Friday, January 14, 2005

Could a National Sales Tax Really Work?

There's a lot to like about it, but...

On one of my favorite talk radio shows I heard a prominent congressman talking up the national sales tax proposal he has put on the table. He was really rather upset at the lack of understanding about the true potential of this monumental change in tax collection. He made some persuasive arguments for the sales tax over the income tax. For instance, he claimed that consumption was a far more stable element for revenue collection than income. He cited statistics that showed that other than during WWII consumption waxes and wanes no more than 3% whereas income as a revenue source has dipped as much as 20% during post war recessions.

The fear that this tax would raise the prices of goods and services was discounted because a sales tax does not stifle price competition and he claimed that it actually improved it. Higher prices due strictly to the sales tax were more than offset by the elimination of income tax.

When asked about the effect on the poor and working poor he acknowledged that basic subsistance level commodities had to be addressed for those without means. His proposal would keep the government out of the business of picking and choosing what constitutes basic conmmodities. Instead of exempting certain products or services his plan calls for direct government checks on a monthly basis be distributed to those classified at or near the poverty line (accounting for family size) to cover the sales tax bite. Those checks would be as good as cash, no strings attached. I like the idea of keeping government officials from tinkering with details that would only result in social engineering, but I see a huge potential for abuse and then more calls for the government bail people out of the messes they make of it. I also see something like this creating even more of a magnetic effect for illegal imigration.

The question I have is: how is abuse of this system going to be curtailed if taxpayers misreport their income? It seems to me that direct government checks would draw out the scam artists like never before. I know the current SSI system is widely abused primarily because the government doesn't have the resources to patrol the ocean of abuse.

While there is much to like about the concept of a national sales tax over income tax I will reserve final judgement until I see how these plans account for the inevitable abuse that will suely arise. Face it, the current income tax system is battered and beaten by fraud and abuse - there's no reason to assume a sales tax wouldn't be a cheater's paradise.



Timothy Birdnow said...

Great Post!

The scary thing about a consumption tax is that it will be easy to hide tax increases from the taxpayers, and lay the blame on ``price gouging``. We hear that every time the price of gasoline goes up (no one ever talks about the enormous taxation on gasoline.)

I agree with you-the jury is still out. We need some kind of reform, but I want to weigh other options.