Tonight, let’s look at a few specifics and common criticisms of the sales tax.
What rate would be required of a sales tax?
The numbers vary. Of the articles referenced below, Forbes says between 23% and 30%. Cato says 15%.
For an overly general consideration of a possible rate, ponder the following numbers:
GDP = $18 Trillion
Federal Budget = $4 Trillion
$4 Trillion/$18 Trillion = 22.2%
This is roughly equivalent to the rate of one of the popular sales tax proposals, The Fair Tax, which calls for 23%.
If everyone pays a flat rate, isn’t this a regressive tax that would hurt the poor the most?
The Fair Tax takes this into account by suggesting a pre-bate up to the poverty level. Essentially, purchases made up to the poverty level each month will be tax free.
Forbes points out that another way to look at the regressive nature of the sales tax is in terms of consumer lifestyle. In other words, some wealthy individuals may be at a point in their life where they make little income but live a wealthy lifestyle – meaning, they buy a lot of stuff. These consumers would pay more than they currently do under the income tax.
For all the current talk about the rich not “paying their fair share”, a sales tax would ensure each of us pays exactly our fair share – of consumption.
How many would pay the sales tax in comparison to the current system?
So, we mentioned last night, the sales tax would broaden the tax base because illegal businesses, tourists, and those who fail to file a return would still pay into the system with the sales tax. Proponents of the Fair Tax estimate the number of tax payers would jump to 250 million from the current 155 million tax filers.
It’s also worth noting that while there still may be some illegal activity, the cost of enforcement will go way down. Instead of the federal government having to manage the filings of 155 million individual returns, it will only have to manage the filings of the businesses through which the sales tax was raised.
Lastly, we’ll end the way we started, with the comment that incentives matter. As we shared previously, the income tax discourages productivity. In contrast, because each consumer knows the tax paid on each transaction, a sales tax would encourage savings. Increased savings could lead to increased investments in our economy, and a healthier financial outlook of American citizens.
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