Tuesday, January 04, 2005

National Sales Tax Should Replace All Other Federal Taxes

Bush has mentioned a number of times now his desire to reform the tax code. In a speech given to new members of Congress, it made his list of top things we wanted to work on this term (AP).

Unfortunately I have heard mostly about the elimination of this deduction or that deduction in order to simplify the current income tax but I haven't heard much about the National Sales Tax option. I don't think that this option should be ignored. Bear with me to give a brief explanation.

This tax would eliminate all other federal taxes, meaning, it will replace personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes. People will take home their gross paychecks (minus any state taxes, of course). To replace this a national sales tax will be used. Many experts say that a sales tax rate of 23% on all final retail sales would be sufficient to bring in revenues equal to what the current system generates.

Now, many of you would ask, "What about the lower income people? This would hurt them more." To address this issue, the government would send out a monthly "prebate" to each family (prebate meaning a return a tax money before it is spent, get it?). The check sent out to each family would equal the money spent on taxes up to the poverty line according to the Department of Health and Human Services. For example, according to HHS, the poverty level for a family of four is $18,850 per year. 23% of $18850 is $4336. If you divide that up per month that makes $361.33. So a check for the amount of $361.33 will be sent out to every family of four in the country each and every month. This ensures a graduated amount of taxes paid according to how much they spend above the poverty line.

This system has a lot of benefits.

1) It significantly reduces the size of the IRS and the number of audits. Most Americans will have nothing to do with the tax system at all. States will be responsible for collecting the tax revenue and forwarding it on to the federal government. Most states already have a system for collecting sales tax that can be utilized. The states and retailers will receive an amount of money for the processing of the taxes.

2) It eliminates any kind of loop hole in the tax system. Everyone, whether a corporation or an individual person will pay the same tax rate. There is no hiding taxes. No cash work under the table. No tax shelters. No manipulation of income to minimize taxes.

3) It encourages savings and investment. If you listen to the news, you would think that the best thing to do with your money for the economy is to spend it. That couldn't be further from the truth. The best thing that can be done with money is to save or invest it (the same thing) where the power of the dollar can be multiplied many times. People can save and invest money without fear of any taxation until that money is spent. Eventually all money accumulated will be spent by the consumer and at that point the government will get its taxes whether it be this year or 30 years from now.

4) It prevents the government from hiding tax hikes. The government won't be able to cut or raise taxes without it being painfully obvious to all Americans. This is essential to the oversight of government by the people.

5) Prevents outsourcing of labor. America will become the ideal place to create and run businesses. Without the government penalizing businesses with hefty tax rates, outsourcing to overseas will become greatly reduced and many more Americans will be put to work because the cost of doing business will be greatly reduced. In addition, a lot of foreign businesses will set up shop in the United States rather than other places in the world.

6) Prices will go down. With the elimination of taxes as a cost of doing business companies will be able to offer their goods at a lower prices, not because they necessarily want to but because market forces will force it down. On average, 22% of the price of goods are from taxes and 25% of services.

7) It bases taxes on consumption instead of income which is much more stable.

There are many more benefits to a system like this. There's a really good FAQ at FairTax.org.

I'd like to hear what people think about this. Please leave comments to discuss this.