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.
- "The Economic and Civil Liberties Case for a National Sales Tax", Stephen Moore, Cato Institute.
- Americans for Fair Taxation.
- "A National Sales Tax is what America needs, Jeff Brewer, Political USA.
- "National sales tax gains momentum", Jon Dougherty, WorldNetDaily.