Follow Up: A Sales Tax Solution

I was thinking more about the “Fair Tax” idea and another benefit occurred to me. It would help those in debt. By taxing earnings debtors pay taxes no matter what. If you tax their spending they would have more incentive to save money. Of course people always have an incentive to make more money, but it’s usually easier to cut expenses than to get a raise. Well not just debtors would have more incentive to save money, but also anybody else. This would definitely help people in America who are in debt.

Current Scenario 1:

$30,000 income
$20,000 expenses
- $7,500 taxes on income (25% income)
$2,500 to pay off debt

Fair Tax Scenario 1:

$30,000 income
$20,000 expenses
- $5,000 taxes on expenses (25% expenses)
$5,000 to pay off debt

Scenario 1 shows how people will probably spend less. Look at Scenario 2 after cutting $5000 in expenses. Scenario 2 shows how people have an incentive to cut expenses.

Current Scenario 2:

$30,000 income
$15,000 expenses
- $7,500 taxes on income (25% income)
$7,500 to pay off debt

$5,000 in more savings (100% of debt reduction)

Fair Tax Scenario 2:

$30,000 income
$15,000 expenses
- $3,750 taxes on expenses (25% expenses)
$11,250 to pay off debt (125% of debt reduction)

$6,250 in more savings (125% of debt reduction)

Pro:

• People would have more incentive to save money
• People in debt could pay off their debt faster by earning more through cutting expenses

However I did come up with a major con of the system. People are more inclined to save money up front than to save money in the long run. People are all about instant gratification. Every time they would buy something they would see that 25-30% or so tax. Most people would probably rather only see their taxes once or twice a month rather than everyday even if it would save them money to get it regularly.

Con:

• People would rather have instant gratification, lower prices up front instead of lower cost in the long run.

No IRS: A Sales Tax Solution

Conservative radio talk-show host Neal Boortz co-authored a book with Congressman John Linder called the “Fair Tax Book.” In it they spell out reasons to dismantle the IRS, income taxes, and every other tax and impose a 23% national sales tax on all consumed goods. I have not read the book and don’t know all the details of this proposal, however I can give some pros and cons to basing the entire tax system on a sales tax.

Pros:

1. Less fraud in the tax system.
   
2. No filing taxes.
3. Simplified tax code.
4. People who do not usually pay taxes (illegal immigrants, prostitutes, drug dealers, tourists, strippers, anyone with good tax lawyers) would all pay their fair share of taxes through this system.
5. When politicians say they need to raise taxes everyone would have to contribute, not just the top 1%. New programs would be more debated and would have to be universally accepted.

Cons:

1. Possible creation of a black market.
2. Some of the ultra-wealthy might live as misers and avoid paying taxes.
3. Retirees would have to pay taxes during consumption when they already paid taxes on earning the money.
4. Growing pains in the system, before-tax prices would immediately.
5. Individuals would have a hard time selling things by themselves.

There are probably other concerns, but I think the cons can be addressed. There are black markets now, and law enforcement could deal with that. If the wealthy don’t spend their money, they’re not necessarily avoiding the taxes; eventually the money would get spent. Retirees could get a waiver. Anyone collecting social security could simply pay a lower tax and over time it would be phased out. We could phase in the tax and cut existing taxes in proportion to raising the sales tax. Individuals could just send off taxes every year. Tax evaders are already prosecuted, we could refocus investigations. Or, we could just say that only new goods and services get taxed. I believe Boortz’s plan calls for that. I’ll have to read the book to double check.

This “Fair Tax Plan” should be considered. According to Congressman Linder he has introduced the bill in Congress and it has received over 50 co-sponsors. The idea is popular and maybe it should be. If I read the book I’ll report more on it. You can buy it from Amazon here:

http://www.amazon.com/Fair-Tax-Book-Saying-Goodbye/dp/0060875496/ref=tag_dpp_lp_edpp_img_in