Since my youngest son and I talked about the concept of abolishing the IRS and instituting a national sales tax last night it's been on my mind. I emailed my oldest son to get his opinion and boy, did he give it to me! 
I knew what he would say because somehow his very conservative father and I managed to raise a, gulp, socialist! He isn't impressed with the thought of abolishing the IRS and having a national tax on consumption and let me know just why. Ouch, my head almost hurt by the time I finished reading his email. But I thought about this at work quite a bit and asked a few people about it.
Most of them were against it but their reasoning seemed faulty to me. They weren't upset about the thought of paying a consumption tax so much as the thought of not getting their "refund" each year. When I asked a couple of them why they loan money to Uncle Sam interest free they didn't understand the question. They don't see it that way. They see the refund as their "savings account" and most of them put it to me just that way. Ummm, okay...
So all you savvy financial sorts, what do you think of the idea of having a percentage tax on retail goods that applies to us all? Would a flat rate tax of something around 23% be fair? Unfair? Is it actually doable?
Expound if you like. Inquiring minds want to know!
What do you think of a national sales tax?
January 16th, 2008 at 01:54 am
January 16th, 2008 at 02:55 am 1200452124
That could still work to our advantage, since we invest about 20% of our income, much of which is invested after taxes. If there was no income tax, that money would get invested tax-free which would allow us to put away even more.
One argument against this is how you handle folks with lower incomes. With our 6-figure income, we spend a much smaller percentage of our income each year than a family earning 30K, which means they would pay a much higher effective tax rate. How would you adjust for that?
January 16th, 2008 at 02:58 am 1200452317
Robert Frank has some good arguments for consumption based taxation in his book Luxury Fever, but I'm too tired to recall those right now.
January 16th, 2008 at 03:05 am 1200452711
The issue of people with lower incomes is a real one, indeed. But I like the idea of a prebate, if it's actually feasible.
You can read about the prebate here:
http://www.fairtax.net/14.htm
That would solve the issue of lower income households paying a tax they simply can't afford.
January 16th, 2008 at 03:12 am 1200453131
Too avoid over taxation on lower income earners as disneysteve said you'd probably have to have separate tax rates for food and other necessities of life or do you give the lower income earners exemptions? How much? Adjustments for dependents? Do you tax services as well? If not why not? Why give all income, passive or earned, a free ride? Each persons ox will get gored and they will try to pass the buck to the next group down the "food chain. if you will.
As well intended as it may seem, and the underground economy would likely be taxed more than now, there are always hidden agendas in any such proposal. As one person wrote, where money is involved the ingenuity of man is unlimited, so what is the foundational basis and premise behind the national sales tax beyond a hatred of the IRS?
The true question is what type of government we want, what services as a nation we want the government to provide for the common good and whether we are willing to pay for it.
Not only do I do not think it would work, I would need much more information to evalute it.
January 16th, 2008 at 05:15 am 1200460516
Poorer folks would be hit especially hard. Most of their budget is the necessities and retail. While the rich have spectacular consumption (yachts, furs, space tourism, etc), most of the time they buy assets that appreciate - stocks, bonds, hedge fund shares - and produce income, which doesn't seem to taxed in this system. So its sheltered, and its profits are sheltered. Pretty sweet, like a really, really big Roth.
January 16th, 2008 at 01:46 pm 1200491206
January 16th, 2008 at 05:23 pm 1200504194
January 16th, 2008 at 06:49 pm 1200509381
It could be tiered. For example, bread and milk can be taxed very low (or maybe even none at all), where as luxury yachts would be taxed very highly. It might seem like a gargantuan task of trying to categorize everything on the market, but they can be broken down into basic categories. Even then, I admit it wouldn't be easy, but I'd rather have this than putting up with income tax.
As for your son being a socialist, I think it's perfectly normal for our youths to be far more radical than us. They may not fully understand how the real world works just yet, but I say it's still a good thing that they are willing to innovate and push the envelope towards a better world. After all, they'll be leading our government and driving our economy some day, and I can only hope that as a parent, I have done my job to help groom them towards that better future.
January 16th, 2008 at 11:27 pm 1200526024
January 16th, 2008 at 11:34 pm 1200526456
I do know that most proponents agree that certain things wouldn't be taxed - things like food, clothing, medical care. But what I don't know is whether or not ALL food, clothing, and medical care would be tax free or just some. I also don't know if services should be taxed but most proponents feel that medical services shouldn't be taxed.
BA, I'm with you about tiering the tax. For example, perhaps variations of things most consider necessity should be taxed. For example, clothing is necessary but is a $15,000 coat necessary? Nope, it isn't.
I'm not sure just what to think yet but I do find it all interesting!