oftwominds-Charles Hugh Smith

Could a National Sales Tax Replace Income Taxes?

Longtime correspondent Strawgold recently penned a thought-provoking argument to scrap the income tax in favor of a national sales tax.

"I deeply fear for the state of the Union - and while I know it has been a subject of fear before, never have the same dangers been present in such a way and in the numbers of today, nor with the instant technology that makes crime easy and punishment unavailable - I refer directly and specifically to the Banking and Financial systems as well as in our elected officials; the lifeblood of the Nation through it's lack of leadership and integrity is compromised like no time before it. King George himself could not have considered himself any more a Monarch than what I observe every day in the Halls of Congress and in the Investment banking system, nor could he possibly have considered himself farther above the law than do these "learned gentlemen" who "represent" us.

There will never be a dent made in any of this travesty as long as "Income" is what is being taxed. Those who use, must pay a fair share (when they buy their $6,000 shower curtains, when they buy their BMW - that is where to find them, not through their "income" because most (or all) of their "income" is accumulated in the Dark and will never be "reported") and it's rapidly catching up to us now, that which has taken decades to form.

Wasn't it the astute, nasty and thoroughly successful Leona Helmsley who reportedly remarked "Only the LITTLE people pay taxes?"

The "income tax" should be discontinued - scrapped - as a method of taxation. It is biased, unfair, blind, unenforceable and, for lack of a more effective word, incredibly stupid. (Or incredibly "well-thought out" depending on where you sit - and if you're one of the chosen few who stand to "gain from it".) Drug dealers, illegals and corporate officials don't report their incomes, yet they use our tax-supported services as though they did. (this last item tongue-in-cheek, but take from it what you will) Think about it.

Remember the infamous "revamping of the Income Tax Structure" that was to take place? The "proposals for different methods of taxation" that have been half-heartedly bobbing around for awhile are nothing short of another pathetic example of how gullible our lawmakers think we are. The flat tax is nothing more than another version of the income tax, readily circumvented. And the VAT idea amounts to another layer of complex taxes, in ADDITION to the income tax. Something nobody really understands, and would require a megatrillion restructuring of the "collection" system to boot. (at taxpayer expense, of course)

Personally, I favor a National Sales Tax as the preferable method of taxation. It's simple, numerous advantages are straight-forward, designed to catch everyone and plays no favorites because it is based on "purchase alone". It is budget-friendly to boot. I have heard the argument that it will affect the poor. To me, that idea comes straight from those who stand to lose the most face - and the most undeserved money - and amounts to nothing more than smoke and mirrors, double talk, stonewalling, rhetoric without substance, the same stuff that has been spoon fed us for decades. The supreme effort to stifle effective change, since the "status quo" has been the feeding trough for the bureaucrats so long, and they have invested so much time into it perfecting the feeding process, that naturally, they don't want to forfeit it now.

I don't for a moment buy this "hurt the poor" argument that is immediately thrown out whenever the National Sales tax is mentioned, because it makes absolutely no sense, especially when laid side by side with the alternative, which is now a national debt that has no chance of being reined in. The hard core poor and unemployed are being supported by welfare right now, (along with millions of illegals, who would suddenly become visible under a National Sales Tax, were it enacted) so they will not be affected in the least. In fact, if it came right down to it, I feel quite certain they could give every bona fide welfare recipient a raise in benefits equal to any sales tax they might have to pay in compensation and STILL be far ahead of the megabucks these professional "income" tax cheats are costing us.

And the states are already set up to collect sales taxes. Very little modification of their computer systems would be required to collect and pass on to the Federal Government. So too, are the vendors, the businesses who already collect sales tax for the states and send it in. (free labor, by the way, from for doing so for them) Eliminate the fear factor associated with the income tax. No more IRS agents. The State Sales Tax Auditors, who already conduct their own audits may need to hire some of them back in to beef up their state staffs for the simple business audits. I have lived through several of them; if you are playing by the rules, you are treated well; if not, you are fined. Nothing changes that way, except the indigenous fairness of the playing rules themselves.

I dare to wonder what their "plan of inaction" will be when all of us baby boomers hit the SS rolls beginning next year? The biggest segment of the tax-bearing population suddenly is no longer footing the "income tax" bill we have been doing for so long. We are now "reversing" and going on the roles ourselves. They plan on taxing our SS benefits? Well, they may be in for a big surprise if that's what is being counted on.

I have heard not one new idea - not even one - brought forth from the spectacular array of the 3 "status quo" Presidential candidates - one of which is, by default, destined to become President of the United States in January. Nobody seems to understand that the current system IS NOT WORKING because it CAN'T work any longer against the surging tide of humanity that is not helping row the boat.

I for one, have been trying to get behind a "national sales tax" agenda to boot out the "income tax" system for several years now, and am going to work harder yet on that end. That is one of the reasons I'm involved with the NWYC (although not nearly enough). I was told the National Tax would have to be 25%, which would be still be less than my own tax bracket is now - but frankly, I feel that figure is totally exaggerated - because when we quit depending on "income taxes" from those who never pay them, and started receiving revenue from segments of population we never even knew existed within our borders, because they don't appear on any "tax rolls" or "census" figures, that 25% figure would shrink like a prune in the sun. When those who have been free-loading for the last 60 years had to start ponying up as they bought things, it would become readily apparent what had been happening - and it wouldn't take six months to see the difference.

The next big problem would be to keep the lunatics in Washington from overspending THAT revenue, but at least it would be a respite from what is happening now. Take the baby boomers out of the equation and the reality of it may be a lot scarier than it appears right now, but of course, denial is part and parcel of the American Political System as it exists. The "Crisis Extraordinaire" exploding onto the scene is much more to their liking - after the fact - because it thus far has bought them additional time to stash even more away in the Swiss & Offshore Banking arrangements against the time when "somebody else" is going to have to do something with it.

I just hope it isn't Hong Kong or Saudi Arabia who is the "somebody else" that ends up "dealing with it." But I wouldn't take odds against that right now.

I'm also convinced that if we ever do, by some miracle, manage to have this National ST method considered as a more sound and responsible alternative to the income tax, it will need to be protected as it goes - with a set of attached by laws much like the "Bill of Rights" was appended to the Constitution; or it will be amended and plundered until it is no longer recognizable (or sensible) and so complicated as to be right back on the griddle we strive to get off of."

Thank you, Strawgold, for presenting the case for a national sales tax system.

The concept has been debated for some time; here are a few links:
National Retail Sales Tax Alliance
The National Sales Tax: Who Bears the Burden? (Cato Institute POlicy Analysis)
Sales tax (Wikipedia)

Strawgold's essay triggered the following semi-random thoughts:

1. Since the Federal Government spends some $2.5 - $3 trillion a year of our $14 trillion economy, and since the consumer sector is approximately 70% of the economy ($10 trillion), then a national sales tax would have to be set at about 20% to replace non-business income taxes.

2. The working poor pay about 8% of their income in Social Security taxes now, even if they pay zero income tax.

3. There are good arguments to introduce a tiered NST (national sales tax). The working poor rarely buy any single item that costs more than $50, so perhaps all items under $50 would carry a NST of 10%, everything from $50 to $20,000 would carry a 15% NST, and everything above $20,000 would carry a 20% NST. This tiering would effectively tax the higher-income segment because only people with decent income buy cars, boats, RVs, etc. with price tags above $20,000. If this seems too low, make it $50,000.

If you can spend $85 on a pair of shoes, you can afford to pay $100. If you can afford an $80,000 vehicle, you can afford $100,000.

4. Do you slap the NST on rent, mortgage payments and medical care? If you don't, then you're creating a bias in favor of those "tax breaks." Shelter consumes about a third of many family's incomes, so if you don't tax housing then the NST on other goods and services must be much higher. If the NST applies to rent, then it certainly should apply to mortgages and the purchase of homes.

5. the key idea of the NST is that you capture taxes when people spend money, not when they earn it. This would encourage savings, but it does miss the difference between someone earning $10 million or $100 million and those earning, say, $100,000. The family taking home $100,000 can be expected to spend at least 80-90% of that income on living; the same is not true of the family with $10 million in income.

The family with $100 million in income may well spend a mere 1% on living and devote the rest to accumulating "the means of production" (a nice Marxist terms for the important stuff in an economy) and buying politicans' attention to their special needs. Thus it could be argued that the top 1%, the ones with incomes above $350,000, should continue to pay income taxes, as the "tax bite" on their total income via a NST would be essentially trivial/unequal.

In 2005, the top 1 percent of tax returns paid 39.4 percent of all federal individual income taxes and earned 21.2 percent of adjusted gross income. (1.3 million taxpayers) Source: Summary of Latest Federal Individual Income Tax Data

6. The law of unintended consequences suggests that any system has hidden incentives and disincentives, and the NST would have to be designed to dodge the largest/most egregious of these unintended consequences.

7. Businesses would still have to contribute 8% of payroll for Social Security and pay either income taxes or a "commercial rate/excise tax" NST. As a small business, I would rather pay income taxes. An excise tax (NST) kills me in years when I am posting losses, for I have to pay it regardless of the health of my business that year. In that sense, an income tax is actually fairer for businesses.

I am sure many other consequences of the NST will have to be thought out, but the key idea of capturing taxes on spending offers the supreme advantage of harevsting some taxes from tax cheats and cash-income lurkers who are pleased to gobble up the benefits paid for by taxes and even more pleased to pay no Federal taxes whatsoever.

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