What Went Wrong? Identifying Root Causes
Their Lips Are Moving—Requiem For The Income Tax
Part 6 of 6
 

A national sales tax would be vastly superior to either an income tax or a value-added tax. It imposes a single tax at the retail level on specified elements of commerce. The benefits secured by adopting this system derive from its simplicity. The eight volumes of fine print of Title 26 vanish, superseded by less than 20 pages of new federal tax law. Common sense replaces “mysterious rules.”

This is a visible tax, almost impossible to evade. Everybody pays the levy with the purchase of each taxable item. Even criminals, such as drug dealers, pay their fair share. The rich tend to spend more and therefore will pay more tax. There are no loopholes for them, no three-martini business lunches. The courtship of lawyer-politicians and special interest groups seeking tax breaks dwindles, reducing the power and influence of both. More important, it breaks their psychological hold on the nation. For the first time in over half a century the people will know what government actually costs and realize that only they pay the bills.

An efficient national sales tax system, working with existing state sales tax systems, eliminates mountains of paperwork. This cuts everyone’s annual tax compliance costs. Under this plan the federal government’s collection costs are meager compared to its $18 billion current yearly expenditure. Less than 10 million sales tax returns replace more than 100 million income tax returns. Collecting data and filling out tax forms becomes a thing of the past for most people. This restores financial privacy and saves Americans about 6 billion hours every year, time that could be spent on more productive activity.
 

Industry and business prosper, working to make money instead of to avoid taxes. Eliminating all income taxes, and their associated hidden collection costs, lowers production costs. Less expensive American goods sell better. Being more competitive in world markets, they create an export boom, reducing the trade deficit. Simultaneously, imported goods cost more. They are subject to the same sales tax as American products. The relative difference, generated by a more efficient local economic environment, falls in America’s favor.

A progressive income tax penalizes productivity, savings and investment. Working harder may earn you more money, but it also may place you in a higher tax bracket. That heavier tax on marginal income helps to explain America’s scanty personal savings rate. Why save and invest when inflation and income taxes eat much of the return? Replacing the income tax with an efficient national sales tax erases all these difficulties—and more.

Most tax crimes vanish with the abolition of the income tax. There will be little reason for confrontations between individuals and government tax administrators. The crowded dockets of federal district courts will get some immediate, much-needed relief. Also, the facilities and judges of the nation’s tax courts, becoming essentially unemployed, may be put to better use.

Unfortunately not all the news is good. The government will still get its perceived due, at the point of a gun if necessary. Studies show that the national sales tax rate required to replace current income tax revenues is between 14 and 22 percent, depending on the items taxed. With its implementation, prices of consumer goods will suffer a sudden and exceedingly unpleasant increase.

For all workers and some high income recipients of government transfer payments, higher consumer prices are offset by the complete elimination of income taxes. For many this will be the largest single pay increase of their working lives. Others, such as low fixed-income recipients paying no income tax, will need special compensation. Fairness requires some procedure other than the Cost of Living Adjustments (COLA) mandated by the government or by private labor contracts. Under current government regulations all sales taxes are included in the Consumer Price Index (CPI) used to calculate COLAs. Excluding the national sales tax from the CPI prevents double compensation for high income recipients with full COLA protection. Without this modification they get an increase in pay with the elimination of income taxes and receive another through a cost of living adjustment. This would be unfair to everyone without COLA protection.[20]

Criticism of a national sales tax extends beyond its inflationary effects. After all, the proposed single jump in consumer prices seems a small penalty to pay to recover from more than 50 years of fiscal mismanagement. It was not that long ago that the nation suffered through several consecutive years of near double-digit inflation and got nothing for it, except a decrease in the value of savings accounts and the opportunity to pay more for the same goods and services. Inflationary complaints will likely be secondary to the charge that a sales tax is regressive.

A tax is labeled regressive when it falls hardest on those who must spend most of the money they earn out of necessity, not choice. Counter arguments should be considered before putting that label on a national sales tax. Close examination shows that income taxes and VATs are also regressive. Rich and poor alike pay them, unaware of the hidden burden. Perhaps a way might be found to remove the regressive aspects of a national sales tax and still obtain its other advantages over the income tax or the VAT.
 

20 John H. Qualls, Ph.D., President, Micro Economics, Ltd., The Impact of a National Sales Tax on the United States Economy (1991, Citizens for an Alternative Tax System, 100 N. Brand, Suite 502, Glendale, CA 91203)
 

Ragnar Danneskjöld from the novel Atlas Shrugged by Ayn Rand