National Sales Tax – Fair or Foul
By George Anderson
The Americans for Fair Taxation (www.fairtax.org) want to get rid of the Internal Revenue Service (IRS).
No, this isn’t another Boston Tea Party, but the group advocates what it calls the FairTax plan. According to the Americans for Fair Taxation, its plan would eliminate the need for the IRS by replacing the current federal payroll system with a much simpler and transparent national sales tax (a 23 percent tax on all goods sold).
The group’s Web site contends the current system is simply outdated. “Cars replaced the horse and buggy, the telephone replaced the telegraph, and the FairTax replaces the income tax. The income tax is holding us back and making it more difficult than it needs to be to improve our families’ standard of living. It makes it needlessly difficult for our businesses to compete in international markets. It wastes vast resources on complying with needless paperwork.”
While a simpler and fairer system is an ideal endorsed by most, the idea of a national sales tax has brought together a group of strange bedfellows in opposition to FairTax proposal.
Progressive politicians have argued that it places an unfair burden on the poor since more of their income is spent paying for life’s basics than wealthier members of society.
Retailers have panned the idea of a national sales tax. In March, the National Retail Federation’s (NRF) senior vice president for government relations, Steve Pfister, said, “A national retail sales tax or VAT would devastate the nation’s economy for years before economic gains – if any – would be seen.”
“Our research shows that during the transition period from the current system to a consumption tax, the economy, employment and consumer spending would all decline significantly,” he said. “The price is too great to pay for any modest growth that might come in the long-term. Many retailers and the companies behind the products they sell – especially the small businesses of America already struggling to succeed – would be out of business before they could benefit from that growth.”
Advocates of the FairTax program do not believe it will burden retailers or consumers. The group maintains its plan is revenue neutral and “the vast majority of retail businesses operating in states with a sales tax (45 states currently use a sales tax) are already sales tax collectors. Under the FairTax, retailers are paid a fee equal to one-quarter of one percent of federal sales tax they collect and remit. In addition, of course, retailers no longer bear the cost of complying with the income tax, including the uniform capitalization requirements, the various depreciation schemes, and the various employee benefit and pension rules. Finally, because of the economic growth resulting from the aggregate, beneficial effects of dramatically lower income tax compliance costs and no payroll or income taxes, customers will have substantially more money – the greatest influence on retail sales – and a reasonable fee for collecting the FairTax, all ensure that retailers will do quite well.”
Moderator’s Comment: Should the retail industry support or oppose a national sales tax? If a national sales tax would have a positive impact over the
long haul, would it make sense for the industry to propose a phased-in program to Congress? –
George Anderson – Moderator
For sure it would be more fair. Our current system unfairly punishes those who opt to produce more income, work harder, take risks, and invest in our economy. If we do have a national sales tax, we must eliminate personal income and corporate taxes. It’s sickening how much time and money people and corporations must devote to paperwork and trying to find ways to avoid taxes. Canada has had a GST for years, however they still have an income tax. Most of us now pay at least 50% in taxes. I consider myself a saver, not a spender, plus I don’t like the whole process of having to report income. So for me, it sounds good.
This is not a question for retailers. Retailers pay no taxes – all taxes are passed through to consumers. Only wage earners and consumers pay tax in our society. Retailers are tax collectors and have been for years. Until they actually become taxpayers they should not have a voice in this debate. However, as a taxpayer I am in favor of a system that would allow each and every person in our great nation to do their part in supporting our government. The “fair tax” plan would allow smugglers, drug runners, drug dealers, pimps, prostitutes, gamblers and others who currently enjoy a “tax free” status as owners and participants in illegal businesses. Remember you only pay sales tax when you buy something NEW. You choose how much tax you pay not the government. Groceries and other necessities would be exempt from tax up to a point (each registered taxpayer would receive a monthly check to cover the taxes on these necessities under the “fair tax” plan). There would be no discrimination, all would be treated the same under this plan. Singles, married, black, white, hispanic, young, old, rich, poor – you spend your dollar – you pay your tax. Incidentally, I believe this tax plan would cover ALL federal taxes including Social Security and Medicare, along with the taxes on gasoline, alcohol, etc. Sounds a lot better when you think about that six pack costing 89 cents plus tax!
Yes, simplifying the tax code is a perfectly good idea. But, to place the tax burden on retailers in the form of a national sales tax or on producers of merchandise in the form of a consumption tax is absolutely crazy. Such as step would be disastrous for the American economy.
It is also important to consider how the US Congress will deal with this kind of tax BEFORE supporting this crazy idea. With a rich history of spending more than they have, our government will sell this idea as a simple tax of just a few percent. As time goes on, they will continue to increase the amount and complicate the new tax code. If we want to destroy the world’s most successful consumer economy, adopting a national sales or consumption tax is a sure-fire way to accomplish that goal. This is a very bad idea!
Everyone including retailers will support whatever doesn’t gore their ox. Retailers must feel that a national sales tax or VAT versus the current income system would hurt their industry, citing that people with less discretionary income would spend less than they do today and thereby hurt total sales. That may or may not be true but taxes and personal spending, like water, always seem to seek their own level. The retail sales of European countries have survived the VAT system and I believe America would also after the initial adjustment…particulalry if the current taxing processes were eliminated. The IRS costs all parties – including retailers – a lot of money. I like the suggestion that unprepared food, shelter and basics would be excluded. Then this proposal would strike me as a not-to-worry situation.
It’s a great idea. It would restore fairness. Release the economy from the infrastructure burden of employing tax code experts. Take the politics out of taxation. Make taxes understandable.
The only issue is the difficulty of the transition from the current system to this.
If this could be implemented sensibly and fairly — two very big ifs — I think it would be a huge improvement over our current system. Closing all the loop holes and having everyone pay their fair share of total taxes would be such a breath of fresh air. Not needing the IRS would also be a major savings and we could learn to quit dreading April 15th. Basic necessities like food could be taxed at a much lower rate or not at all to reduce the burden on low income families and individuals. Tobacco could be even higher that it already is to further discourage consumption, and so on.
Retail sales may or may not have survived VAT in Europe as Gene claims; it’s like any kind of insurance or placebo, impossible to tell what the situation might have been if there was a different system. And who/when/where/why/how are sales taxes paid if we continue using credit at the current or an expanding rate? How fair is that? Prices go up and down but the taxes are paid only on the price at the moment of sale even if the bill isn’t paid until days, weeks, months or years later. That doesn’t make sense to me.
As for the cost of collecting, I think retailers are right to protest about having to spend even more time on even more complicated calculations. And believe me, VAT calculations are complicated and time consuming. Perhaps individuals would spend less time on their annual tax returns but retailers would be spending a great deal more time. Nor is there any less bureaucracy or fewer civil servants; they simply have different job and departmental titles. There are also countless civil servants in countless cubicles creating definitions and criteria for eligibility and exemptions. Confectionery is apparently not food and therefore taxable; ditto chocolate covered cookies/biscuits which are called countlines over here. Chocolate chip cookies, however, are food and therefore zero rated. There are zillions of other even more outrageously pedantic and ridiculous rules and regulations (to do with hot and cold food, for example, and who is selling it) but creating them does create jobs along with the red tape so maybe there is an up side.
I’ve had my time as a retailer and also as a service provider which made me eligible to re-claim VAT I had spent on essential purchases. It is not a system I would ever recommend. The American taxation system and IRS are a nightmare which I remember well and they certainly need to be improved and simplified. But scrapping them completely and attempting to substitute an equitable system based on sales tax seems to me very close to impossible and would cost far more over a longer period of time than could easily be recovered.