I am strongly in favor of discarding the current income tax system and replacing it with a sales tax system. One proposal to do that is the current Fair Tax system.
I’m not going to discuss what the Fair Tax system is in any depth. It is described in depth in many places. A good starting point is fairtax.org. Basically, it is a plan to replace all income taxes with a national sales tax. This idea has been tossed around in various forms for quite a while, and there have been a number of changes suggested over time. In general, I’m pretty neutrel on most of the specific variations, but I am strongly in favor of the concept.
I wanted to list some of the reasons that I personally want to see a sales tax used. Some of these are pushed by Fair Tax supporters, others are primarily personal reasons, but I feel strongly about each of them.
Tax consumption, not production
A tax serves, not only as a means of generating revenue, but as a factor that affects some type of behavior. When a behavior is taxed, the tax acts as a natural deterrant to that behavior.
For example, if you increase the tax on cigarettes by a reasonable amount, the behavior (smoking) changes as a result of the tax. Nobody (sane) looks at the tax and increases the amount they smoke because of the tax, so people fall into certain categories. If the tax is small, most fall into a category of people who ignore the tax. They continue to smoke the same amount while paying a smal amount more. This group accounts for the increase in revenue due to the increased tax. Other people may reduce the amount they smoke. Either they cannot afford even the small increase so they are forced to reduce their smoking, or the increase provides incentive to them to reduce (or quit). Tax revenue from this group will decline.
Of course, if the tax is an unreasonable amount, the behavior changes dramatically, but in ways which are usually not desirable. For example, if a $100/pack tax were placed on cigarettes, revenue from cigarettes would fall drastically, since very few people could afford them. Cigarettes would then become the equivalent of an illegal drug (people would start selling them illegally in order to avoid paying the tax), and the primary result of this tax would be to create a new criminal society (illegal providers, and the users). The net affect would be that tax revenue would disappear, but expendature would increase (since you have to add resources to drug enforcement branches to police this).
But let’s say that we only tax a reasonable amount (whatever that means) so that we’re not creating illegal behaviors, a tax still has a damping effect on a behavior. The damping may be greater with some behaviors than other, and it will depend on the size of the tax, but it will always be there.
Let’s compare the current system of taxing income with the proposed system of taxing purchases. What are the behaviors being impacted? With income tax, the behavior that is impacted is that of earning money, of working, or in other words, the behavior of producing. With sales tax, the behavior being impacted in that of consumption.
Some people would argue that the two are similar. The argument that can be made is that if you tax consumption, fewer things are consumed, which means that fewer people are needed to produce those things. Although certainly true, I like to keep things simple and direct. In general, the primary impact will be greater than the secondary impact (unless you make the primary impact so large that a snowball effect is started, and this falls under the category of applying an unreasonably large tax).
So, if we tax income, the most important damping affect is on production. The secondary impact is on consumption. With a sales tax, the primary damping affect is on consumption.
I do not feel that anyone benefits by damping production. I’m not talking about damping the production of one item (we could certainly produce too many loaves of bread, or television sets, or some other item), but of production in general. It is always better if everyone is working.
This reason alone is enough for me to want the Fair Tax.
A simple way to make sure everyone pays
Taxing income is very difficult. The question of what constitutes income, and which types of income should be taxed, and at what rate are very complex (and have been made even more complicated). As a result, there are many ways to avoid paying taxes.
Any type of illegal income (the sale of illegal drugs for example) is not taxed. Many people use many different loopholes (some legitimate, many NOT) to hide income and shield it from taxes.
It is an impossible task to monitor the income of hundreds of millions of individuals, and expect them to report that income accurately so that they can pay an honest tax on it.
The end result is that many people are not paying taxes on income which should be taxed.
The Fair Tax system is so much simpler to administer.
Instead of monitoring every individual AND business, you only need to monitor businesses. That automatically decreases the complexity enormously. Second, you’re only monitoring one type of activity: the sale of a product. Every business already does this (though you still have the problem of getting accurate reporting).
Most importantly… everyone pays. Everyone buys things, whether they are drug dealers, illegal immigrants, rich people who can afford great tax lawyers, or your average middle-class citizen. A sales tax makes sure that they are all paying their taxes, and it doesn’t require that they report anything.
Most people believe that a graduated tax system where people who make more money pay a higher tax rate than those who make less.
I’m actually not necessarily a believer of this… I believe that everyone who benefits from living in the country should pay taxes. However, I’m much less interested in this issue than with others, and one benefit of the Fair Tax system is that it can be made to fit either scenario quite easily.
A graduated tax system is available is easy to implement by taxing luxury items at a higher rate than necessities (and some necessities may not be taxed at all).
Tax users of a benefit
Another benefit of the Fair Tax system is that the tax for some things payed for by taxes can be specifically targeted to those who profit from them.
For example, all costs for maintaining roads could come from a sales tax on gas. Any number of regulatory agencies could be funded by sales related to that industry. For example, an agency that regulated radio and television could be funded by taxes on the sales of radios and televisions, cable television bills, etc.
Doing this does mean that the tax rate will vary considerably from one item to the next, but it has the advantage of giving you a lot more control over what taxes you pay.
If I absolutely disagree with a specific tax, I can “refuse to pay it” by not buying items which have that tax while I lobby to get the tax changed.
Immediate knowledge of what tax I’m paying
Under the current system, it is difficult to know how much tax I’m paying. Indeed, I won’t know how much income tax I’m paying until next year (long after I’ve paid the tax). I may know how much is withheld from my salary, but it’s not until I fill out the income tax forms that I actually know my tax.
With a sales tax, it is immediately obvious. If the price tag says $100 before taxes, and $150 after taxes, I know exactly how much tax I pay.
As part of the Fair Tax code, I would support a requirement that the tax be listed on the price tag so you could see in advance what the tax is.
In any case, there would need to be a tax site where you could plug in some item’s tax code and see exactly what tax rate applied to that item, and what taxes were included in that rate.
Several years ago, I wrote to my congress person asking them to support a Fair Tax bill. I received a letter back saying that they did not support it because, according to numbers given by some agency, that would mean a 70% sales tax.
I was outraged… not that the tax would be 70%, but that the congressperson would thing that it was in my best interest to hide the number from me. I’m paying the taxes already in one form or another. If the taxes I’m paying are equivalent to a 70% sales tax, I want to be reminded of that every day, and I want everyone else to be reminded of it too. If everyone realized just how much they were paying in taxes, perhaps they wouldn’t be so apathetic about them.
Of course, I’d also be upset if a 70% sales tax were needed to fund the government… it would tell me quite clearly how bloated the government was. I think that a total sales tax (including both federal and state portions) should be around 25%.
When you buy a $20,000 car, how much of that is due to taxes? I’m not talking about the taxes that are added in when you go to pay for the car. I’m talking about taxes that are included in the actual price of the car.
The company that dug the iron ore out of the ground and made steel paid an income tax which they have to cover by including it in the cost of the steel they sell.
The company that bought the steel and used it to manufacture car parts also paid an income tax, which they tack on to the cost of the car parts when they sell them.
Next, the car company that takes the parts and builds a car also pays an income tax. To cover that, they have to charge a higher price for the car.
On top of that, you have to pay sales tax when you buy the car, but an unknown portion of the $20,000 price tag goes to pay the taxes paid by the companies as described.
With a sale tax many of the hidden taxes could be eliminated. I would favor taxing only consumer products and services. By not taxing all of the intermediate products, the hidden taxes are virtually eliminated. They are not completely gone of course… companies make use of some of those end products, and they have to pass the cost on to consumers, but these tend to be a fairly small portion of the cost to run a business, so the hidden taxes would be minimal.
Reduce the size of the government
It would not be possible to get rid of the IRS of course (no matter what form taxation takes, there will still be the need to monitor and regulate it, so there will always be a role for the IRS), but by eliminating income tax, it would be possible to reduce the size of the IRS drastically.
The IRS would have virtually no contact with individuals. They would work directly with businesses (which they already do), but there would be no need to have direct contact with other people.
It can be fixed by itself
So many of the problems in government are incredibly complex, and fixing them involves making so many different changes that it is difficult to come up with a plan to really fix them.
The tax problem however can be isolated from other problems with relative ease. It can be changed in many ways without impacting other government functions. It is also one of the very few systems which could be totally redone without having a large negative impact on the majority of people (tax lawyers and accountants being one of the few groups that would be impacted).
As a result, the tax system lends itself well to a complete fix whereas most other systems (health care and social security for example) will require changes to many different systems, and an “ideal” solution can probably not be achieved in one step (and may not be achievable in many steps).