Replace the IRS with a National Sales Tax

Today I had a small sample of Blogger Heaven. Captain Ed Morrissey of the perenially top of the Blog Chart "Captain's Quarters" linked to my post "Keep it Simple, Simplifiers," and I got to briefly expose my opinions about tax reform with his readership of over 24,000 visitors a day, more than I get in a year. However, most of the exposure occurred when I responded with comments on Captain's Quarters to comments others made there. The exchange began with the following reader comment:

You can either have a tax that is fair, or a tax that is simple. You cannot, however, have both. I prefer to err on the side of fairness and put up with the inevitable tinkering that comes with such a regime, because a simple tax regime (like a national sales tax) perpetuates unfairness in the form of wages being taxed more than dividend income.

I responded:

Our current income tax system is neither fair nor simple, so why can't you have one that is the opposite?

Read my lips - with a national sales tax, wages are not taxed more than dividends, because NEITHER WAGES NOR DIVIDENDS ARE TAXED. Only consumption is
taxed - the more you consume, the more taxes you pay. The rich consume more, they pay more taxes. So far, doesn't that sound fair to you?

If you are one of those who think it unfair for the poor to pay any taxes (I personally think they should have to pay some taxes), you could demand that the poor up to a certain income level have the sales taxes they paid rebated into a personal savings account, like the one they will have for their Social Security contributions (another necessary reform). They'll be able to spend themselves into possession of an estate of value, and cease being poor!

The Democrats would hate that.

But what could be more simple, and fair? Only a national sales tax accomplishes both.

He responded to my response:

Major Mike, as sales taxes are highly regressive and thus affect wage earners more than those who draw dividend checks, they are more unfair to those who work for a living. Those who are richer generally spend proportionally less on things that would be subject to sales taxes, such as homes and other property. Taxing both wage and non-wage income is therefore necessary. My own philosophy on taxation is that it works best when the tax base is broad and rates kept low enough to not encourage cheating on them. I think having income, sales, property, gasoline, excise and other taxes is better than having one big tax as some suggest. Besides, many income tax filers do use simpler forms than the 1040, so that issue to me is just a red herring.

I responded to his:

Cheating is rampant on income taxes now. We have illegal income, such as from drug dealing, prostitution, gambling, bribery, and all the other lucrative vices, which is not taxed. We have tax shelters, off-shore banking, and the cash-only economy. Cheating is ubiquitous. Bartenders cheat on tips and the till. Waiters and waitresses cheat on tips. Embezzlers and white collar criminals don’t declare their ill-gotten gain on schedule SE of their 1040’s. How low are you going to take those rates before all this cheating stops?

Progressive taxation discourages savings. Since income not spent for consumption is saved, i.e. invested, increased savings/investment increases economic activity. Increased economic activity is of greatest benefit to the wage earners, therefore to the total economy, because each marginal dollar they earn gives them greater value/utility than it does the wealthier. The increased income of the wealthy predominantly goes into increased savings (capital accumulation) rather than consumption.

The progressive taxation crowd has put a brake on economic growth by limiting capital growth, thereby encouraging schemes such as off-shore banking and tax shelters that bleed funds from productive capital investment.

You who favor “progressive” income taxation also favor a potpourri of what you call “regressive” forms of taxation: besides the sales tax, such taxes as social security (FICA), property, gasoline, and excise are all a flat percentage of cost (and FICA taxes stop at $94,200 this year), as are many other levies such as building permits. You would call some of your “broad-based” taxes ultra regressive, such as licenses and other flat fees.

Each of these taxation systems has its own offices, employees, thick tax codes, voluminous files, and all the other trappings of a gold-plated waste of taxpayer time and money. They are the heart of the Tax Lawyer and Accountant Full Employment Act.

Did you read the part in Captain Ed’s post where the tax code was 55,000 pages and required 6.4 billion hours for tax compliance each year? Is that a red herring?

At this point I wonder, is there more? So far we have established he likes the present system of many forms of taxation, which he characterizes as "progressive," and doesn't feel it is complicated or time consuming. In another post, not directed to me, he noted that he charged his annual week of tax preparation work to his business, as if that meant it had no cost to him.

What have I established in return? A national sales tax would be simpler to establish and operate, and would eliminate almost all forms of individual and corporate tax preparation. It would eliminate tax cheating without requiring any policing and enforcement organizations. Even criminals would pay taxes that they now totally avoid by not declaring their ill-gotten gains.

The economy would benefit by the encouragement of savings and capital investment.

Is it too soon to declare victory for the national sales tax over the IRS based system on the basis of the comments exchanged today? I favor a victory declaration, but there's an army of politicians, lobbyists, tax lawyers, accountants, and estate planners who would feel their very existence in jeopardy if we went to a national sales tax.

For me, that's reason enough to do it.

Please click on the label below to see all my articles on this topic.