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How to make a national sales tax work–fairly

So the idea of a national sales tax to replace the income tax comes up again, and this time it gets some consideration, or at least some air time.

The usual people are howling about it: Sales taxes are regressive, and regressive taxes are unfair.

Here’s a fair way to fix that.If you haven’t guessed, I’m in favor of this. The yearly paperwork is a major pain, and getting it right is even harder. Without professional help, I never can. How many hundreds of thousands of hours are wasted preparing taxes, just so we can have a tax system that seems fair?

And it’s not really fair. It’s impossible to close all of the loopholes, and those who have reason to find the loopholes also have sufficient money to find and take advantage of them.

I like the sales tax idea because it’s based on the money we spend. Want to pay less in taxes? Save more money. So it encourages saving, which is something we desperately need to do. It’s also next to impossible to evade, since two people are going to get in trouble for it, and it’s not worth a merchant’s while not to pay it, so the merchant will collect it.

So, let’s hit the regression problem.

Sales tax is regressive because both rich and poor alike have to buy food. And since rich and poor alike pay the same price for the same loaf of bread at the same store, the sales tax takes a larger percentage of a poor person’s income. That extra dime hurts the person who makes $250 a month a lot more than it hurts the person who makes $250 an hour.

So why do we tax food in the first place? That eliminates the problem. That way the guy who makes $250 a month and can’t afford to buy anything but groceries can still live, and he pays no taxes. The guy who makes $250 an hour pays no taxes on his food, but he does pay taxes on luxury items, which, in theory at least, he will be buying in much larger quantities than someone with a sub-subsistence income.

One could even choose not to tax subsistence-type foods like bread, eggs and milk, but tax luxury foods such as chocolate. Alcohol absolutely should be taxed. Defining luxury foods could be a dicey affair, but could it possibly be more complicated than the current tax code?

Other necessities like personal hygiene products, medicine, and clothing could be handled much the same way. Perhaps some sort of a baseline price could be established on clothes, so that a generic $10 pair of blue jeans isn’t taxed, but a $90 pair of designer jeans is.

And I have a question: How much money does the government spend every year enforcing the current tax code? This change does away with the processing centers, the need to print lots of forms, the auditors, the help lines, and the expenses that go with them. Or is the creation and maintenance of all of these cushy jobs a prime motivating factor behind the current tax code?

While this solution doesn’t solve all of the problems or potential problems with such an extensive overhaul, I do hope it helps prevent the idea from being dismissed just on the basis of it being regressive. It doesn’t have to be. And I hope it encourages those in favor of such a code to make it fair.

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2 thoughts on “How to make a national sales tax work–fairly”

  1. Dave,

    Your ideas are good and interesting but I doubt they would work. If I was the guy making $250 an hour then I would also be a person that maybe lives in two different countries or I would be spending my money in other countries where things would not be as expensive as your proposed tax would make it. Remember that the world is growing smaller by the minute and our national boundaries are slowly but surely loosing their significance.

    As for it being hard to do your tax returns, here in Sweden the company employing you is responsible for removing the tax part of your salary every month and reporting back to the government about your income. For the majority of the people here, when you get your tax return, you basically get a sheet of paper stating your salary, what your taxes were, loans etc that affect your taxes. We only need to read through it, verify the figures and sign our name to it. Signing has been removed as well actually. You can give the report the tumbs up though internet or SMS if you like.

    Don’t get me wrong, I am not saying that you should keep your current tax system. I am just saying that there are ways of making it easier and that ideas about sales-tax-only will probably have as many loopholes and unfair advantages as your current system.

  2. Not related to the topic, but since Slashdot mentioned the people who helped make Wikipedia great, I went looking, and there you were at 968 !

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