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Thursday, March 31, 2005

Flat Sales Tax

George F. Will writes about replacing all other taxes with a flat sales tax:

The power to tax involves, as Chief Justice John Marshall said, the power to destroy. So does the power of tax reform, which is one reason why Rep. John Linder, a Georgia Republican, has a 133-page bill to replace 55,000 pages of tax rules. His bill would abolish the IRS and the many billions of tax forms it sends out and receives. He would erase the federal income tax system -- personal and corporate income taxes, the regressive payroll tax and self-employment tax, capital gains, gift and estate taxes, the alternative minimum tax and the earned income tax credit -- and replace all that with a 23 percent national sales tax on personal consumption. That would not only sensitize consumers to the cost of government with every purchase, it would destroy K Street. 'K Street' is shorthand for Washington's lawyer-lobbyist complex. It exists to continually complicate and defend the tax code, which is a cornucopia from which the political class pours benefits on constituencies.
He goes on to offer a number of compelling reasons why this is a very good move economically. It certainly would be simpler, which is my first priority for tax reform.

6 Comments:

Blogger tsykoduk said...

I totally support this idea on many fronts. While, being a LPer I should not be for taxation, I live in the real world. Until we can control the Fed's spending spree, we are going to have to bankroll it some how. I think that a sales tax would be a fantastic method of doing so - and a flat one even more so.

It encourages people to save rather then spend. With the current income tax we are taxed on our savings. It would make retirement planning that much easier - no need for IRA's etc - just invest or save your money up and call it good.

It would tax everyone fairly. If you spend a lot, you get taxed a lot. If you buy jets and buildings, you help the goverment out a lot. Conversly, if you are poor - you still carry your weight, however, you carry a reasonable burden.

All in all, a very good idea...

3/31/2005 01:52:00 PM  
Blogger honestpartisan said...

Couldn't disagree more. Kevin Drum makes the case here:

http://www.washingtonmonthly.com/archives/individual/2005_03/005987.php

Besides everything, the lower your income is, the greater percent of your income you (have to) spend rather than save. Thus the tremendous regressivity of the sales tax. You may choose to defend it on other grounds if you prefer, but your implication that the burden is fairly distributed is not one of them.

It's possible to have a simple income tax code. Just cut out a lot of the ways to get around paying taxes! That's what accounts for the complexity of the code. The 1986 tax reform took out a lot of the compexity while lowering rates. If it's simplicity you want, I find this approach highly preferable.

3/31/2005 03:14:00 PM  
Blogger Dave Justus said...

I read Drum's article. Most of his points seems fairly foolish to me with the possible exception of what the tax percentage would have to be to equal current revenue (and based upon what he linked to he is being disengenuous in his summary of the numbers) and the extra burden on retired people.

Even his extra burden on retires is of course only partially accurate. Most retirement savings and Social Security are not taxed but when income is drawn from those sources they are taxed. Certainly there would be some people badly hurt by this transition (getting hit by hefty capital gains right before the switchover) but depending on how it is worked out this could be mitigated.

As for the progressive angle, if you read the George Will column you would not that part of the plan is:

"And his bill untaxes the poor by including an advanced monthly rebate, for every household, equal to the sales tax on consumption of essential goods and services, as calculated by the government, up to the annually adjusted poverty level."

Works out mathematically to be a progressive system, although perhaps not as progressive as you would like, but the numbers could be fiddled with.

Indeed that is my biggest worry with this plan. I can see it becoming a very powerful populist wealth transfer program. Rack up the tax a couple of points and give everyone a hundred bucks a month. Anyone who spends less than 5k a month wins, anyone who spends more than that looses.

I agree that their are other ways to make things simple, and I'm not sold on the idea of a national sales tax. Your reason's (and Drum's) for dismissing the idea seem spurious however.

3/31/2005 03:38:00 PM  
Blogger tsykoduk said...

A few issues with that short piece..
The tax would apply to home purchases. Here in The OC, for example, the average price of a new home is around $500,000. Linder's tax would mark that up by $300,000 or more. Can you spell "housing crash"?

Cars would be taxed too, of course. That SUV you've been lusting after? Better tack on $20,000 to the asking price.


Yeah, and incomes go up as well. If I were not paying Federal Income Tax, I could afford a lot more house then I can now.
This entire article is just scare tactics.

I own an SUV – it cost me $30k. Let's do the math – 23 % of 30k is about $6900. If he is worried about paying $20k extra for his SUV – gawds he wants to buy a $86k SUV – that would be the Gold Plated Hummer w/ a pintel mount .50 right? Sheesh – If I were buying a $86k Vehicle, I would be buying one of these!

Houses – how exactly does he get 300k or more for a 500k house out of 23%? Sorry – this guy has no grasp on basic math, I will not accept his arguments about something as complex as taxes!

The fact of the matter is that we are taxed at a certain rate right now. If we give that money back to people, make their lives easier, and allow them to spend or save it as they see fit, it's going to help the economy all around.

3/31/2005 03:52:00 PM  
Blogger tsykoduk said...

This comment has been removed by a blog administrator.

3/31/2005 03:52:00 PM  
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