National Sales 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.
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 Ã¢€” 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.