Fed Chief Calls for National Sales Tax
By George Anderson
Federal Reserve Chairman Alan Greenspan believes that moving from an income tax to a national consumption or sales tax could spur economic growth.
Speaking to the President’s Advisory Panel on Federal Tax Reform, Mr. Greenspan acknowledged that moving to a consumption tax from an income tax would draw opposition from groups that believe they or their constituents would be adversely affected by a switch from the current income formula.
He suggested that perhaps some combination of income and consumption taxes would be best as a compromise and/or interim step.
Regardless of the final decision concerning any change in the current tax system, Mr. Greenspan said, “A simpler tax code would reduce the considerable resources devoted to complying with current tax laws, and the freed up resources could be used for more productive purposes.”
Moderator’s Comment: Should the retail industry drop its historical opposition to a national sales tax if there is a reduction or elimination of the
income tax?
Retailers, with reason, have always been suspicious of talk about a national sales tax, even if there was the promise that the income tax model would be
changed. It’s a lot harder to undo a bad government program than it is to create it. Still, a national sales tax with some exemptions is worth considering if it helps to reduce
complexity (and the costs to individuals and businesses) in the tax code elsewhere. –
George Anderson – Moderator
There are two problems to consider: how much money should the government get to do what, and where should that money come from?
The answer to the first question varies all over the board, but for me the answer is LESS!!! The majority of the country would no doubt agree, and one of the reasons that we can’t rationally deal with the second question is because no reasonable person would trust the government to not take ANY change as an opportunity to increase their take. That’s pretty well how we’ve gotten to where we are – every change is vetted by those whose fortunes will be affected, with advantageous exceptions multiplying like the frogs of Egypt.
IF, and that’s a big IF, the government could be trusted, we should have three taxes, based on assets (real estate, stocks, etc.); based on income (net of business expenses – VAT); consumption (possibly excluding “necessaries” like food; and housing – which is covered under assets.)
This balanced approach would make it difficult for anyone to avoid paying a reasonable share. The simple single tax would be a frank expression of cynicism about government – which might be the only way out of our current mess.
Looking to Alan Greenspan’s past actions for guidance on what he is really trying to accomplish with his recent statements on a consumption tax, it is clear to me he is trying to raise public awareness of the precarious financial condition of the federal government. By launching a public debate on a national sales tax, he forces attention to the budget deficit, which he knows to be an anchor holding back real economic prosperity. Also, he sees that policies enacted by the Bush administration during the past five years to be accelerating the income divide between the haves and have nots, and a consumption tax would bring that relationship back into line. At the very least, it would call into question some of the tax laws enacted under the current administration. Once again, Greenspan is trying to play the politicians like a fiddle (or, in his case, clarinet).
Loads of questions spring to mind.
First, if income tax were to be reduced or eliminated and replaced by sales tax, might some people not figure out that they would save an awful lot of money by not buying things? Or, at least, buying fewer and less expensive things? Would there be a sliding scale of tax so people buying the most expensive goods and services paid the most? Or will the richest, yet again, end up contributing less for what they consume?
If there were a sliding scale, would it be based on what the items are or purely on price? Would there be taxes added to things that are not currently subject to it? In the UK there is no VAT (Value Added Tax) on food, for example. Or children’s clothes and a few other basics that are essential purchases for rich and poor alike. But some of the definitions for food, for example, are so complicated that they are laughable. A cookie is a cookie is food and not taxed unless it has chocolate covering and then it is a countline or confectionery and must be taxed.
Secondly, will collecting this tax shift responsibility from civil servants (and therefore bureaucratic and government costs) onto retailers who will have to charge customers then pass on what they’ve taken to someone standing at the door of the treasury with a collection box in hand? What a great way to reduce government outgoings.
Flat tax doesn’t grab me because I would like to see those earning the most contributing some of it to ensuring the continuing wellbeing of the society whose largesse they enjoy (and sometimes take advantage of). What saddens me about tiered tax systems, in the way that most of human nature saddens me, I suppose, is that it is always those at the top of the tree who are best at manipulating the system and finding ways to keep their money rather than respecting the system and paying their dues. The idea that cutting taxes for the richest encourages them to spend more doesn’t seem to actually work in practice. Over here, some of the biggest earners are (young) football players who learn very quickly that they can incorporate themselves, pay a generous salary and expense account which buys them cars and houses etc that are “essential” to their business and then “invest” the rest of their money in offshore accounts where it can’t be touched.
Overall, however, I think the tiered system is the most likely to work if only we (in all countries) could find enough honest accountants and civil servants to close the loopholes and make everyone equal under the law.
According to page 74 of the instruction booklet of the 1040 tax form, federal income last year was $1.8 trillion. Outlays were $2.2 trillion, leaving a $400 Billion deficit, but that is another story.
$1.8 trillion is a scary big number. The US economy was approximately $10 trillion last year. If the government were to drop all forms of taxation and go solely with a sales tax, that tax would need to be 18% to make as much money as it gets now, and 22% to not have a deficit.
I think I would be more comfortable with a Constitutional Amendment that does three things:
1. Amends the Constitution to make a National Property Tax legal, and also explicitly states the right of the Federal Government to impose a Sales Tax.
2. Caps the proportion of income the government can receive through income taxes to one-third, the proportion of income through sales taxes to one-third, and the proportion of property taxes to one-third.
3. Explicitly makes Value-Added Taxes illegal. I dislike the VAT because it is invisible to consumers and makes it too easy for government to consume an ever-larger entity that drags the economy into mediocrity.
Under this scenario, income taxes would be one third what they are now, there would be an extra 6% or 7% national sales tax (on top of state and local), and there would be a property tax (on top of state and local).
People that are house-rich and cash poor would hate this, as are people that tend to spend every penny they can without saving anything. But people that live below their means would come out way ahead.
Those people that live below their means are exactly what government should want – they’re the same ones that will not be a strain on Social Security or Medicaid.
All forms of taxation are, to some degree, a form of social engineering in addition to a revenue stream. We’ve tried to engineer society by modifying people’s incomes. I think it’s time to try modifying the spending instead.
Any version of a tax system can be molded to deliver the results that are desired and be reasonably fair to most taxpayers, but creating and implementing it in our bureaucratic system would be nothing short of a miracle! I have long thought that a true flat tax with no loopholes would be the easiest way to implement and reduce the nightmare of paperwork that is our current system. It seems fairer than a national sales tax, as that would be more likely to penalize the poor and people on a fixed income, such as retirees.
While it might be better to have just a sales tax, or a flat income tax, I seriously doubt that the accountants, tax attorneys, and other lobbying groups will let that happen. How long have we been talking about reforming health care, and look at what a mess we have after all these years? The worst scenario, and I fear the most likely, is we’ll get a national sales tax ON TOP of our current taxes. Somehow, we need to get our government focused on reducing spending and becoming more efficient. Maybe Wal-Mart could tutor them.
I’m no expert on this topic, but I do pay my share of taxes.
There’s ample precedent for value-added tax in the UK and elsewhere. Under such a system, folks who can afford to buy pricey stuff like huge SUVs and the fuel to run them would pay a little more tax than those who do not. Seems like a fair arrangement in principle, especially if income tax rates can be simultaneously lowered and that system simplified.
The very poor should be protected, of course, perhaps with an exemption for basic needs like food and heating oil or with an offsetting income tax credit. The very wealthy should be required to contribute back to the system that enriched them (i.e. fewer loopholes), while estate taxes should be minimized or eliminated.
I imagine the RW crowd would debate many of these positions. Bring it on. A fair society is worth arguing over.
I think Greenspan is trying to reduce the complexity of the federal tax system and promote saving. He’s also trying to promote growth because it’s popularly thought that a consumption tax system maximizes growth. However, I’d challenge the idea that such a scheme promotes the highest quality growth or the equity of the citizens.
Speaking with an eye to the interests of a retail community that depends upon consumers, it’s clear that the savings dilemma is the problem of a large number of Have Nots on the low to lower middle end of the income scale, many of whom are in debt. In which case, a consumption tax isn’t the answer. Rather, the government would do well to lower/eliminate all forms of income taxes on low earners, including *ahem* social security. This would also have the effect of bringing more low earners into the formal economy instead of encouraging them to be cash-under-the-table earners whose employers are subsequently busted and deprived of the opportunity to serve the public.
Secondly, the government adds complexity by increasingly transforming the budget to a system of making block grants to the several States. This process has the further disadvantage of Congress determining which States will be net losers/winners of federal funding as compared to their residents’ federal tax payments. It would be better if the government reduced federal labor taxation and, in turn, correspondingly reduced the block grants, leaving the States to figure out their own best tax systems.
Thirdly, America has inherited the legacy of its Monroe Doctrine whereby land has been undertaxed to encourage national expansion in terms of square mileage. Having gone from sea to sea, in modern times, there are several undesirable results from undertaxing land, such as sprawl, too high labor taxes (creating a gray market for labor and an artificial labor shortage), inefficient land use, inequities from trying to get the federal tax money from a two factor system, and periodically excessive land speculation that drives up land prices and discourages business formation, to name just a few.
However, we don’t pay federal land taxes because it would be seen to be the Feds horning in on the States’ ability to use such taxes. Once again, the federal government could further minimize labor taxes and then assess the States for transfer payments. That would leave it to the States to raise their property taxes and/or reform regrettable schemes such as California’s Proposition 13.
Our income tax system only fails because it is the result of political processes.
Look at WIC cards. WIC cards provide different nutritional food products to women and children to ensure their health. But, in operation, the items provided must be this brand or that brand. So how do you get your brand on the program? Paying a poly.
Then, there are personal tax laws. If you know a senator well enough, you can write your own tax law. The senators owe each other, so these bills pass without blinking an eye.
Then, you have the ordinary purposes of tax law, incentivizing some behaviors and punishing others. So we end up with a tax code that heavily favors corporations and the wealthy. The middle class is punished.
The AMT is just a ruse. Sure, the wealthy have to pay it. But, so do an ever increasing portion of the middle class. Those that pay it get an AMT tax credit so, in subsequent years, they only pay AMT on their new wealth. Back to the middle class: as inflation has driven up wages, the tax brackets have not gone up, so increasingly the wealthy have escaped paying more than the middle class in terms of the so-called progressive tax system.
Sales tax would be subject to the same political forces. In the state of Texas, we used to only tax non-food purchases. Now, we tax everything, but not really. There are so many exceptions that it’s hard to tell anymore if you will be paying sales tax or not.
So for all the posturing, accept that we will never have a fair tax system. If we did, someone would call it socialism, which we accomplish through corporate welfare and other mechanism. Or, someone else would call it unfair to corporations, creatives, innovators, or the wealthy.
I’d rather leave the current system in place and raise the tax brackets with some reality towards what the true rate of inflation has been all these years, while we said “oh there hasn’t been any inflation.” Why is it that $50K doesn’t give me a better life than my $21K job did back in 1983?
There are plenty of people who don’t buy things. We call them the investor class. And, they got their tax cut last year. The reality is that we all use governmental services, but none of us want to pay for them. Ok, so push it off on the kids. We’ll all be dead. Sorry, no.
Only if it lowers my taxes.
I might be a little off base (who me?), but in 1996 when new Welfare Reform laws were enacted, millions of people began to enter the workforce for the first time in their lives. We used to pay them to sit and watch TV. Now companies like Wal-Mart were paying them to work in their stores. Although their lifestyle did not improve, it made us taxpayers feel better knowing they were working. Many of them, for the first time, became taxpayers and got a W2. They even got big Earn Income Credit Bonuses. How nice it might have felt to get a big tax refund check. But as we all know, there are big bucks to be made off the poor. Tax Return businesses, tax refund loans, etc began popping up to take advantage of an unsophisticated group of new taxpayers. Many operating right inside of stores like Wal-Mart. Even though the IRS had simplified tax returns for the poor so it was nothing more than a few lines, most did not have the wherewithal to comprehend. By eliminating the filing of tax returns of low income people, we would probably put a few hundred dollars a year back in their pockets.
The National Sales Tax is a proposal that has some momentum and has endured some criticism and revision already. The organization at FairTax.org has put forward a plan that would impose a sales tax on every dollar SPENT. You keep every dollar you earn. If you are a $100,000 a year man you bring home $100,000. You just pay tax on what you buy AND the sales tax would include the payroll tax you currently pay for FICA and Medicare. Not one dime would be deducted from your paycheck by the Federal Government for anything. Additionally, everyone would get a check from the government monthly as an allowance/exemption from sales tax up to the poverty line. If you are below the poverty line you pay NO sales tax period. The sales tax would be set at 23% of everything you spend and would apply to everyone. Check this out at FairTax.org, it is a simple plan that would simplify all of our lives and capture all of the tax that is now unpaid by our huge underground cash economy. Imagine, drug dealers and pimps will now become tax-paying citizens. Corporations worldwide will flock to the USA, jobs will be created by the influx of foreign business and investments will grow at unimaginable rates untaxed. And best of all NOTHING used will be taxed at all – only new purchases! Give it a look, what have you got to lose!