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| The Basics | 3 reasons to junk the income tax
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Let's replace our corrupt tax system with a national sales tax.
By Scott Burns
"I don't hate the rich; I just hate that I'm not one of them. I do, however, have a problem with a national sales tax on consumption. The family of four with a household income of $75,000 is, I'll bet, spending every dime. A family of four with a household income of $500,000 might be spending more than $75,000, but they are probably not spending 100 percent of their income. With no tax on savings, the 'rich' are escaping taxation on a lot of their wealth. The 'average' family escapes nothing. I wish you would comment on this in a future column."
So wrote a San Antonio reader in response to a recent column of mine (free registration required) saying it was time to bury the entire tax code and replace it with a national sales tax.
My personal belief, which is supported by a significant amount of research, is that working Americans would benefit more than "rich" Americans (however they are defined) if our wretched tax system was buried and replaced with a national sales tax.
Wed all gain plenty
Here are three of the "dividends" we could expect from a national sales tax:
Dividend No. 1: Liberation of the skilled working stiff. The tax code falls heaviest on people who work hard and are good at what they do -- but can't cope with the complexities of record keeping for taxes. There are millions of people like this. They're good electricians, good store keepers, good building contractors, good service garage owners -- you name it. Without them, the rest of us couldn't get through the day. They work their butts off only to pay extravagant fees to experts who read the entrails of the tax laws. The burden of time and fees is the single largest thing that keeps these workers from accumulating wealth.
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These workers are not represented by anyone in Congress, Democrat or Republican. Our laws are written by special interests that range from the AARP to the nameless lobbyists who tack on the special tax breaks that benefit a single company or industry. That's the way it is. It is an entirely corrupt system. Readers who think I'm being hyperbolic should read "Prostituting the Political Process, a study of political fund raising by the Leuthold Group in Minneapolis.
Dividend No. 2: If you don't spend your income, everyone benefits from it. Suppose you earned $1 million a year but spent only $50,000. Under a national sales tax, you wouldn't pay much in taxes. You'd be living at the consumption standard of a person earning (and spending) $50,000 a year.
The $950,000 that wasn't spent on consumption, however, would become new working capital for our economy. It would provide new cash for bank deposits, inventory for stores and manufacturers, and capital for equipment. Without the drain of taxation, a larger supply of capital would force down interest rates.
The person who earns that extra $950,000 doesn't benefit from it until it is spent on consumption.
Frees up capital
In the meantime, guess who benefits most from lower interest rates: Everyone. Borrowers (most people) would benefit because less of their income would be consumed by interest payments. Investors would benefit because the value of their stocks and bonds would rise.
If the wealthy then celebrate their new wealth by purchasing yachts, the sales taxes collected will go a long way to paying the government's bills.
The same increased capital could also finance new jobs and create many more new dollars of labor income. A full 100% of the income from a new job might go to new consumption -- with the accompanying sales taxes -- but I doubt anyone would feel exploited for having a new job.
Dividend No. 3: Greater equity in taxation. As long as we have the employment tax and the personal income tax, there will be claims of inequity in taxation. Although the top 25% of all income earners pay 84% of all income taxes, Democrats will claim they should pay more. Although the bottom 50% of all workers pay a combined income and payroll tax rate of just more than 18% while the super-rich pay only 15% on dividends and capital gains, Republicans will claim it's good for the country. Both miss the mark.
If a national sales tax replaced the payroll tax, young low-wage workers without health insurance would no longer be pitted against senior citizens -- who not only have health insurance but who, by not working, enjoy a larger income than low-wage workers do from working.
Meanwhile, both political parties are failing to recognize that the worlds of work and entitlements are on a collision course.
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