Tuesday, March 5, 2013

National Sales Tax

In class the topic of a national sales tax came up briefly.  It was also mentioned in one of the supplemental readings.  It got me interested in exploring the idea of a national sales tax.  A form of a national sales tax, the Value Added Tax (VAT) is common in other countries, especially in Europe, so the concept can work.  With the IRS tax deadline of April 15th looming, a simplified system that doesn’t require so much time nor incent so many high earners to develop ways around paying taxes would seem better.

There is a lot of debate to be found on this topic. I found a fairly comprehensive list of pros and cons on the BalancedPolitics.org website.  The ones that I find the most compelling include:


  • The removal of an income tax encourages saving and investing, which is the key to job growth.
  •  Individuals would have an extra incentive to work hard and earn income, leading to a far more productive nation.
  • A sales tax would be a much simpler system, eliminating the need for individuals to comply with complex tax reporting requirements and freeing up all the money & time lost on the income tax process.


  • A sales tax would be a regressive tax; i.e. low-income individuals would pay a much higher share of their incomes than wealthy individuals.
  • A national sales tax is a risky system that may not raise near enough money to support all our needs in defense, education, health care, etc.
  • Tax evasion and instances of black market purchasing would likely increase.

Simplicity isn’t good for everyone; a whole section of jobs have been created out of the complexity.  But I don’t think it is as dire as the statement on the Opposing Views website: “The entire tax industry would be destroyed, and thousands of accountants, IRS workers and other people in the tax business would lose their jobs.”  Many industries these days go through continuous change and must learn to adapt.  If there was a major change in our tax system, assistance could be provided for retraining.

The regressive nature of a national sales tax is the biggest concern from my viewpoint.  This issue could be mitigated by decisions that are made in the implementation of a national sales tax.  Economist Gilbert Metcalf from Tuft University suggests that it could be made progressive by adding a universal rebate tied to poverty thresholds.  Metcalf also made the distinction between annual consumption versus lifetime consumption, as it changes over the life cycle and how it impacts regressiveness.

From an adequacy standpoint, a national sales tax rate would need to be high in order to replace income tax and provide a sufficient source of revenue for education, defense, etc.  I have seen the rates quoted in the range of 23-34% which raises the worry that this would discourage purchasing.  In the short term, I think that would make sense.  It is much harder to guess at the long term impact once people saw a larger take home pay.
Around tax time last year the Brookings Institute hosted a Web Chat on tax reform, and the national sales tax was not perceived as having either Democrat or Republican support, the former because it is regressive and latter because it would raise too much revenue.  This points out what I believe is the biggest challenge – political feasibility.  With these philosophical reasons to oppose a national sales tax, coupled with an aversion to risk and change it doesn’t seem likely that our current Congress would enact any major tax changes.

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