The flat tax is not the only solution that has been proposed to address the problem of our monstrous federal income tax code. Another proposal under discussion is the national retail sales tax. It would be a consumption tax levied at the national level. One variation that has gained a lot of support in Congress is a 30% tax on most consumer purchases of goods and services.
As I say in my new book, Flat Tax Revolution, the flat tax is a better idea than the sales tax for a multiplicity of reasons. But it should be stressed that supporters of a sales tax have their hearts in the right place—they rightfully believe that what we have today is an abomination, that we are overtaxed and that we are all subject to abuse from the IRS. A sales tax would be infinitely preferable to the current monstrosity.
I believe, though, the flat tax is preferable, not least because it could more easily be enacted than a national sales tax: Before a sales tax is put in place, we must repeal the 16th Amendment, which allows Washington to impose the income tax.
The national retail sales tax is intended to replace personal and corporate income taxes as well as payroll taxes, capital gains levies, and estate and gift taxes. It would be collected on the sale of new goods and services and exempt from all transactions of used items. Business-to-business purchases would also be exempt from taxation.
The national sales tax plan calls for a refund from Washington for all taxpayers. This refund would be issued each month to offset the tax levied on necessities such as food, clothing, and shelter.
The official poverty level for a family of four is $18,850—the rebate, if this family included a married couple—would be $479 a month or $5,745 a year.
Many Serious Challenges
On the surface, a sales tax can look appealing. It employs some of the same principles that make the flat tax work. It does not create unnecessary and distorted incentives for certain segments of the economy. It treats savings and investment neutrally. But, alas, the concept presents numerous challenges:
• A national retail sales tax will raise the price of many goods and services. The price of non-exempt goods and services purchased at retail would increase 30%. Partisans reply that such hikes would be overcome by people having higher take-home pay—no more deductions for income taxes or FICA taxes. They also insist that the sales tax would sufficiently lower the cost of most goods and services over the long term, so that the 30% surcharge would not be noticeable. Really? We have to admit we’re skeptical. Have you ever heard of a tax—one that’s, in effect, a surcharge—making a product less expensive?
• The plan’s fixed rebates favor those who live in low-cost areas. Those who live in high cost-of-living cities might receive higher wages, but at the same time they spend more of their money.
• Rebates don’t correspond to income. No matter how much money you make, you’d still get the same rebate in the mail each month. Poor taxpayers might resent that their well-off counterparts are getting the very same amount they are.
• The plan opens the door to encroaching entitlements. There’s also the danger that the rebate under the national sales tax would morph into something resembling a traditional government entitlement. There would be political pressure to increase the rebates and to then differentiate between people of various incomes.
• Putting the program in place would mean a new, high-cost bureaucracy. A national sales tax would require establishing a dedicated government bureaucracy tasked with implementing the rebate program—with its various processes of taxpayer registration and verification, not to mention the payment system itself, generating layers of government paperwork.
• The sales tax would devastate the market for new homes. By taxing new homes at 30%, it would constitute a significant disincentive for new home buyers, who are key drivers of economic growth. People would seek to avoid the tax by purchasing existing homes.
• The tax would raise the already soaring cost of college tuition by 30%. College tuition, the sky-high price of which is already straining the resources of most families, would be among the goods and services to be taxed. There is no way any parent facing college tuitions would want to see a national sales tax enacted.
• The sales tax would stifle the online industry. The Internet owes its growth, in part, to its status as a little-regulated, tax-free zone. The national retail sales tax would stifle this industry with its comprehensive tax blanket covering both goods and services.
• The tax is unfair in times of recession. In a down economy, when you may be earning less, you’d still be hit with the 30% tax when purchasing goods and services. In contrast, the flat tax is based on how much you earn. If you’re making less in a bad down economy, you pay less tax.
• The plan encourages redundant, inappropriate taxation of business. Many fear the unfortunate phenomenon of so-called cascading taxation will be exacerbated by national sales tax. Retail outlets will collect it erroneously, just as they currently do at the state level. Businesses will be even more unfairly taxed.
• Collecting the tax using existing state apparatus, as some advocates propose, may not work. Each state has distinctions in what can be taxed. In some states, groceries are taxed. In others, they are not. Introducing a national sales tax is not a matter of piggybacking on preexisting sales tax systems. It would require a unique, uniform system across all 50 states.
• Sales taxes increase tax evasion. Experience shows that sales taxes face major enforcement problems when rates go beyond 10%. Studies have concluded that when governments attempt to enforce a retail sales tax at the level proposed—30%—evasion picks up dramatically.
• The plan’s business exemption will encourage tax avoidance. You’ll see a rush of eligible and ineligible people seeking to declare themselves “businesses” in order to qualify for the tax’s business exemption. Licenses and exemption certificates for phony businesses would be rampant.
• The national retail sales tax puts retailers in the unfair position of policing their customers. Retailers would have to determine, for example, whether the lumber a customer just bought is really meant for business resale—or for fixing up the customer’s kitchen.
• The sales tax would unnecessarily inflate the cost of government to you, the taxpayer. It would also apply to purchases made by the government. Think of all the supplies and equipment Uncle Sam buys. The tax would raise the cost of government in America by literally hundreds of billions of dollars.
Fairer and Simpler
A flat tax would be fairer and simpler than a national sales tax. Under a flat tax, for example, everyone would get the same exemptions. It would also be more efficient, because there’s a system already in place that is a proven tool in collecting the huge amounts of revenue.
It’s not that the national sales tax is all bad. It’s just that we can reform the current code faster, and better, with a flat tax.