Monday, November 15, 2010

The Case for a National Sales Tax: Part 1

Given the current economic situation, a lot of attention is being paid to tax policy. One of the biggest debates at the moment is over tax breaks and who should get them. I would like to make the case for a complete overhaul of the U.S. tax system with the implementation of a national sales tax. I certainly did not originate this idea and am not certain about some of the finer details. Overall, however, I think that the ideas behind a sales tax are sound. In order to discuss the general principles of such a tax system, I will use one of the more prominent proposals, FairTax, as the base example. Before I get into the specifics, I want to begin by saying that I have issues with the way that FairTax is promoted. The name itself is loaded. While I intend to argue that a national sales tax is indeed more "fair" than the current system, the name "FairTax" has a slimy feel to it. It is also often spoken of in terms of a tax-inclusive rate in order to make it seem lower than the traditional tax-exclusive rate that many are used to with current state sales tax rates.* In any case, it is worth setting aside the political haze that clouds every idea Congress tosses around in order to actually evaluate proposal.

FairTax is a proposal to eliminate all federal taxes such as individual income, corporate income, capital gains, alternative minimum, payroll (social security, unemployment, medicare, etc.), estate and gift taxes. They would all be replaced with a nationwide tax on the retail sale of all new goods and services. There would be no tax on purchase amounts up to the government defined poverty line. That is to say that someone earning at or less than the poverty line would not be subject to the sales tax at all. This would be implemented by every household (even those making more than the set poverty level) receiving a monthly "prebate" check. Rather than filing a tax return at the end of the year, each household would be reimbursed for the total tax that would be collected on a year's worth of purchases at the poverty level. This amount would be divided by 12 and disbursed each month. So in effect, each household would only be taxed on what they spent above the poverty threshold.

That's basically it. The proposal has some details on what constitutes a new good, etc. But for the most part it is very simple and straightforward. In fact, to the right is a picture of outgoing Representative John Linder R-GA holding the 133 page FairTax Act alongside the current tax law. In my next posts I will discuss the benefits of the a national sales tax over the current tax system.

* Tax-inclusive means that the rate is calculated based upon total spent, so if you spent $0.77 on an item and paid $0.23 in tax, you would calculate the tax rate by: 0.23 / (0.77 + 0.23) for a rate of 23%. Nobody calculates rates like that in the real world. If you see an item in the store, you calculate the sales tax based upon the price of the item only, not including the tax. In the above example, if you paid $0.23 in tax on an item that cost $0.77 almost everyone would calculate the tax rate as 0.23/0.77 for a rate of about 30%. Playing games like this is not going to win any friends.


  1. I like the picture. I agree that "Fair Tax" sounds slimy, so I'm glad you pointed that out. And I'm excited about this new series!

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  3. You know, you could fit the current tax code in 133 (really big) pages.
    I wouldn't try to sell this to the populace that hates to read by saying "it's shorter!" They still won't read it.