline. Those who will lose invariably manage to marshall their forces to defeat radical change.

Update: Megan McArdle thinks it sounds “pretty good.” Matthew Yglesias, though, thinks “Will ought to be ashamed of himself” for touting the plan without noting potential problems.

Kevin Drum points out that this would “royally screw” over the elderly, since we’re changing the deal on them after the fact:

All their lives their incomes have been taxed away, but at least what’s left over is tax free because they’ve already paid taxes on it. Under Linder’s plan, though, they suddenly have to start paying huge taxes again — on rent, medicine, vacations, and cat food. It’s the mother of all double taxations. I figure that should be good for about 30 million postcards from AARP members.

That’s a fair point. As with Social Security privatization/personalization (or the metric system, for that matter) the transition is a bear. There may be a way around this, but I don’t know what it is.

FILED UNDER: General
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Jim Henley says:

    Not to mention that what you end up with when you try to replace an income tax with a sales tax is an income tax AND a sales tax. There’s a fight not worth the candle if ever I saw one.

  2. James Joyner says:

    Sadly, you’re likely right. Any national sales tax would have to accompany a repeal of the 16th Amendment.

  3. Kappiy says:

    I wouldn’t be fooled by these idiotic “simplification” schemes. They are nothing more than a subterfuge to raise taxes.

    Such a plan would be disastorous not only economically, but politically.

    Currently, some of the largest federal welfare programs are squarely situated in the income tax code: deductions for home mortgage interest, deductions for refinancing fees, deduction of casualty loss, deductions for home equity loans and lines of credit, and deductions for property taxes.

    The middle class beneficiaries of this government support are in suburban–generally conservative Congressional districts. People at the extreme high and low income margins may benefit from initiating a new tax, but for the middle classes, they are likely to suffer significantly.

    Also, the real estate market will be spun into a state of chaos, with thousands unable to afford to buy (or maintain) homes.

    It is very easy to demonize the IRS and the current system, but whenever politicians start screaming about “simplification,” it is important to understand the full consequences of a massive tax increase.

    In 2003, the Feds subsidized homeowners to the tune of $110 BILLION. It is true that the Feds are running at a massive defecit and many of the social Security proposals being talked about by Bush and Repubs are going to increase that significantly.

    This type of plan is clearly a back-door way to jack up taxes needed to pay for defecits brought on by reckless spending over the past 4 years without coming clean about the real economic ramifications that will really hurt middle class America.

  4. flaime says:

    Kap:

    How do the poor benefit from a 23% increase in food costs?

  5. Boyd says:

    Flaime:

    “And his bill untaxes the poor by including an advanced monthly rebate, for every household, equal to the sales tax on consumption of essential goods and services, as calculated by the government, up to the annually adjusted poverty level.”

    But as James indicated, it doesn’t matter how well such a transition might work. All that matters is how such a change would be perceived politically.

  6. Kappiy says:

    Flaime- You bring up a good point. When you look at the section Boyd quoted you can anticpate major problems if the federal poverty index is used to determine rebates. The poverty level is a national figure that doesn’t take into account regional distinctions in cost of living. So, actually, the very poor folks in rural areas would probably be the only sector of poor folks who benefit while the urban poor would face challenges.

    I would argue that the “poor proviso” is put in there mostly for political reasons to stave off Democrats’ attacks.

  7. Mikey says:

    The corporations will pass the sales tax onto the consumers also – If anyone thinks differently they’re dreaming. It’s just another cost of doing business, like wages, commodity costs, rent, etc.

  8. Maggie says:

    TAX, TAX, TAX, TAX, TAX, TAX, TAX.

    Ye gods, don’t they know any other word in Washington.

    Let’s fix all the problems at once…Medicare and Social Security….

    National Lottery….ten dollars for a ticket…lottery once a month….

    and the winner gets……

    Drumroll please:

    NO MORE FEDERAL TAXES!!

    Yup…. the federal government keeps all the lottery money…..and the winner gets a free federal ride for the rest of their lives!!

    BABY, SIGN ME UP….that’s $10 a month well spent.

  9. Tom Kropewnicki says:

    Here we go again. Uninformed people making rash judgements about something they know nothing about. Everyone has a right to their opinion, and I don’t mean to imply otherwise. Please everybody, log onto FAIRTAX.ORG. Get informed. If you still disagree fine. But this country will not remain economically competitive much longer if we don’t move to the FAIRTAX.

  10. Jerry Kreiner says:

    Tom is absolutely correct. Log on to Fairtax.org and get yourself educated prior to bashing a plan you clearly know very little about.

  11. etb says:

    To be sure, any significant change in our tax code is probably a pipe dream. Too many toes to be trampled. Do many deserve to be stomped…yes indeed, but that’s not the point. Most have advocates and their howls will be heard. Let’s not fool ourselves. Does anyone really believe that countless tax lawyers, CPA’S

  12. Douglas says:

    “The corporations will pass the sales tax onto the consumers also – If anyone thinks differently they’re dreaming. It’s just another cost of doing business, like wages, commodity costs, rent, etc.”

    There are no taxes to “pass on” under the fair tax plan. The tax is paid only on retail sales of new goods. Like Mr. Kropewnicki said, educate yourself at fairtax.org before making statements about a topic you know nothing about.

  13. Randall Ierna says:

    I am a taxpayer. As an independant contractor in Real Estate for over 30 years, I have paid over 6 figures into the income taxes and another 6 figure number into social security. I cannot comprehend the 55,000 page tax code. I have had to pay a CPA for years to do my taxes.
    With that said as background, I fully support HR 25 and S25 The Fair Tax. It is very simple to comprehend. You buy you pay. The more you buy (only NEW goods and Services) the more you pay.
    The poor will get a rebate check every month. The tax has been calculated at 23%. I personally will save about 30%. Because I will not have to pay Income, FICA and FUTA taxes out of my earnings.
    Folks, I have STUDIED this plan.
    I went to http://www.fairtax.org and read it. I went to the House website and read HR 25 and went to the senate website and read S 25. It is the way to go.
    Now I realize powerful forces are already at work to try to kill this tax plan. The IRS is definitely against it. It puts most of them out of work. The Tax Attorneys and Tax Accountants are harumphing that it will never work and give eloquent and convoluted reasoning why (See some of the posts here). A lot of politicians are against it because it limits their control and social engineering through the use of tax shelters All I ask is that those of you that are at least interested in looking at something else, go to one of the websites and get educated. If there is anything you can see wrong with the “FAIR TAX” plan then by all means support the truly incomprehensible system we have now.
    All you Bureucrats, Politicians, Attorneys and Accountants that will lose your jobs because of this can continue to battle a losing cause. You can say what you want. The American public is sick and tired. much like they were when they revolted against the King Of England for his “Tea” tax and took the country.
    Don’t be ignorant. Check out http://www.fairtax.org

  14. Dee KayT says:

    My son is 24 years old and still a student in college (post graduate). He works a part time job and made only a little over $6700 last year. (I pay his tuition and books … he pays his lunches, etc.) I still do not get to claim him as he is over the age to use as a deduction. I did the math. Last year, he ended up with a refund of all of he withholding, but paid almost $400 into Social Security and Medicare. He didn’t get that back. Under the Fairtax plan, his monthly rebate would have been at $172 per month. I figured if he spent the entire $6700 and paid 23% tax he would have come out ahead for the year by over $1100. That is $1100 more than he had under the present tax system. How is that unfair to the poor? Doing the same calculation for someone with $40,000 per year that person comes out at $200 ahead. The government also gets more because there are no refunds at the end of the tax year. The monthly rebate is a known figure that the government can budget in. The government would also get the tax on the over 50 million foreign visitors per year plus the illegal aliens, drug dealers, thieves, etc. Nobody would be exempt. Especially the rich. Study the program then make your comments. http://www.fairtax.org

  15. James Harper says:

    I would like to ask those opposed to the Fair Tax why they would prefer to have politicians and lobbyist dictate how much of their money that they can keep? Why would you want to hold yourself subject to the will of another? The absolute beauty of the Fair Tax is that it puts the power of taxation where it belongs, in the hands of the people. You and you alone control how much tax you are willing to pay and the only power left for politicians is the rate of one simple tax. No more hidden taxes. No more class warfare. Under the Fair Tax everyone is equal and April 15th is just another day on the calendar. Bottom line is that the Fair Tax is the simplest, most efficient and most economic friendly tax system available. One last thing incase you haven’t noticed, currently every American is paying the tax burden for all businesses in the way of higher prices for products and services because businesses must be able to pass their cost on to the consumer in order to remain in business and this amounts to double and triple taxation on each American. The Fair Tax will eliminate these hidden taxes and ensure that we are all taxed once and at the same rate and what could be fairer?

  16. Mikey says:

    Douglas, businesses buy things retail also. If you think they won’t end up paying a tax, you are dreaming. If you don’t think they’d just calculate their likely amount and pass it on to their customers, you are really dreaming.

  17. Jim says:

    From the FAQs of the FairTax.org site:

    “Under the FairTax plan, money retained in the business and reinvested to create jobs, build factories, or develop new technologies, pays no tax. This is the most honest, fair, productive tax system possible. Free market competition will do the rest.”

    http://www.fairtaxvolunteer.org/smart/faq-main.html#23

  18. phil wilburn says:

    When I stop and think about how much revenue we would be getting from sales tax,paid by illegals,thieves,drug dealers and pimps,I jumped right on board the fair tax bandwagon.Also think about all those foreign visitors even more money. Absolutely no one who buys retail would escape.
    I know your next uneducated argument is no one will buy retail and the economy fails. Please go to fairtax.org and get educated.

  19. Kimball says:

    From a post by: Mikey at April 1, 2005 12:09: “…businesses buy things retail also. If you think they won’t end up paying a tax, you are dreaming. If you don’t think they’d just calculate their likely amount and pass it on to their customers, you are really dreaming.”

    Under the current system AND under the FairTax, businesses must recover their costs. Nothing wrong with that. Businesses that stay in business, however, seek to control their costs in order that they may offer their products at competitive prices.

    The FairTax eliminates the cost of corporate income taxes, including most of the huge dollar amounts businesses waste simply to comply with the current tax code by hiring tax lawyers, tax accountants, and staff specialists on payroll / Social Security taxation, etc. Much less cost remains to pass on to those who really pay these costs–the consumers.

    The FairTax gives the choice to businesses, also, to control their taxes by controlling what they buy at retail that is subject to the new sales tax. Business-to-business transactions will not be subject to the sales tax, so the true payer of costs in a competitive economy (again, the consumer) benefits by not funding the costs of compliance with the current tax system.

  20. Doug says:

    1. Tax is really 30% calculated as other sales taxes. It is 23% of total including tax. An item selling for $100 will have a $30 tax!

    2. All of your after-tax assets value will be reduced because they will be double-taxed. This includes your Roth IRA!

    3. You will get to pay Social Security taxes until you die instead of untill you retire.