Where Am I Going Wrong on a National Sales Tax?

First of all, I think it would require an amendment to permit the federal government to lay a point-of-sale sales tax on good sold to the public. I'm not assuming Congress can just claim "Commerce Clause" and implement such a tax of their own authority.

The reason I am thinking about a national sales tax is due to a point many conservatives are making: With 51% of the population paying no federal income tax whatsoever, they have no "skin in the game." They have no "tax sensitivity;" increased taxes on "the rich" (that is, the 49% paying federal income taxes) are pure win for them, at least as far as primary effects. (Secondary effects, like retarding growth, are a matter of argument and theory and are not as powerful a driver of behavior and belief as primary effects.)

So how do you get more of the public to have "skin in the game" as far as increasing taxation?

As a starting point, I do not believe it is politically possible to raise tax rates on those not paying taxes right now (aka "the poor," even though most are not really poor as we've historically defined it).

To some extent I suppose this can be done, sort of invisibly, by freezing the level of the personal deduction, etc, to let inflation do its work, so that in ten years a smaller percentage of the public will not be immune to taxation any longer,

I'm not sure that'll work, though.

But a widely-collected national sales tax would capture virtually everyone and make most people taxpayers, at least to some extent, even those in black market occupations. With some money coming in on the sales tax side of things, income level rates could be lowered a bit, to make it all mostly revenue-neutral. (As a practical matter, it wouldn't be actually revenue-neutral, but revenue-raising, because why else would Democrats vote for it?)

There are several conservative objections to such an idea:

1. A national sales tax could be increased at any time and is an "invisible tax," scarcely noticed by the public, and therefore gives the government license to tax the hell out of the public. So the government could extract more and more from the public, without the public noticing, and the public would be left with the mystery of why their economy has faltered; there would be no "fingerprints" recoverable in the crime to pin it on taxation.

I don't believe this objection is close to true. Some sorts of sales taxes can be well-hidden from the public by incorporating those taxes inside the base cost of a product; I think that is the point of the Value Added Tax, and thus why liberals so love the idea of it. (I think.)

But a national sales tax -- 3% or whatever -- imposed at point-of-sale is plainly visible to everyone. It isn't hidden.

It's actually annoying. No one likes a sales tax. That is a good thing about them, that they're visible and annoying.

I don't think these taxes are "invisible." When states increase (or impose for the first time) sales taxes, it's generally fairly contentious, about as contentious as any tax-hike plan. I don't think it's true that a national sales tax, added to the top of any bill, and clearly indicated on a receipt, is a "stealth" tax the way other taxes (such as the value added tax) might be.

2. You don't want to impose a tax on such a vital activity of the economy -- consumer purchase of consumer goods -- because taxes always, inevitably, retard the activity taxed, by making it more costly to engage in this activity.

This is true, but this is true of virtually every tax laid. We want people to make higher incomes, but of course we penalize those higher incomes with higher taxes. We want people to buy and sell property, but we impose taxes on the sale of property; we want people to own their own property, but we impose taxes every quarter or year on that property.

Apart from sin taxes or the death tax, every tax we lay on the public is actually on an activity we'd wish to encourage, not discourage. So when this objection is laid, it has to be evaluated in context -- true, we don't wish to discourage consumerism, but then we also don't wish to discourage capital gains, and yet we tax those, and we don't wish to discourage investment income, and we don't wish to tax income from interest on savings, and yet we tax that, and so on and so on.

The argument would have to be made that consumer purchases are unique among economic activities in being so sensitive to taxation that we do not dare lay a tax on it, even while taxing virtually every other exchange.

So, if those arguments are not strong, should we think about this?

Now, I'm not sold on this idea, and have just been thinking about it for a week or so, so this is very first-draft and first-blush.

But I am worried about that old bromide about the country going to hell when 51% of the country realizes it can vote itself all the income of the other 49%, and am wondering how on earth we can make a good-sized majority of 60 or 66% concerned about government spending again.

posted by Ace at 02:58 PM

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