Tuesday, October 18, 2011

Considerations on a National Sales Tax

I could support a national sales tax.

A national sales tax is a part of Republican Herman Cain's "9-9-9" tax plan – a 9 percent national sales tax, 9 percent corporate income tax, and 9 percent individual flat tax.

This is not to say that I support Cain's 999 plan. I do not. It seems well designed to tax the middle class for the purpose of supporting the wealthy.

Furthermore, I am not a supporter of a "flat tax". As I have argued in the past, I think that the first dollars for government public goods should come from the dollars that fulfill the least and weakest desires. Because of the diminishing marginal return of dollars, these are the last dollars of the very rich.

However, there is some merit to the idea of replacing taxes on labor, savings, and investment with a tax on consumption - merit grounded on real-world reasons for action and not imaginary "intrinsic values".

A tax makes the activity being taxed more expensive. You take an option that fulfills just a few more and a little stronger desires than an alternative and tax it, and you create a situation in which the alternative wins out. This suggests that taxes should be placed on activities that one wants to discourage, and not be placed on taxes one wants to encourage.

Working, saving, and investing are not good candidates for "activities we have reason to discourage".

In fact, we have more and stronger reasons to encourage these activities than discourage them.

Is "consumption" something we want to discourage?

A sales tax is really a tax on consumption - on spending.

Whether this is something to be discouraged, I would argue, depends entirely on what is being consumed.

One of the objections to national sales tax is that it is a regressive tax. It puts a greater burden on the poor and middle class - who have to spend a higher percentage of their money to survive - than on the wealthy who have spare cash to save and invest.

However, as I said above, I am no fan of the flat tax. I think we can engineer a sales tax in such a way that it avoids these objections.

First, we do not have a sales tax on what is needed to survive. Food...good food...need not be taxed at all. The portion of the poor person's income that goes to food need not be taxed. Medical care, prescription drugs, and primary shelter (rent and mortgage on a first home) can also be included in the list of things not taxed.

The more things excluded from the sales tax, the higher the rate needs to be on the things included in order to make up the lost revenue. However, that is not an objection to the system. This is, instead, an application of the principle that the first dollars to go to pay for government services should be the dollars that fulfill the least and fewest desires.

On the issue of rent and mortgage, we can rationally conclude that a $10,000 monthly rent or mortgage payment represents the purchase of a form of shelter not needed to maintain basic human welfare. So, perhaps, allowing the first $1000 in rent or mortgage per month to be free of a sales tax would be sufficient.

I am throwing these numbers out for illustrative purposes only. A proper understanding of the subject matter may argue for a different number, but the principle remains the same.

Another economic good that we can argue should be tax free is education. Indeed, education - because of its free-rider problem (an educated population is a benefit to everybody, even those who do not contribute to the cost of education) - is something that the government should subsidize, not something it should tax.

On the other side, we can have a higher sales tax rate on things that are clearly luxury items - pure consumption. Jewelry, designer clothes, everything above $2,500 in monthly rent or mortgage, luxury cars, expensive hotel suites, cruises and first-class plane tickets are examples that can fit into this category.

The fact that a sales tax is supported by Republicans - and can be designed as a system that taxes the middle class to benefit the rich - does not prove that it is a bad idea. It has its merits - and can be designed in such a way that it is just as progressive as an income tax, with the tax focused on collecting those dollars that fulfill the fewest and weakest desires.


mojo.rhythm said...

Did you say that you would not tax investment at all?

That is right in line with Herman Cain. He also wants to cut the capital gains tax to nothing.

Warren Buffett said that at the moment, since he makes all of his income off of investment, he only pays a tax rate of about 17%. Are you saying he should pay zero? Or have I misunderstood you?

Alonzo Fyfe said...

Well, it depends on whether one xan generate sufficient income from a luxury consumption tax (and a fairly hefty inheritance tax).

I am not in favor of taking somebody Jeffie the pleasure of taxing them. "There is money over here, let's get some".

But I have not repudiated the idea that the dollars that go to provide public goods and basic welfare should come from the dollars that fulfill the least and fewest desires.

If this means ni capital gains tax, that's fine. They will be paying someplace else.

Anonymous said...

You are suggesting a luxury tax which was tried about 20 years ago and repealed because it didn't work. It was short lived and not given much of a chance yet they say it cost jobs which isn't a good thing. I wondered if it were possible that the wealthy and the industries they support might have lobbied and won that repealed or if it was just a bad tax. Can you tell me why it would work now when it didn't work then? We are suppose to learn from history, not repeat our mistakes.