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Sunday, May 06, 2012

Why not a national sales tax?

3,000,000. That’s roughly the number of words in the IRS tax code. And that doesn’t even include the 6,000,000 plus number of words of IRS regulations. How many people are out there saying, “Yeah, that’s about what it should be”? Yet, nothing is done to change the system because, I suppose, it’s just too scary to do something different. Businesses and individuals spend over 6 billion (yes, billion) hours each year preparing and filing their taxes. The current system encourages not only tax avoidance, but tax evasion. And the IRS has a budget of over $10 billion a year in order to collect what the government is owed.

Why not a national sales tax? How verbose would the tax code have to be for that? How much time would people have to spend to prepare and file their taxes? To what extent could individuals and businesses avoid or evade their taxes? How much smaller would the IRS and its budget be under this system?

In addition to being simpler, cheaper, and less susceptible to scofflaws, it promotes both productivity and saving. People don’t make decisions on work versus leisure based on their gross wages, but rather on their take-home pay. Taxing consumption rather than income induces individuals to work more because they know they will get to keep what they earn. And now that the money is in the workers’ pockets, they decide for themselves whether to make a purchase, and thus pay taxes, or to save. The decision shifts from “work or leisure” to “consume or save”.  Because of this shift, people will have more incentive to save and this will mean that they will tend to carry less debt and be better able to fund their retirement.

One main argument against a national sales tax is the thought of it being a regressive tax. The less income one earns, the greater the proportion of that income that must be spent on necessities. Those who earn greater incomes are in a better position to forgo consumption and instead save. However, this easily can be overcome. Certain goods could be exempted from the tax. For instance, food, medicine, gasoline, used cars, and electricity could be completely exempt. A house or new car could be taxed only on the price above the median. Clothing, too, under a certain purchase price, could be exempted. In addition, rebates and credits, just like the Earned Income Tax Credit does now, could be granted to offer protection to the poor.

So, why not a national sales tax? Sometimes more complexity adds depth. Not many people would suggest that Steinbeck should have cut the length of The Grapes of Wrath in half. But sometimes more complexity is simply unnecessary. Our tax system is unnecessarily complex. It doesn’t have to be. The median amount paid by individuals for tax preparation is about $250. Wouldn’t that money be better utilized some place else?

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