The Case For A National Sales Tax
Replacing income, payroll and other taxes would rid us of many of the income tax's most destructive attributes
Sometime during this 117th U.S. Congress, the long-proposed “Fair Tax” will likely receive its first-ever floor vote in the House. A national sales tax, it would replace not only personal and corporate income taxes, but Social Security, Medicare, estate and gift taxes too.
Though every tax scheme has its pitfalls and moral failings, the net impact of a switch from the income tax to a sales tax could be positive for the citizenry and the economy. While entrenched interests and the opportunity for misleading political attacks on Fair Tax proponents make its adoption in the near-term a long shot, it’s a concept worth keeping on the country’s collective back burner.
Fair Tax Basics
HR25, the “Fair Tax Act of 2023,” advances a national sales tax “on the use or consumption in the United States of taxable property or services in lieu of the current income taxes, payroll taxes, and estate and gift taxes.” The Internal Revenue Service would be sent into history’s dustbin, while a much smaller federal tax bureaucracy would administer the sales tax.
The federal tax rate would be a whopping 30%. The bill and many FairTax advocates describe it a 23% “tax-inclusive” rate, which means they arrive at by expressing the tax as a percent of the total outlay — including the tax itself.
While there’s actually some financial logic to that methodology when comparing it to income taxes, Fair Tax proponents should abandon the practice. Everyday Americans are fully accustomed to state and local sales taxes being expressed as a percent of the purchase price, and will never grasp the arcane reasoning that leads to 23%. They should emphasize the fact that paychecks would have no more federal income tax or payroll tax deductions and make the case for the 30% rate.
Opponents are quick to decry sales taxes’ lack of progressiveness. Setting aside the question of whether it’s actually just for governments to confiscate a higher proportion of money from those who earn or spend more of it, the proposed Fair Tax does include a “prebate” — money sent to every household that effectively negates federal sales tax for spending up to the poverty level.
For 2023, it would be about $6,900 a year for a family of four. It should be noted that the least prosperous Americans currently receive money through the income tax system, via “refundable” credits. If Congress wants to replace that largesse, it will have to create new entitlements.
Ridding America of The Income Tax’s Worst Traits
A federal sales tax would addresses the worst evils of the income tax, which include:
Complexity. Even for the financially astute, the income tax code is mind-numbing. Congress and the IRS create a wickedly complex maze, and then — with threats of penalties and jail time — put the burden of navigating it on people and businesses.
Wasted time and money. Americans spent an estimated 6.5 billion hours and more than $200 billion to comply with IRS filing and reporting requirements in 2022. While tax preparation fees and effort are top-of-mind, the income tax is a weed that drains time, money and energy throughout our economy — from all the record-keeping required by financial institutions, to the legions of lawyers and financial advisors straining to find loopholes for corporate and individual clients.
Intrusiveness. The income tax requires individuals and businesses to disclose an enormous amount of information — and to be prepared to share much more if the IRS comes knocking. With a sales tax, the government doesn’t need to know about your choice of charities, your marital status, how many nights you slept in your vacation home, how much alimony you paid, which investments you sold and how much you paid for them.
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A magnet drawing money into politics. A sales tax would certainly invite corporate lobbying and political contributions aimed at exempting certain goods and services from the tax, but the scale of that effort would be a fraction of what’s goes on vis-a-vis the income tax.
Tax-free criminals and illegal residents. Sales taxes reach those whose income is derived from illegal commerce or otherwise hidden from the government, from drug dealers and illegal immigrants to “under-the-counter” employees. Regardless of its origin, when money is spent, it’s taxed.
No tax system achieves 100% compliance and each one invites evasion, but it seems safe to say sales taxes outperform income taxes on those fronts.
Hiding the cost of federal government. That cost is obscured by the tax code’s complexity, and Americans’ obliviousness to the fact that businesses’ taxes and tax-compliance costs are largely passed on to them in the prices they pay. With a sales tax, the cost of government is printed on every receipt.
Seeking to collect about the same amount of total tax as the array of taxes it would replace, the Fair Tax would be set at 30%. For people used to state and local taxes of say, 4 to 8%, that’s a jarring figure — and that sticker shock is one of the best aspects of a national sales tax: forcing people to directly confront the cost of our enormous federal government and its sprawling military empire.
The rate would initially be set at 30%, but politicians would certainly run on promises to cut it. That, in turn, might make politicians more amenable to actually reducing the growth rate of the federal budget.
On the downside, politicians may seek to exempt certain classes of individuals from the sales tax.
Resetting Americans’ Understanding of Social Security, Medicare
The income tax isn’t the only problematic tax that the Fair Tax would abolish. For example, doing away with Social Security and Medicare payroll taxes would go a long way toward curing Americans of the false belief that Social Security taxes are “contributions” that fund individual “accounts.”
Rather, these programs that are hurtling toward insolvency would be seen for what they are: entitlement programs that redistribute money among Americans. Viewing them in their true light would help foster support for changes that will prevent their ballooning costs from turning into a higher sales tax rate at the register.
Tax-Code Profiteers Will Resist
Any effort to bring about major change must confront the tyranny of the status quo, as those who benefit from the current arrangement rise to preserve it.
Enactment of the Fair Tax would, overnight, render obsolete a great many American businesses and individual professions. Intuit — the maker of TurboTax — already has a history of lobbying against efforts to make federal income-tax filing simpler and free.
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Income tax repeal doesn’t just threaten tax preparation outfits, accountants and tax lawyers. For just one example, consider that repeal of the income tax means no more investment taxes — rendering 401(k) custodians irrelevant too.
There’s a huge political headwind as well: An incumbent’s vote for the Fair Tax is a huge gift to any challenger. As has been already demonstrated, challengers will run alarming ads proclaiming the incumbent supported a new, 30% sales tax, conveniently neglecting to disclose that the tax would replace all the other federal taxes, allowing Americans to keep every penny of their employment and investment income.
Even among the most impassioned opponents of the income tax, you’ll find strong resistance to a national sales tax, over fear we’ll end up with the current array of taxes and a new federal sales tax too.
The Fair Tax Act would do away with the income, payroll, estate and gift taxes and the IRS, but I fully agree that’s not good enough: It’s essential that adoption of a federal sales tax be accompanied by simultaneous repeal of the 16th Amendment, which cursed the country with the federal income tax in 1913.
There are many more sales tax considerations to discuss — unintended consequences such as incentivizing black markets….the benefits of taxing consumption rather than income…what’s really “fair” when it comes to taxation. Let’s kick it around in the comment section.
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You touch on many of my concerns in the final section of the column. Here's another: what about people who have paid their income tax and have saved enough money to live on, who will now be hit, taxed twice, with a national sales tax when they go to spend that money?
Rather than focus on how we're taxed to support the hugely bloated governments at all levels, I think we should focus on sharply paring down government, particularly at the federal level. At least 90% and probably more like 99% of what the federal government gets up to is not authorized by the Constitution, which also expressly forbids any activity not explicitly authorized by it. In plain language, most of what the government does is illegal, abetted by the near complete corruption of the nation's courts, which are charged with keeping the other branches in line.
If government spending were reduced to 5% of current levels, I wouldn't much care what sort of taxing system was employed to finance it.
I am a retired tax professional (JD, LLM in Taxation, CPA, co-author of a 3-volume tax treatise, and lecturer), with no stake in ANY tax system (I would pay LESS tax under FT). This is a brief summary - for details, see Web: http://sceldridge.wix.com/sceldridge & YouTube video https://youtu.be/wiVLf1vrQX8
FT is 30% sales tax, not 23%. If an item costs $100 before adding FT, you add $30 (not $23), for a total of $130. They deceptively divide the $30 FT by the total $130. Pretty sneaky, eh? When exposed, they babble that it “compares to” a 23% income tax, but FT is a SALES tax of 30%. The 30% FT would be added onto virtually every dollar you spend on goods and services.
FT admits readily (advertises) that it is MORE Progressive (more welfare) – see http://sceldridge.wix.com/sceldridge%23!fairtaxs-progressive-socialist-heart/c1hzm
The Prebate is not a refund of FT paid, as advertised. It would be a (today) $750+B NEW ENTITLEMENT, with EVERYONE receiving a big monthly federal check. It is financially/ politically unwise to create yet another huge entitlement that automatically increases annually and could be increased even more by Congress at any time.
FT (Prebate) has the poor pay no part of the fed govt, pay nothing for their personal SS/Medicare benefits AND give them a big tax welfare check. FT (Prebate) extends tax welfare to the non-working poor – and also takes the next Progressive Cloward-Piven step towards giving SS/Medicare to all regardless of work, by removing the tax cost of reporting SS Wages, which “invites” fraud in reporting them (as also noted by other authors).
The Prebate purports to merely repay the poor for any FT they pay (as if we all agree with that), but it would actually pay them far MORE by “assuming” the poor spend more than the underlying HHS Poverty Guidelines and that they will pay FT on all of their purchases (but they WON’T) – see http://sceldridge.wix.com/sceldridge#!ft-increases-tax-welfare/copu
Many FT’ers still market the original FT lie that we get a big raise (no Income & P/R taxes) AND FT prices would be the same as today’s - that can’t be true. FT is merely supposed to change the method of paying the same total tax dollars we pay today, so if you get a big raise, prices must go up by the same total dollar amount (except for minor savings in compliance costs). Retail prices would rise by nearly the full 30%. Even the AFFT’s in-house economist later admitted that prices would rise substantially, but prices would rise even higher than AFFT admits - see http://sceldridge.wix.com/sceldridge#!ft-will-increase-prices-by-nearly-30/czaa
FT results in a combined fed+S/L 30-45% initial in-your-face sales tax that would spark a
taxpayer revolt that would destroy our retail-sales-sensitive economy - that’s 30% FT (not 23%) plus 0-15% S/L. Those rates might go up to (say) 60-75% at an illustrative 30% evasion/avoidance rate (incredibly, FT “assumes “zero evasion, zero intentional reduction in spending, and zero migration from new to used goods – instead of increasing the FT rates, the $600-$900B shortfall will more likely result in a new Income tax, see below).
The FT’s 30% rate is actually closer to 50%. FT hides another appx. 20% in taxes (but FT’ers deceptively say “the FT is fully transparent - just look at your receipt and you will see all of the FT you will pay”). 1) 12+% is hidden by having fed + S/L govts pay FT (which is likely unconstitutional) – ultimately, they must get that money from us, 2) The fed budget will rise for a) SS & all fed pension COLAs caused by FT’s 30% price increase, and for b) fraudulent new SS benefits “invited” by FT’s removal of the tax cost for reporting SS Wages (as noted by other authors ), 3) FT economists have admitted that the FT is 5% short. See https://sceldridge.wixsite.com/sceldridge/fts-hidden-taxes
USED goods are advertised as exempt from FT, but that is a cruel hoax because the buyer won’t be able to prove that FT was paid by the seller(s) AND that none of the listed credits against FT were claimed, all as required by the Bill. And because the price of all used goods will rise to reflect the higher cost of new goods, the buyer will incur FT twice, once implicitly in the higher price of used goods and once explicitly because he can't prove the seller(s) paid FT.
Contrary to AFFT claims, FT’s new IRS (i.e., STAA) may well be even more invasive than today’s IRS - the buyer is liable to pay FT and receive/show a receipt, and STAA may audit consumers – see FT Sec 101(d). Also, we may well have to file an “Annual FT Summary”. See http://sceldridge.wix.com/sceldridge#!the-myth-that-the-irs-is-abolished-/c1tu0
As also noted by Cato Institute (see http://bit.ly/1vNxnq3 ), FT leaves us more vulnerable to wind up with both a NEW Income Tax and FT (instead of dramatically increasing FT’s already high explicit 30% rate). Congress would surely repeal FT’s laughable Sunset Clause and (with the 16th Amendment surely still in place) would use the excuse of the large revenue shortfall from evasion/avoidance to enact a new Income Tax which I believe is Congress’ true ultimate objective (i.e., to grab even more of our money to redistribute to those who will vote for them).
To summarize, the FT required a much higher tax rate. AFFT simply “assumed” away 20-30% evasion/avoidance, hid 12% by taxing fed +S/L govts, reduced the rate by 5%, and ignored the FT-caused fed budget increases - to get the rate down to 30%. Then a clever AFFT lawyer twisted the statute’s words deceptively, making 30% superficially appear to be “only” 23%.
Seniors would start to pay for SS/Medicare again and some would pay a 2nd-3rd tax on their earnings. Many middle-class seniors would pay more FT than they would have paid in Income Tax. Many would lose purchasing power because of 1) the nearly 30% price increase and 2) the higher S/L & federal taxes required because both govts must pay FT and can only get those funds from us, and 3) higher federal taxes due to nearly 30% higher SS & federal pension COLAs and fraudulent SS benefits. See https://sceldridge.wixsite.com/sceldridge/seniors
FT promises grand economic benefits which are all entirely unpredictable - mere Hype & Change. FT employs marketing hype and hyperbole, making countless undeliverable claims.
Instead, we need a Flat Income Tax; No Deductions/Exemptions/Credits,10% rate, business income taxed only once on a very simple basis - IRS is neutered, 1-page tax filing, everyone pays, evolutionary. See A Very Flat Income Tax, http://sceldridge.wix.com/sceldridge#!page-2/cjg9 Let your representatives in Congress know that this is what you want.