Economics, Politics, Social Commentary and occasionally Superstring Theory.

Thursday, June 01, 2006

National Sales Tax

I was shopping for a book last night and, to my surprise, ran across several books written in support of abolishing the national income tax and replacing it with a national sales tax. I will leave the statistical compilations to others, but even in theory this is a bad idea. Why?

Because poor people consume more (if not all) of their income because they are forced to do so. For example, let's say there's a baseline of money that it takes just to survive (rent/housing, food, etc.) We'll pick a number from the air and say that amount is $10,000 per annum per person, on average. Now take Randy and Glenda. Randy makes $25,000 a year as a call center operator. Glenda makes $250,000 a year as a securities trader. Both of them must spend at least $10,000 per year to live. Under a national sales tax, 50 percent of Randy's income is taxed, but only 10 percent of Glenda's is taxed.

Glenda, in all likelihood, will consume more than Randy. So, the percentage of Glenda's income that is taxed will probably be more than 10 percent. However, she is not required to consume more than ten percent of her income. And there is the rub. The national sales tax will result in a forced tax hike on the poorer members of society, while resulting in an optional tax hike on the richer members of society. The richer members of society have the option of reducing their consumption so that the national sales tax does not affect them as much as it could. Poorer members of society have no such option.

All of this is far and away from the economic consequences. Any rise in prices, which a national sales tax would produce, will result in a loss of consumption. A loss in consumption will result in job loss. Moreover, putting all of the government's revenues in the precarious grip of consumption will frustrate policymakers as they attempt to predict future government revenue. Income is certainly more stable than consumption.

While we all may feel a kneejerk moment of joy when the phrase "Eliminate the IRS" is uttered, the consequences of such an elimination, as posited in the current books hyping the subject, would do little aside put us in a less predictable and less equitable world.


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