The case for a national sales tax

In recent months there has been much talk in the United States of the possibility of introducing a National Sales Tax (NST) to replace the existing income based tax system (stories on Fox News, CNN Money). The proposal has been steadily gathering support in Congress and has the backing of Federal Reserve Chairman, Alan Greenspan (stories on Chicago Tribune, Fox News).

The proposal for an National Sales Tax would replace all forms of taxation, including income tax, capital gains tax, corporate taxes, and other duties and levies with a single sales tax, or Goods and Services Tax (GST) for the Australians amongst us.

As a long-time advocate of a completely consumption based tax system here in Australia, I'll present my own take on this issue and why I think it would be an extremely beneficial policy. The main points in favour of a NST, in my opinion, are as follows:

  • Increased investment and employment
    The present income based tax system has the following effects:

    • Investment is strongly discouraged through Capital Gains Tax (in fact investment is doubly taxed: first in the form of income tax and then again on the capital gains earned on the investment).
    • Employment and promotion are discouraged through Income Tax.
    • Entrepreneurship is discouraged through Income Tax and Corporate Tax.
    • Consumption is encouraged, since it is, on average, taxed at a much lower rate than income.

    A consumption based taxation system would have the converse effect. Namely, people would be encouraged to seek employment, to seek promotion while in employment, and to invest their money rather than spend it. This would have several consequences:

    • Employment levels would increase. As a result of the elimination of disincentive to work we could reasonably expect unemployment levels to decrease. This would be further exacerbated by the fact that with increased investment and a decreased tax burden, companies would have more capital available with with to take on employees.
    • Interest rates would be lower. With a higher percentage of peoples' disposable income going into savings, banks would have a greatly increased capacity to lend money, resulting in lower effective interest rates. An important point is that these decreases in interest rates would not have an inflationary effect, since they come about as a direct result of people's consumption abstinence.
    • Economic growth would increase. As a result of massively increased investment and decreased growth disincentive, economic productivity (i.e. GDP) would increase.
  • Elimination of bureaucracy and complexity
    The present tax system necessitates a massive bureaucracy to support its processing and collection. In the United States this costs almost $11b annually. Under a simplified consumption based tax system this bureaucracy and its associated maintenance costs would be slashed, representing a significant saving to the tax-payer.

    In addition to bureaucratic simplification, a NST would represent an enormous simplification to the individual. I'm sure anyone who has filled in a tax return, whether it be here in Australia, the US, or anywhere else, would concur on that note.

  • Less tax evasion
    A NST would eliminate tax evasion, which is rife under the present system. People often argue against sales taxes on the basis that they harm the poor and favour the rich. I would argue that in fact quite the opposite is true. It in an undeniable fact that the bulk of the income tax burden falls on the shoulders of the middle-class, not the extremely rich. In fact, the very wealthy typically have the means by which to avoid income tax altogether through a variety of mechanisms which are not accessible to the working class. Under a consumption based tax system this could, to a large extend, be mitigated, and everyone would pay tax as a proportion of how much they consume.
  • Ideological reasons
    From an ideological point of view, I'm sure I'm not alone in being critical of how materialistic society has become. For this reason I believe a NST is a better alternative to the present system since it would encourage people away from living materialistic lifestyles, towards ones which place more emphasis on the importance of saving, investment and long-term financial planning.

Perhaps the most common criticism of consumption based tax systems is that they represent an increased burden on the poor. There are two rebuttals to this criticism:

  • Under the NST proposal a rebate on tax paid would be offered to those below the designated poverty threshold.
  • Unemployment levels would be reduced, resulting in many people at the lower end of the poverty scale being drawn out of poverty and into employment.
  • The effects of the NST would be partially offset by an increase in disposable income.

In summary, a National Sales Tax would be pro-growth, pro-employment and pro-investment, which is in stark contrast to the present system which seems to discourage all the things we should be encouraging and discouraging all the things we shouldn't.

Sources:

6 thoughts on “The case for a national sales tax”

  1. THE IRISH FAIR TAX MODEL. How to boost the economy to 5% growth.

    Irish wealth grew with over 167% between 1984 and 2002. Average European wealth grew at less than a quarter of that pace. Irish industrial jobs increased with 35% in this period, while in the rest of Europe industrial employment caved in. While the rest of the world was booming, the European economy gradually slided into stagnation or even recession.

    Why is Ireland so different? Why could Ireland devellop into the second most prosperous country of Europe in barely a half generation of time? The Irish socio-economic model is a perfect synthesis of the social welfare state and Anglosaxisch liberalism. Its model differs from the rest of Europe by its “fair tax system”: an optimal combination of MODERATE AND EFFICIENT GOVERNMENT SPENDING (35% of GDP) and A BALANCED REPARTITION of the TAX BURDEN between direct and consumption taxes.

    The irish model provides the incentives for productive contribution, for dynamic entrepreneurship and a high participation rate. The Irish model is successful. Today Ireland meets the challenges of globalisation and the demographic time bomb. Ever more European countries adopt Irish policies, particularly in the East.

    Also in England, France, Belgium, Holland and Germany could boost growth, job creation, and wealth by implementing the strategy of decreasing their demotivating taxation, and shifting the tax burden from income to consumption. Ireland showed that it can be done and that the strategy works. Where does one wait for?

    More over the Irish success story, how and why can be found at following adresses:
    (Dutch and Frensh versions now available at the same web site)

    http://workforall.net/
    http://workforall.net/EN_Tax_policy_for_growth_and_jobs.html
    http://workforall.net/EN_Europe_direct_and_indirect_tax_burden.html
    http://workforall.net/EN_Europe_social_security_sustainability.html




  2. Either the amount of savings that people have is of an insignificant value or not. If it is not, then what’s the reason against giving all these people that have already paid federal taxes on this money an extra 23% (or whatever the National Sacrifice Tax would be), in order to off-set this double-taxation? If the amount of savings that people have IS substantially significant, then where is the humanity of those that would want to rob 23% of those peoples future?

    There are basically five groups of people that any kind of National Sacrifice Tax would effect. (1) Non-Retired people with an income and little or no savings (2) Non-Retired people without an income and little or no savings (3) Retired People with little or no savings (4) Retired People with savings that they have planned to give to their children and (5) Retired People with savings that have planned to use that money to be able to enjoy the final years of their lives……

    The first 4 groups will be able to make out like a bandit and the 5th group will really take it in the butt unless they decide to continue living on a marginal level (like they did while saving for their retirement and not purchase those luxurious that they have been working and planning for) for their entire lives. In other words, “put the old folks in a home and take their money”!

  3. Partisan political perspectives continue to cloud the taxation issue, as those in office and those seeking office have an overriding motive to present solutions that are “simple.” The problem with “simple” solutions is that they don’t exist. Here’s a a list of questions that help test the soundness of any tax plan.

    1. What drives a country’s economy?

    2. What does the plan propose be taxed?

    3. Upon which economic force does the tax apply, the driving force or the non-driving force?

    4. What effects could taxing this force have on the economy?

    5. Would these effects promote growth or stagnation, given that most people take steps to reduce the amount of taxes they pay?

    Tax reformers would do best to honestly answer these questions in their proposals. These are the only simple truths that give one plan merit over another. Charts, figures, percentages and arguments steeped in bad logic and appeals to emotion serve only to confuse and deceive. Answers to these questions will quickly help cut through the smoke and mirrors, and expose the true intent and merit of any tax plan.

    I present a more in-depth examination of the Fair Tax on my blog, Independent American, at http://americanindy.blogspot.com/2005/10/how-fair-is-fair-tax_22.html

  4. Several tax reform proposals have been introduced in Congress to repair the income tax. These include most prominently the Dick Armey flat tax plan and the Domenici-Nunn consumed income tax. A third proposal that is gaining political momentum is the national sales tax as a complete replacement of the income tax.

  5. That is what the American people want. They know that our current income tax system is broken. It is complex, it is unfair, it inhibits saving, investment and job creation, it imposes a heavy burden on families, and it undermines the integrity of the democratic process.

  6. I’ve been engaged in taxes for longer then I care to admit, both on the individual side (all my employed life-time!!) and from a legal point of view since satisfying the bar and following tax law. I’ve put up a lot of advice and corrected a lot of wrongs, and I must say that what you’ve put up makes impeccable sense. Please persist in the good work – the more individuals know the better they’ll be equipped to comprehend with the tax man, and that’s what it’s all about.

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