Federal Sales Tax

[blueback]

What if we got rid of the income tax, capital gains tax, estate tax, etc and replaced the whole thing with a national sales tax.

It would save a massive amount of money by being simple to implement, track and enforce compared to the expense of the IRS. It would make it impossible for anyone who wanted to participate in the "white market" to avoid taxes. It would automatically tax the poor a little and the rich a lot because the poor don't buy yachts. It would increase the personal savings rate because all the money we earn would go to us, instead of to the government as an interest free loan.

What do y'all think? I have an inkling that it might encourage Americans to buy more stuff overseas to avoid paying the tax. Would that be bad?

[MichaelH]

You're right that the poor buy fewer luxuries than the rich. However, the poor spend a greater percentage of their income than the rich do. (The rich may buy a yacht or two, but they tend to invest.) This makes a national sales tax a regressive tax - the tax rate is greater on the poor than it is on the rich.

Also, the sales tax would be rather high - my WAG (wild ass guess) would be 30%. This would create a huge incentive for a black market where things are bought and sold without having to pay the tax.

FWIW, I do like the simplicity of a national sales tax. It would remove many burdens from many people's lives.

[ScottH]

You're right that the poor buy fewer luxuries than the rich. However, the poor spend a greater percentage of their income than the rich do. (The rich may buy a yacht or two, but they tend to invest.) This makes a national sales tax a regressive tax - the tax rate is greater on the poor than it is on the rich.

Yes, this is true, but "basket" items would likely be un-taxed (as with most state sales taxes), and, since poorer people tend to spend most of their income on basket items, it favors them too.

For what it's worth, flat income taxes are just about as simple--in principle--but have just about the same number of disadvantages.

My personal opinion is that everybody should contribute, proportional to their ability to do so, but always more than "nothing." Today's system doesn't enforce this; some fairly wealthy people can all but dodge taxes with breaks, writeoffs and loopholes, and some poorer people actually get more back than they pay in. I don't like either.

[Fej]

What if we got rid of the income tax, capital gains tax, estate tax, etc and replaced the whole thing with a national sales tax.

It would save a massive amount of money by being simple to implement, track and enforce compared to the expense of the IRS. It would make it impossible for anyone who wanted to participate in the "white market" to avoid taxes. It would automatically tax the poor a little and the rich a lot because the poor don't buy yachts. It would increase the personal savings rate because all the money we earn would go to us, instead of to the government as an interest free loan.

What do y'all think? I have an inkling that it might encourage Americans to buy more stuff overseas to avoid paying the tax. Would that be bad?

My economics teacher said the exact same thing you've said here, and I agree it would be a very good thing. However it will most likely never happen. Thanks to our oh-so-efficient government.

And as to Americans buying stuff overseas I don't think that would be a big problem when you consider that you'd have to pay a shipping fee which could potentially be more costly than the tax itself.

[le Duc]

I personally would have a couple of serious concerns about this type of proposal:

1. Proponents of the idea (and general anti-tax persons) talk about the elimination of the IRS, referencing its creation in conjunction with the Sixteenth Amendment, which authorized the graduated income tax (incidentally, this is not directed at the OP, who referenced this briefly but didn't make these assertions).

But the agency actually dates back to the creation of the Office of Internal Revenue in 1862. The reality is, there will always be a federal agency charged with the collection of tax money and enforcement of tax laws. So the 'selling point' of doing away with the IRS is, to me, not a selling point at all. Now the idea that the IRS would then be more efficient and less costly is a legitimate argument, which brings me to my second point.

2. Obviously, one of the difficulties right now with the income tax is all the different definitions and classifications of income and exemptions and so forth. But I see the same problem arising, only worse, within a few years of enacting a sales tax: what is a sale? If you exempt yard sales, what if I sell my boat at one? How do you define distinctions between sales and service? And then once everything is defined, I see a much larger enforcement arm than we already have now to crack down on black markets and bartering. I would anticipate that the end result would be a much more oppressive tax code and more expensive enforcement.

Having said that, if I did hear of a proposal that I thought was cheaper, I would love it. To respond to MichaelH: the poorer do spend a greater percentage of income, but a lot of this is on daily necessities, including food (every proposal I've seen exempts food), utilities (would that be sales or service?) and living quarters (renting isn't a purchase, and you could exempt a certain level for purchase of a house). I don't think it would necessarily be regressive if it was designed properly.

To blueback's final concern, the way the income tax is now, you get taxed where you work and where you live, with offset credits between most jurisdictions (referring specifically to states and municipalities). I would imagine that the under a national sales tax, there would be some system in place to tax any international purchases, thus eliminating that loophole.

This is a great topic, and I look forward to hearing all the different perspectives.





le Duc added to this post, 4 minutes and 32 seconds later...

And as to Americans buying stuff overseas I don't think that would be a big problem when you consider that you'd have to pay a shipping fee which could potentially be more costly than the tax itself.

That misses the point, though, because the shipping fee goes to the shipping company. This isn't about taking money out of the consumer's pocket, it's about generating appropriate revenue for the government.

[blueback]

I think it makes sense that people support the system to the extent they benefit from it. The state provides a secure, predictable environment in which to trade to mutual advantage. Therefore, if people take advantage of the environment by trading, it makes sense that they pay to support the environment to the extent that they trade.

Sort of like a person who provides a location to host a floating crap game. They don't bet, they just collect a percentage of every win to offset the risk of establishing the environment in which the game can happen. If they provide a poor location, and the game doesn't happen, they don't get anything. If they provide a great location, and people get all night, they get a lot.

I suppose private sales of all kinds would be handled roughly the same way they are today. You will be expected to report the income and pay tax on it. I don't think the government will worry too much about the $100 that gets exchanged at a yard sale, but not paying tax on it will be criminalized. It might never cause a problem, but if it did come up something would be done about it. Probably just a forced taz collection plus a fine.

Taxing investments is an interesting idea. I actually think it might be a good idea not to tax them; at least not when they are not income. Let them grow tax free and when the new money is withdraw (converted into cash) tax it. I think that it would be a good idea to encourage people to put as much of their money as possible into investments. We don't save enough as it is. Also, the more money being invested the better off everyone is.

[le Duc]

Blueback's private sale analysis makes a lot of sense, because stuff like that happens in the income tax world now: small cash income amounts that people pocket and don't report. It's criminal, it's under the table, and it's too small for anybody to worry about it (actually, it probably makes more sense for it to be done that way than to document and report that $200 on the tax form).

I've really only considered the sales tax as a replacement for the income tax... I would think the best idea is to leave existing capital gains and estate taxes in place, although I think the latter should be appropriately adjusted for inflation. As an investment manager, I don't like the capital gains tax, but my greater concern in eliminating these two is how much this lack of revenue would force an off-setting sales tax increase. Right now, most tax-deferred vehicles are subject to income tax instead of capital gains, so just taking away the income tax has a positive impact on investors.