Wednesday, November 02, 2005

Nixing the National Sales Tax

The President’s Advisory Panel released their 300+ page report last Monday. The full report can be found here: So far I have had an opportunity to read only portions of it, and I expect to read and comment more on this in the coming days. However, here’s an initial reaction to one dimension of this report: No on the National Sales Tax.

The National Sales Tax has been floated in various forms as a means to deliver us from the perceived evils of the IRS, the burdens of tax compliance and consequential deadweight losses in the economy, and various other human maladies. A recent version, known as the Fair Tax, was backed by grass roots organizers including notables such as libertarian talk show host Neal Boortz, who published a best-selling book with Georgia Congressman John Linder. Their web site can be found here: .

I used to live in Mr. Linder’s district in the Atlanta area, and I was a solid supporter in those days. He is a good man who is well-intentioned, but I think he’s off base on this issue. Though I am attracted by reducing burdens of tax compliance and deadweight losses, I have never been convinced that moving toward sales taxation was a good approach. The Advisory Panel apparently agreed with me on this one, so I say good for them. Among their reasons that I find persuasive are these.

First, you are kidding yourself if you believe that a sales tax of 30 percent or more will not require significant additional enforcement efforts and government costs. We are not a nation of angels. If you think income tax evasion is a problem, the increase of sales taxes to these levels will incentivize significant new efforts to evade taxes. Unlike income such as wages, interest, or dividends, which are subject to reporting by payors to the IRS (a big incentive to file honestly, since big brother is watching), the sales tax is in the hands of the merchant. It may be hard to verify that sales aren't happening outside the tax net, whether through side transactions or through fraudulent claims for exemption.

Second, the Panel was also concerned with the problem of regressivity, and in particular with the Fair Tax approach to addressing it by making cash payments from the government to ameliorate the impact of the sales tax on lower-income Americans. That creates a new bureaucracy which the Panel found undesirable. I agree.

Of course, I have other reservations about an expanded sales tax. Shrinking the base for things like food, medicine, and similar goods would mean rates must be higher. Special interests could have there day here, as well. Big ticket items like homes would present particularly troubling scenarios. If you owed 30% of the value of your home as a national sales tax, how would that be financed? What if you moved in two years, as many Americans do? There is more to be said here, but suffice it to say I agree with the thrust of the report on this issue.

Americans love to complain about taxes. Those who pay them complain a lot, and these days even those who don’t pay (or at least those who claim to speak for them) complain that those who are paying aren’t paying enough. We go to extreme lengths to avoid raising visible taxes by doing things like allowing gambling in our states, which effectively collect a stealth tax from the folks who believe they are lucky, but who get mugged by the mathematical reality of statistics. We also sell a lot of lottery tickets. (Those of you reading in New Hampshire, do you find it embarrassing that one of your senators buys lottery tickets? Perhaps he is just a public-spirited person who thinks he does not pay enough taxes. Or perhaps he thinks he is lucky - and maybe he was right this time. But I digress.)

The Panel seems to have some interesting ideas for reform that would simplify our system and reduce some compliance burdens. Query whether they can get through the gauntlet of special interests to achieve any of them. More to come.


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