A National Sales Tax

I tend to keep out of tax reform debates because, frankly, I'm not smart enough to keep pace. I used to brag about how I haven't taken a math class since high school, but now that my kids are getting to be school-aged I am beginning to fret about when, exactly, they will surpass me. I'm thinking I have until junior high before I have to start learning (or re-learning) along with them to help out with homework.

So I'd heard of the proposal for a national sales tax, but didn't think too much about it, until I recently heard it boiled down to this: "We should tax consumption, not productivity." Stated that way, it seemed incredibly sensible to me, so I decided to dig a little deeper. You can play along by Googling consumption tax or national sales tax.

Basically, because that's the way my mind has to work in this area, a national sales tax would eliminate the income tax, so you would get the full amount of money you earn, and replace it with a tax on new goods and services purchased.

One of my pet peeves with our society is how consumption-oriented it is. We have to have the bigger house (with higher energy bills), we have to buy the bigger car (with lower fuel efficiency), we feel like our self-worth is measured by possessions and owning more and more. Wouldn't we be better off learning how to live more efficiently and focusing more on the simple pleasures of life? And even though I am a liberal and, as the stereotype goes, love big government, I think we all would love a more efficient government.

A national sales tax would seem to be a step toward both. First, it would likely encourage saving and investment over consumption. Here are some quotes from modern-day prophets on staying out of debt and living within our means:

President Heber J. Grant: “From my earliest recollections, from the days of Brigham Young until now, I have listened to men standing in the pulpit . . . urging the people not to run into debt; and I believe that the great majority of all our troubles today is caused through the failure to carry out that counsel.”

President Ezra Taft Benson: “Do not leave yourself or your family unprotected against financial storms. . . Build up savings.”

President Harold B. Lee: “Not only should we teach men to get out of debt but we should teach them likewise to stay out of debt.”

President Gordon B. Hinckley: “Many of our people are living on the very edge of their incomes. In fact, some are living on borrowings. . . I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt to the extent possible. Pay off debt as quickly as you can, and free yourselves from bondage.”

Americans, as a whole, spend more than they earn. Bankruptcies continue to climb. Very few people had created a safety-net for the current economic crisis (which I have heard many refer to as the Great Recession). A tax on consumption (ranging anywhere from 15-30%, usually pegged at about 23%) might encourage more savings, thus creating a more stable society and economy. It would also encourage investment, leading to greater capitalization of business. Increased savings would reduce stress, interest payments, and becoming beholden to banks.

Second, under the current income tax system, individuals and corporations spend hundreds of billions of dollars every year just complying with the income tax requirements. The code is so long and so complicated that it is astonishing to me that the system even works. A national sales tax would virtually eliminate the tax code bureaucracy, eliminate the need to ever file a tax return again, and some have even suggested it would eliminate the need for the IRS completely under certain conditions.

The downside, and there are always downsides, is that it is inherently regressive. The poor must spend nearly every penny they earn in the marketplace, whereas the rich spend an increasingly small amount of their wealth on goods and services. This means that the poor would spend a larger percent of their money on taxes than the wealthy, which is the opposite of what our income tax has always been.

This alone is enough to torpedo the idea, for me and most Americans, but there are ways around it. The most common is the annual or monthly prebate or rebate check which would eliminate the tax for those living below the poverty level, and lessen it for those making otherwise low incomes. Another idea is to eliminate the tax on essentials, like food and medical expenses, and/or create a higher tax on luxury items.

So I like it because of its simplicity and its propensity to encourage Americans to save and invest. I am leery because it is potentially very oppressive for the poor. I am by no means completely sold on it, but it is an interesting way to look at tax reform. Thoughts?