Thursday, May 14, 2009

A National Sales Tax

I tend to keep out of tax reform debates because, frankly, I'm not smart enough to keep pace. I used to brag about how I haven't taken a math class since high school, but now that my kids are getting to be school-aged I am beginning to fret about when, exactly, they will surpass me. I'm thinking I have until junior high before I have to start learning (or re-learning) along with them to help out with homework.

So I'd heard of the proposal for a national sales tax, but didn't think too much about it, until I recently heard it boiled down to this: "We should tax consumption, not productivity." Stated that way, it seemed incredibly sensible to me, so I decided to dig a little deeper. You can play along by Googling consumption tax or national sales tax.

Basically, because that's the way my mind has to work in this area, a national sales tax would eliminate the income tax, so you would get the full amount of money you earn, and replace it with a tax on new goods and services purchased.

One of my pet peeves with our society is how consumption-oriented it is. We have to have the bigger house (with higher energy bills), we have to buy the bigger car (with lower fuel efficiency), we feel like our self-worth is measured by possessions and owning more and more. Wouldn't we be better off learning how to live more efficiently and focusing more on the simple pleasures of life? And even though I am a liberal and, as the stereotype goes, love big government, I think we all would love a more efficient government.

A national sales tax would seem to be a step toward both. First, it would likely encourage saving and investment over consumption. Here are some quotes from modern-day prophets on staying out of debt and living within our means:

President Heber J. Grant: “From my earliest recollections, from the days of Brigham Young until now, I have listened to men standing in the pulpit . . . urging the people not to run into debt; and I believe that the great majority of all our troubles today is caused through the failure to carry out that counsel.”

President Ezra Taft Benson: “Do not leave yourself or your family unprotected against financial storms. . . Build up savings.”

President Harold B. Lee: “Not only should we teach men to get out of debt but we should teach them likewise to stay out of debt.”

President Gordon B. Hinckley: “Many of our people are living on the very edge of their incomes. In fact, some are living on borrowings. . . I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt to the extent possible. Pay off debt as quickly as you can, and free yourselves from bondage.”

Americans, as a whole, spend more than they earn. Bankruptcies continue to climb. Very few people had created a safety-net for the current economic crisis (which I have heard many refer to as the Great Recession). A tax on consumption (ranging anywhere from 15-30%, usually pegged at about 23%) might encourage more savings, thus creating a more stable society and economy. It would also encourage investment, leading to greater capitalization of business. Increased savings would reduce stress, interest payments, and becoming beholden to banks.

Second, under the current income tax system, individuals and corporations spend hundreds of billions of dollars every year just complying with the income tax requirements. The code is so long and so complicated that it is astonishing to me that the system even works. A national sales tax would virtually eliminate the tax code bureaucracy, eliminate the need to ever file a tax return again, and some have even suggested it would eliminate the need for the IRS completely under certain conditions.

The downside, and there are always downsides, is that it is inherently regressive. The poor must spend nearly every penny they earn in the marketplace, whereas the rich spend an increasingly small amount of their wealth on goods and services. This means that the poor would spend a larger percent of their money on taxes than the wealthy, which is the opposite of what our income tax has always been.

This alone is enough to torpedo the idea, for me and most Americans, but there are ways around it. The most common is the annual or monthly prebate or rebate check which would eliminate the tax for those living below the poverty level, and lessen it for those making otherwise low incomes. Another idea is to eliminate the tax on essentials, like food and medical expenses, and/or create a higher tax on luxury items.

So I like it because of its simplicity and its propensity to encourage Americans to save and invest. I am leery because it is potentially very oppressive for the poor. I am by no means completely sold on it, but it is an interesting way to look at tax reform. Thoughts?

11 comments:

winkieburger said...

I worry what it would do to those who already have "careers" in the market of consumption. I'm not talking about the CEO and higher up's but the people further down the line (those with little education or those pursuing education through these menial jobs).

I am weary of what would happen to the poor as well. How feasible is it that those living below the poverty line can afford to wait for a rebate check each month? They would end up affording less essentials over the course of the month while waiting for their check. (Although that might turn out to be just a learning-about-money management curve)

Jacob S. said...

The point about the checks is one I had thought of, as well. Plus it would add more administrative costs and layers to the whole process.

As far as retailers go, and again I am far from an economist, if everyone has to add the same amount of tax I don't think it would squeeze anyone out. The fact that more people are saving, though, may hurt retail a bit, so that is a real concern, I agree. I think it might be worth the trade-off, though, to have increased saving and increased investment in business.

Doug said...

I apologize for the lengthy comments. I felt compelled to review some basics:

As a liberal, my hard reaction to the prospect of a national sales tax is very negative. You are correct to state that it is regressive in nature. In essence, the less you earn, the higher your tax rate.

No one likes to pay taxes. That said, liberals and conservatives understand the word differently. Conservatives view taxes as a confiscation of wealth: the government is taking MY money. For liberals taxes are the price of admission to civilized society—it’s OUR money. Liberals view taxes as the reasonable and appropriate way to fund an investment in society and the future. From the liberal point of view, if somebody doesn’t want to pay taxes, they’re a freeloader.

When a liberal and a conservative get together on April 15 to complain about taxes, they are complaining about two different things. The conservative is upset about paying the government to do a job she thinks private industry could do better. The liberal is upset that her tax dollars are being used to promote private morality (so-called faith-based programs, funding unnecessary wars, and so on) instead of providing for schools, roads, health care, and public good.

From its beginning, the United States has always valued opportunity. Embedded in our vision of America is the belief that government should never put a limit on the success and wealth of the individual. The American culture of innovation and limitless opportunity has been a key ingredient in the economic successes that have driven the great American job machine for generations.

We need a tax code that encourages economic and job growth, continues to reward ingenuity and hard work, and expands the American middle class. We also need a tax system that raises revenue efficiently—that creates as few economic distortions as possible while still meeting our other national priorities.

Our tax system has at its foundation a basic notion of fairness—that the most successful among us should contribute a greater share to support the collective services we all enjoy. The idea of “progressive” taxation grows from the belief that those who achieve the greatest wealth also benefit the most from what our nation provides. Our schools, the stability of our economy, and public investments in research and innovation all contribute to the successes of America.

Here are some cons from my perspective:

- While encouraging savings and investment, consumer spending, which drives a thriving economy, would likely drop as people save and invest more rather than spend.

- Many incentives built into our tax system (such as education, home ownership, charity-think tithing payments, etc.) would be eliminated.

- On the operational and administrative side, adopting a national sales tax will greatly reduce costs. However, this savings comes with a human cost: hundreds of thousands of attorneys, accountants, and human resource workers who would likely lose their jobs due to the simpler tax system.

- Real estate values would likely plummet since the tax advantages to ownership would vanish.

- Mortgage and other consumer debt would likely explode since consumers would be forced to finance the taxes also.

- We would have to come up with another way to raise or set aside funds for social security.

- The transition costs of such a change would be extremely expensive.

- Tax evasion and instances of black market purchasing would likely skyrocket.

- Consumer prices of many items would go up by a much greater rate than the sales tax rate since raw materials would also be taxed.

- Retirees and others who have earned the majority of their life income have already had their money hit with income tax; thus, they will pay extra sales tax with money already subjected to income tax.

- A sales tax is more insidious; i.e. it's easier for the government to raise taxes without the people knowing it, as opposed to an income tax which shows up on the W2's and 1040's every year.

There are far more progressive alternatives for restoring a fair, simple, and pro-opportunity tax system, while generating the resources necessary to meet our looming challenges.

Little sister of SO said...

I have to wonder about the impact on businesses of decreased consumer spending. As consumer spending decreases significantly, surely companies would go out of business. When companies go out of business, how can investment in business (as a whole) increase?

I took the tax portion of the CPA (certified public accountant) exam yesterday, so I am well-aware of just how complicated the U.S. tax system has become. While I agree that simplification is in order, I cannot logically see how it can happen.

Don't forget that taxes are not paid solely by consumers. Business pay taxes as well, and the rules vary for C corporations, S corporations, partnerships, estates, trusts, etc. I believe that part of the reason tax laws became so complicated is because over time, lawmakers have started asking themselves "well, how should taxes (or deductions, or credits) be considered in situtation A? What about situation B? Should they receive the same blanket treatment, or should they receive different treatment, treatment that may be more fair?"

I am a financial statement auditor, not a tax return preparer, so my knowledge of taxes is not acute. However, it appears to me that taxes became complicated because different situations merit different tax treatment.

I am extremely wary about the idea of a national sales tax. Maybe I'm just being pessimistic, but I bet that even if a national sales tax were to replace the current system, it wouldn't be long before people are saying "what about this situation, and what about that situation." Even if taxes were restriced to sales, there are still situations that would merit different tax treatment. Thus, the national sales tax could very well start becoming as complicated and confusing as the current tax.

There are many other potentially negative side-effects of switching to a national sales tax, but I'll save that for another day.

Jacob S. said...

Okay, I'm sold. In theory it sounded like a nice idea, but I agree that the negatives are just too great to overcome. Thanks for your insights.

Andrew said...

I think the core issue here is whether or not our economy provides too many incentives to consume. I think a national sales tax is too extreme of a remedy, but I also feel that there may be other ways to stimulate responsible consumerism and savings practices. IMHO credit should be harder to obtain; perhaps someone should be keeping an eye on the value of all outstanding debt and whether or not that's a sane number. I understand that in today's financial world that might be a difficult thing to measure; a big part of our current crisis is not knowing how much all the paper out there is actually worth. But, fundamentally, I think this is largely a supply issue.

peter said...

I just want to say in response to Doug, that conservatives don't, as a rule, completely oppose paying any taxes, it is just a matter of what those taxes are going to pay for. What we think is appropriate spending just differs from what liberals think is appropriate.

Taxes are for taking care of things that can't be taken care of by the individual...infrastructure, police, fire, defense, education, etc. They aren't for redistributing wealth and making things more fair.

That being said, I appreciate the insight into a sales tax based tax system. I'm just curious, what changes in the tax system could be viable alternatives? Anyone have any ideas?

Kristy

Randall said...

FOLLUP TO THE FIVE PART SERIES ON THE DISCUSSION BETWEEN THE RESONANCE OF CONTEMPORARY LIBERALISM AND THE CHURCH OF JESUS CHRIST OF LATTER DAY SAINTS


As discussed earlier the discussion will happen in 5 sections or postings

Week One- A general construction of the essential question.

Week Two- An investigation of the policies and statements of the church and church leaders regarding points of overlap with social, moral, and political questions.

Week Three- An investigation of the nature of contemporary liberalism and its expressions on the same overlapping questions

Week Four- A juxtaposition of the church's positions against those of contemporary liberalism and contemporary liberals.

(Note: I use the phrase contemporary liberals because the term "liberal" is a phrase whose meaning has shifted in the last few generations. The contemporary conservative movement, in fact, is based on a political ideology known as classical liberalism, a point of future discussion )

Week Five- A conclusion of the findings of the juxtaposition and a broad discussion of the resonance or assonance of the church to "liberal" thought and practice.

I apologize that week two should have appeared on Sunday, but we are still working on it and ran into a couple distractions. It will appear this week.

Thanks to all

Randy Lewis

Randall said...

Jacob,

At last, a point on which we can completely agree. Of course a national sales tax is the most fair and simple way to tax Americans. Do you understand that the national sales tax has only been championed by conservatives and dismissed by liberals? This is why.

1. A national sales tax reveals exactly what the government is getting in simple terms. If the national sales tax were say fifteen percent, everyone would know what it was. Liberals like the byzantine tax code because it makes the question of taxes so complex it is hard for anyone to know how much they are really paying.

2. It is non progressive. In a national sales tax EVERYONE PAYS TAXES. That is an abrupt change in direction from isolating a greater and greater share of Americans from the burden to taxation and shifting taxes increasingly to a minority of people.

3. The tax code is the most important carrot and sticks liberals have. Liberals love the complex tax code because they can reward some things ( getting solar panels ) and punish other things ( smoking ) Without the tax code how are we going to control people? How will people know how to behave? They will be able to do whatever they want?

4. Sales taxes do not punish wealth building. In a sales tax paradigm, people with money could grow their money with no punishment. If someone can turn a million into two million, there is no tax until they buy something. As liberals generally demonize anyone with wealth, the sales tax eliminates the chance to rally the troops with class envy.

5. It would be harder to raise taxes in a national sales tax. In such a system, if the government attempts to raise taxes there would be universal resistance because everyone is paying taxes. No more tag teaming the "rich." In such a world, elevating tax levels would be nearly suicidal politically and lowering them would make you a champion of the people.

As you can see, the national sales tax works against every expressed agenda of the DNC. It would make it nearly impossible for them to get what they want because they would have to get EVERYONE to pay for it.

What a strangely conservative idea, I agree with absolutely every component of the moral argument for it. I want to try championing it to your parties leaders, even locally, and see their response. I'm curious now.

Of course, we would still disagree with how much money the federal government really needs, what it does, and how it disperses funds. But we would agree with its mechanism of collection.


Actually, I think the national sales tax fixes the other problems as a matter of course. I like your thinking. You see I'm rubbing off already.

Your brother in Christ

Randy

Randall said...

Oh Jacob

You caved already. Didn't it feel good for just a few minutes to champion simplicity and individual freedom?

But the lurking voice of the great paternal government came back into play.

I have a system of allowance in my house. When the kids do this and that, I give them allowance, when they dont do this or that they get less or none. But they are CHILDREN.

Liberals see themselves as parents and everyone as children. The great parent in Washington has to keep us all in their control rewarding us here, punishing us there, etc. God forbid people just spend what they spend and do what they do. tIME TO LET US ALL GROW UP AND MOVE OUT OF THE HOUSE.

They might give to the poor, but what if they don't? Better not risk it, better just take their money and do the right thing for them, they are after all, only children, too stupid to know what to do without us.

I think your one friend said it all when he said that the progressives see everything as "our" money. No one really has anything, the government ownes it all anyway.

I still think you felt the thrill of liberty for a few minutes there, of letting go of the great paternal grip of government they exersice with the tax code.

Better not to let us children decide what when daddy knows whats best. I still think you enjoyed your five mintes as a conservative.

Andrew said...

Randall, I'm curious. You seem pretty sold on a national sales tax as a way to "fund" government, so I assume you have or can find answers to some basic questions:

1.) What rate of taxation do you support? (i.e. 20%, 40%, 50% etc.)

2.) How much money would that provide to the federal government?

3.) Do you support taxing internet sales? How about international online purchases?