National Sales Tax

National Sales Tax?

[Another unsaleable article]

As I write this article, I am just about finished doing my taxes—and I am once again really, really intent on replacing the income tax with a national sales tax. I’m not one of those “gold fringe on the flag in the courtroom means it’s an admiralty court” or “I’m not a 14th Amendment citizen, so you can’t tax me!” sorts. I’m just sick of the incredible complexity and perverse rewards that our income tax system creates.

After I lost my job at Hewlett-Packard, the only work that I could find was consulting—which meant that the firm for which I was working withheld no taxes. I thought that I had calculated the quarterly payments close enough—but I forgot about the rather substantial Social Security tax. (As a consultant, you get to pay both the employee’s half, and the employer’s half). As a result, I’ll be writing a very painful check to the IRS shortly.

It isn’t just the painful gotcha of that big check that has me ticked off at the income tax. It is the complexity of keeping track of property tax payments, health insurance premiums, charitable contributions, amounts that I wrote for books for son going to college—and then, because I make a bit of money from writing and manufacturing telescope accessories—going through all the business receipts for expenses.

By comparison, a national sales tax is fundamentally simple. When a retailer sells a product, he adds a percentage to the price. At the end of the quarter, he totals up his taxable sales, and sends a check for that percentage to the government. I know; I’ve done this before, when I was a gun retailer in California. It’s perilously close to being idiot-proof—and there are relatively few opportunities for rich people to get sleazy little tax breaks written into the process.

Let me emphasize: a national sales tax in place of the federal income tax—not in addition to it. And let me also emphasize a sales tax—not a “value-added tax” as White House economics adviser Paul Volcker is now talking about as an addition to the federal income tax. A sales tax is simple to administer and hard to avoid; value-added taxes are very European in their accounting complexity and opportunities for manipulation.

Now, I’m sure that someone of you are already sharpening your knives because sales taxes are regressive. Yes, that’s true. That’s why most states exempt food, prescriptions, and rent from sales tax. These are the three major expenses that poor people can’t really avoid. But while you complain about regressive sales taxes, think about this: what can a wealthy person do with his money, if he doesn’t spend on taxable goods? He can invest it (which is good for the economy), he can put it in the bank (which makes money available for loans to others), he can buy land, or he can smoke $100 bills. Any other purchase is going to generate sales tax revenue for Uncle Sam.

But there’s something else to consider: 47% of American households will pay no federal income tax for 2009. I don’t mean that they had enough withheld from their paychecks; I mean that they owe no tax; all the federal income tax that was withheld from their paychecks will come back to them. While I would agree that it’s a bit harsh to require the desperately poor to pay income tax, 47% of Americans don’t qualify as “poor.” Not even close. A national sales tax would at least mean that every American would be contributing at least a little bit to the operation of the federal government. That’s only fair—and it might give them a bit more interest in whether the federal government is spending tax money in a sensible way, too.

There’s one more powerful incentive to consider a national sales tax instead of federal income tax: it encourages hard work and discourages consumption. If I know that every dollar of interest is mine, mine, MINE to keep—and I don’t have to give any of it to the federal government—that’s a strong incentive to keep building up my nest egg until it can hatch into something truly wonderful. Economists keep fretting (and with good reason) about the low national savings rate. Here’s a solution.

A national sales tax will also discourage frivolous consumer purchases—by which I mean the latest consumer trash that the Chinese make so that Americans will pay to build up the Chinese military. Which, in the long run, is better for America: if most Americans have a year’s paychecks in the bank, or a 120-inch plasma HDTV in the living room? I know which result is more likely to come out from replacing the federal income tax with a national sales tax.