| TAX SALES, NOT INCOME!
(Burton's commentary is as valid today as when he wrote it in 1998.) |
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Author: David R. Burton
Issue: July, 1998A national sales tax is more compatible with the principles of a free society than any other tax system.
Americans pay dearly for the folly that is the income tax. The current tax system forces them to endure a lower standard of living, lower wages, and lower family incomes; industries that are less competitive in international markets; an intrusive collection apparatus that diminishes privacy and violates taxpayer rights; a system that disproportionately benefits lobbyists and the politically well-connected; extravagantly high compliance costs; and a future for their children that is much less full of hope and opportunity than it need be.
Virtually every study predicts a much healthier economy if the current tax system is replaced with a national sales tax. Typical estimates are that the economy will be 10-14% larger than it would have been under the income tax within 10 years and that savings, investment, productivity, and real wages will increase substantially. This larger economic pie will allow more people to buy the goods and services they want.
An economy this healthy will mean that everyone who wants a job can get one. It will mean better-paying jobs and more opportunities for advancement. The productivity and competitiveness of U.S. finns will improve as new investment and new technology are put to work. Family budgets will improve. The Federal, state, and local government budgets will benefit because, when the economy improves, tax revenues go up and relief spending declines.
A national sales tax would improve the standard of living of the vast majority of Americans because individual decisions to work, save, and invest will not be punished, as they are under the current system. Under present law, consumption is favored over savings and investment. The income tax system rewards the here and now, penalizing taxpayers who seek to save for the future by taxing the income that is saved and what that savings earns. A sales tax taxes savings and investment just once--when the income earned is used for consumption purposes. Under a sales tax, affluent persons who receive tax-sheltered income or profit handsomely from the complexities and confusion of the current system (such as tax lawyers and other tax professionals) will have to relinquish their favored place in the American economic system.
A sales tax would benefit lower-income families through increased economic growth and opportunity. Slow economic growth or recessions have a disproportionately adverse impact on the poor. Breadwinners in these families are more likely to lose their jobs, less likely to have the resources to weather bad economic times, and more in need of the initial employment opportunities a dynamic, growing economy provides.
Interest rates immediately will fall 25-30% under a national sales tax. This immediate effect has nothing to do with higher savings rates. Investors no longer will need to charge a tax premium to achieve a particular after-tax rate of return. The impact of elimination of the tax wedge or tax premium on interest can be seen every day in the Wall Street Journal. Tax-exempt municipal bonds tend to yield about 30% less than taxable corporate bonds of similar term and risk.
Small businesses create most of the new jobs in this country. Yet, the present tax system has a disproportionately adverse impact on such enterprises. Compliance costs are a much more substantial economic drag on small firms than they are for larger ones. We would all be better off if we let entrepreneurs concentrate on developing, producing, and marketing their products, rather than force them to deal with the demands of the income tax system. According to the Tax Foundation, small corporations spend $724 to comply with the income tax for every $100 they pay in tax. Replacing the payroll, income, and estate and gift taxes with a single, simple national sales tax on the retail sale of all goods and services dramatically would improve the economic environment for small businesses.
Investment is vital to all Americans. The most important cause of increased real wages is a higher level of capital investment per worker. A worker or farmer is more productive if he or she has more machinery and equipment to work with, particularly new ones that incorporate the latest technological innovations. Higher productivity leads to higher real wages. It is impossible, on a sustained basis, for an employer to pay workers higher wages than their productivity justifies because employers that did so would go out of business. Empirical studies suggest that higher investment levels per hour worked explain more than 90% of the increase in inflation-adjusted wages since 1948.
A national sales tax would impose the same tax on goods sold at retail in the U.S., whether manufactured here or abroad. This stands in stark contrast to the treatment of exported and imported products today. Exported products bear the full burden of U.S. income and payroll taxes, while imports are free of any such impositions.
For individuals who are not in business for themselves, a national sales tax would mean never having to file a Federal tax return again. April 15 would be just another spring day. For businesses, instead of the complex morass of income tax, payroll tax, employee benefit, pension plan, and estate tax roles, regulations, and information reports they currently must comply with, the question simply would be: How much did you sell to consumers last month?
The alternative minimum tax; depreciation schedules; determining tax basis for purposes of calculating the capital gains tax liability on your home; investments or business assets; uniform capitalization roles; the complex international provisions; the morass of rules governing pensions and employee benefit plans; 1040s, 1120s, and W-2s; and reams of other recordkeeping and paperwork would become just unpleasant memories. According to the non-partisan Tax Foundation, Americans spend around $225,000,000,000 annually complying with the income tax. Others have made comparable estimates, some higher and some lower. These costs are incorporated into the price of everything bought. That $225,000,000,000 amounts to about $850 for each man, woman, and child in the U.S. that is spent on tax-related paperwork. This is $850 that might as well burn for all the good it does anyone. Americans would be better served if the money and time used to comply with the tax system were spent on a child's education or a toy, to free parents to spend more time with their families, on a vacation or a new kitchen appliance, to donate to charity, or however they want to spend their time and money.
The system is becoming so unfair and so burdensome that it is starting to lose its legitimacy in the eyes of more and more people. The role of law and the national experiment in republican self-government gradually is being undone by the income tax. Under the income tax, tax evasion is a major, continuing, and growing problem. Notwithstanding a much larger Internal Revenue Service, more burdensome information reporting requirements, increasing stiff and numerous penalties, and a host of legislative initiatives, the problem is getting worse.
Based on IRS figures, tax evasion has increased 67% during the past 11 years. As a percentage of gross domestic product, tax evasion has reached two percent, compared to 1.6% in 1991. Taxes evaded continue to be in the range of 23% of income taxes collected. Moreover, these IRS figures do not include taxes lost on illegal sources of income such as the drug trade.
The income tax is collected with a heavy hand. In 1995, the IRS assessed more than 34,000,000 civil penalties on American taxpayers in an effort to force compliance with the tax system, about 4,100,000 of which were forgiven. Of the penalties, 22,100,000 involved the income tax and 10,600,000 the payroll tax. Both of these taxes would be replaced by the sales tax plan offered by Americans For Fair Taxation, a Houston, Tex.-based citizens group. Even assuming every business in America sold at retail and was required to file returns, no more than 13,000,000 businesses would have to do so, compared to over 154,000,000 returns (of all types) filed today.
Except in criminal or fraud cases, a taxpayer today must prove that his position is correct and that the government is wrong. Even with newly enacted reforms, it is extremely difficult and expensive for taxpayers to prevail in disputes with the IRS. Under a sales tax, most taxpayers no longer would be responsible for filing returns, so this no longer would be cause for personal concern. The sales tax would change the law so that the government carries the burden of persuasion and the taxpayer only is responsible for production of documents. Under the sales tax, Americans once again will be presumed innocent.
No tax on necessities. Under a national sales tax, no family would pay tax on the purchase of basic necessities. Unlike current law, a family would not be asked to support the government until it was able to support itself. A rebate of sales tax would be provided to all families on expenditures up to the Federal poverty level. The rebate would be paid monthly in advance to every family. Conversely, a family that worked and saved to improve its standard of living, independence, and security would not be punished by steeply graduated tax rates.
Because their first $15,600 was not taxed, a family of four spending $31,200 would pay an effective tax of 11.5% on taxable purchases, or $3,588. A family that spent $15,600 would pay no tax. One that spent $62,400 would pay an effective tax rate of 17.25%.
Cliff Cofer's comments, September 14, 2003: Above are 1998 figures. GoTo: FCA! for 2003 figures. Under the FairTax H.R.25, that's it. No Income tax, or Soc.Sec. and Medicare paycheck deductions. No estate, gift or capital gains taxes. No business Income taxes (or compliance costs) hidden in the price of goods/services. Thus, the price of new goods and services could drop as much as 20% to 30%, per studies by Dr. Dale Jorgenson of Harvard University Business School of Economics.
For a Summary Overview of the 2003 FairTax bill, have a look at this one-page FLYER!
That same family today pays 7.65% in Social Security and Medicare payroll taxes. The employer's share of the payroll taxes, which most economists believe actually is borne by the employee through lower wages, is another 7.65%, for a combined 15.3% tax ($4,774 on $31,200 in wages) before any income tax is paid. A family of four earning $31,200 would be in the 15% income tax bracket and pay roughly $2,055. In contrast to the $3,588 in sales tax paid, this family would bear the burden of $6,829 in taxes and have roughly $4,445 withheld from its paychecks.
The day that the income tax is repealed, the family in the above example will receive an increase in after-tax income by the amount of the employee payroll and income taxes currently being withheld. This amounts to an increase of 17% in the family's income, looking only at withheld taxes--26% if one considers the employer portion of the payroll taxes most economists believe actually is borne by employees. This extra money will mean that the family easily can handle the 11.5% increase paid under the sales tax plan.
The U.S. should not go down the road most nations have of exempting certain categories of goods such as food, housing, clothing, or medical care. First, exempting these goods would shrink the tax base dramatically and raise the required rate on other goods and services. Second, this approach is a terribly ineffective means of getting relief to low- or middle-income citizens. Exempting food exempts both lobster and macaroni and cheese. Exempting clothing exempts both $1,000 designer suits and T-shirts. Exempting housing exempts apartments and townhouses, but also exempts mansions on 1,000-acre estates. Third, such an approach would reinvigorate the lobbying industry as every business and interest group would work to secure its exemption.
Finally, it would make the system more complex and raise compliance costs as businesses (and their lawyers and accountants) seek to comply with and take advantage of the system. The best approach is to use the rebate system that all Federal sales tax plans employ. This targets the relief more narrowly.
This article so far has assumed that pre-tax prices will remain the same and after-tax prices of goods and services will go up by the amount of the sales tax. This is the worst-case scenario for the impact of a sales tax on prices. In fact, it is very unlikely that prices will rise by the full amount of the sales tax. Income and payroll taxes are embedded in everything Americans buy, and the repeal of these taxes will cause prices, before the sales tax, to fall. Harvard University economist Dale Jorgenson estimates that, in many cases, prices will come down so much that, even including the sales tax, the prices that consumers face will not increase. Jorgenson predicts that prices will drop dramatically, typically 20-25%, in a wide variety of industries.
A national sales tax is the simplest, most visible, and most understandable alternative to the present tax system. It conveys clearly the cost of government to every American each time that goods and services are purchased in the marketplace. Unlike virtually every other system, no part of the sales tax is hidden from view. Indeed, some argue that this very aspect of the sales tax --its honesty and visibility-- is a drawback. These pundits believe that hiding taxes from the American people is the best policy.
Finally, most alternative tax systems look and feel similar to an income tax and, with a few important, but relatively simple, modifications, can be converted back into an income tax. A national sales tax is impossible to convert into an income tax.
Although a national sales tax is the most appropriate tax system for a free society, Washington will not make this change on its own. Inertia is much too strong a force in the nation's capital.
Only sustained pressure from the public to do the right thing to build a better tomorrow will allow Americans to shed the heavy weight of the income tax. Once the public understands the immense gains to be achieved from junking the present tax system, that pressure will come.
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Mr. Burton is a principal in the Argus Group, a Washington, D.C.-based law and government relations firm. COPYRIGHT 1998 Society for the Advancement of Education
COPYRIGHT 2000 Gale Group