A Taxing Proposition

My aunt was a very cost-conscious shopper. I can remember, as a kid, riding all over town just so she could save a nickel on a loaf of bread or a dime on a gallon of milk.  Now, I’m not inclined to drive across town just to save a nickel, but I do want to get the best quality at the lowest price.  I don’t think any of us want to pay more than we absolutely have to for bread, milk, or anything else for that matter.

Now imagine, if you will, a store that charges you for a loaf of bread based, not on the cost of the bread plus any profit the store hopes to make, but on the size of your salary.  Would you shop there?  I know I wouldn’t.  What if the price of the bread and the size of the loaf were dependent on the size of your salary?  The more you earned, the more expensive the bread and the smaller the loaf?  Sounds crazy, right?

Unfortunately, that very thing happens.  Instead of paying for bread, consider how we are paying for our government through our income taxes.  The more you make, the more you pay.  And chances are good that the more you make the less government services and benefits you require so the less you get.  Recall that there is a large segment of the population that receives more benefits from the federal government than they pay in income taxes.  And if you are the thrifty sort that saves or invests the money you earn, an interest or dividends earned are also taxed--a double taxation.

Under our current tax laws, we punish the successful and the thrifty by taxing their gains.  Doesn’t that undermine the incentive to work, save, and invest?  And our tax laws are so complex that the IRS estimates that 16 hours is required to collect information and complete the 1040 tax form, or costs, on average, $152 for a tax professional to prepare the forms.  Add to that the cost of the IRS itself, more than $11 billion, and it should be apparent that our tax system is defective.  We tax those that work more than those that don’t, and the entity that reviews the tax collection costs billions to operate.

There are lots of ideas about how to fix the tax code.  Some say close the loopholes; others want a flat tax, a tax rate that is the same regardless of earnings.  Others want to raise the tax rate on the rich, although the definition of rich is a somewhat ambiguous, depending on who is lobbying for it.  These are all attempts to repair a tax code that is fundamentally flawed.  Personally, I like the idea of a national sales tax.

The Cato Institute (http://www.cato.org) has long been an advocate for a national sales tax to replace the current tax codes.  Their proposal is to scrap the individual and corporate income tax, the capital gains tax, and the estate and gift tax with a national sales tax on the final purchase of all goods and services at the retail level.  When you buy goods or services, a federal tax will be collected at that time, just as state and county taxes are collected now in most areas. Their proposal includes a universal rebate for every household that, in effect, exempts consumption up to the poverty level.

Furthermore, the state revenue departments of the 50 states could collect the revenue, which is sent to a small agency within the Department of Treasury to fund national assets.  The IRS would no longer exist; its budget available for other government agencies or left in the pocket of the taxpayers.  Because the national sales tax would tax only spending, there would no longer be a double taxation on savings or investments; this would make more money available for economic growth.  It would also simplify corporate taxes, negating the need for armies of accountants and tax lawyers and would make business capital easier to acquire, further stimulating economic growth.  Simply, if you choose to make a purchase, expect to factor in the tax.  If you don’t want to pay the tax, don’t make the purchase.

A national sales tax has a lot of attractive features.  It would make savings and investing much more attractive, stimulate economic growth, and virtually eliminate the IRS.  But there is one subtle feature of a national sales tax that I particularly find attractive.  Under the current tax code, taxes are withheld from your paycheck before you receive it, so it’s not obvious to most American’s just how much they pay in income taxes.  With a national sales tax, the cost of the federal government is printed on the receipt; everyone will know the costs.  When you see the cost of the federal government in each purchase, we may be more inclined to demand a smaller, more efficient government.  Do the research and then contact your Senators and Representative and let them know what you think about the IRS and a national sales tax.  Maybe, then April 15^th becomes just another day.