I’m a long-time proponent of tax reform and I mostly focus on the flat tax, but as I wrote last month, a national sales tax also is a good option.
Here’s some of what I said on the topic back in 2007.
The key thing to understand is that the flat tax and sales tax are different sides of the same coin.
What differs is the collection point. A flat tax takes a slice of your income when you earn it
while a sales tax gets a slice of your income when you spend it.
But otherwise the two plans have a lot of similarities. Both tax at a low rate. Both get rid of double taxation (in the jargon of economists, this means a “consumption base” system). And both eliminate corrupt and distorting loopholes.
Those are the main economic arguments, though it’s also worth noting that either version of tax reform would allow a dramatic downsizing of the IRS.
I don’t know whether that should be a victory over bureaucracy or a victory for civil liberties, but it would be a good outcome.
In a column for today’s Wall Street Journal, Professor John Cochrane of the Hoover Institution makes the economic case for reform. Here are some excerpts.
…t“Fair Tax” bill…eliminates the personal and corporate income tax, estate and gift tax, payroll (Social Security and Medicare) tax and the Internal Revenue Service. It replaces them with a single national sales tax. Business investment is exempt, so it is effectively a consumption tax.
Each household would get a check each month, so that purchases up to the poverty line are effectively not taxed. …our income and estate tax system is broken. It has high statutory rates with a Swiss cheese of exemptions, immense cost, unfairness and distortion. …A consumption tax, with none of the absurd complexity of our current taxes, is the answer. It funds the government with the least economic distortion. …A range of implicit subsidies will disappear. Good. Subsidies should be transparent. Money for electric cars, health insurance, housing, and so forth should be appropriated and sent as checks, not hidden as tax deductions or credits.
The bottom line is that we would have a much less destructive system with a national sales tax.
That being said, there is a very relevant debate about whether a sales tax is the politically smart way of trying to fix tax code.
In the video above, Bruce Bartlett argued that incremental reforms could solve almost all of the problems in the current system. That’s technically true, but tinkering with the tax code over the past 110 years is what’s produced the current mess.
So is it realistic to think that tinkering in the future will yield good results?
Regardless of our strategy, the odds of a good outcome are not favorable, but my two cents is that our best bet is to advocate for big changes like either a flat tax or national sales tax.
International Liberty 
Kerry, sales taxes are regressive taxes because people spend a lower percentage of their income as their overall income increases.
Gandalf. Food already isn’t taxed. It just sounds like you are more interested in cheating the system than setting up a fair tax system.
A couple of things that a flat income tax does that further draws me to a sales tax. A flat income tax pre taxes savings and investments resulting in a lower return on the investment and the returns are taxed too. Additionally, a flat income tax without further mention appears to include the regressive payroll taxes. Lastly, among other disadvantages of the flat tax, is the multiple tax consequence for investors consequential to corporate taxes. All the aforementioned consequences gone with the sales tax and with the flexibility to buy used items exclusive of the tax, 100% exclusive if bought from other than a retailer of used products.
I enjoyed the contrasts made
Reblogged this on Calculus of Decay .
A national sales tax will only work if we change the constitution and get rid of the income tax, otherwise we will end up with both.
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Any tax on income is unfair by definition… It is theft of the money I earned. Now, a tax on purchases is a different animal. I may choose where and when to spend my untaxed money. Theoretically, I could grow my own food, pay cash to a neighbour for a used car, etc, and seldom pay anything. It’s voluntary to a very large extent and thus morally permissible.
Paying everybody every month to “balance” the fair tax is what makes me oppose it. It’s just gonna be riddled with incompetence and corruption. Better to exempt food, clothing, drugs from any tax.
While I too commend a flat tax, the article you referenced today in WSJ talked about a 30% flat tax rate — way more than anyone is paying now — and omitted from your discussion. No longer a marginal rate, it’s 30% on the first taxable dollar. If I remember back when Steve Forbes ran on a flat tax, it was about 14% or so. Are you saying that providing the government with twice as much money as a flat tax is OK? The devil is in those details.
Is a home considered consumption? The proposal introduced is missing more details than it includes.
Both the flat tax and the national sales tax would be a big improvement in the current system provided that the 16th Amendment is repealed as a condition of implementing a notational sales tax. A national sales tax sans the 16th Amendment would be much better than a flat tax because with a national sales tax, the taxpayers can remain anonymous. The federal government not having data on our financial lives will prevent a lot of federal mischief.
In my version of the national sales tax, I wouldn’t include a provision for each household to get a check each month, “so that purchases up to the poverty line are effectively not taxed” because it’s too tempting for politicians to play games with the check. They’ll try to win votes by bloating the size of the check and increasing the cutoff point. Too, there will be fraud where people will collect multiple checks or collect checks for dead people. The check is too much of an opportunity for mischief.
The issue with creating a national sales tax is that government would only temporarily roll back those other taxes. Eventually they would bring back income taxes, payroll taxes, estate taxes and so forth. All you would be doing in the long run is giving government another avenue into your wallet.
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