What About A National Sales Tax?

Categories: Economy, Taxes
Comments: 2 Comments
Published on: 2016.01.02

Since I no longer like the idea of a Flat Tax, what about a national sales tax? (Or, as some have called it, the “Fair Tax”.)

Sometimes, a national sales tax looks attractive. It would incentivize savings, for example, because you won’t pay taxes unless you spend money. It also sounds fair — the rich buy more than the poor, so they would by default pay more on their sales taxes. Right?

1. It Would Be Unfair To The Poor

Not so fast. The poor spend a much larger percentage of their income “mostly on basic needs like housing, food and transportation”, while the middle class — on average — floats by with a little to spare, and some percentage isn’t spent on “basic needs” but on luxuries. The rich, meanwhile, spend far less of their income on housing, food, and transportation.

For example, the poor spend 72% of their income on housing, while it’s only 19% for the rich. The poor spend 28% of their income on food, while it’s only 7% for the rich. (And this study is using a fairly low number for the “rich”.)

While the poorest often have to borrow just to get by (notably, with much higher APRs than the rich will get), the middle class and rich are tucking away money for retirement or as an inheritance to pass on to the next generation of wealthy elites.

If we eliminate the income tax and replace it with a national sales tax, yes, the wealthiest Americans will still foot the biggest part of the bill — just as they do now — but just like today, it will hurt them the least.

2. A Luxury Tax Poses Hard Questions

One variation on the national sales tax is a “luxury tax”, which basically leaves untouched “necessary” goods like food, clothes, housing, utilities, etc., and taxes everything else. This seems fairer to me, in that the poor wouldn’t be punished for trying to get by, but it also seems like the rates would have to be tremendous on everything else. Additionally, there would be the tricky question of defining “necessities”.

I lean much more strongly toward this idea than I do toward the flat tax, but only if it could be shown it would work — raise the necessary funds — without taxing the items that the poor need the most.

As an example of how definitions could get thorny, what about food? Food is a necessity, so it wouldn’t be taxed. But what about a $100 dish at a fancy restaurant — is that a necessity or a luxury? Another example would be clothes. I can buy a warm coat for $20, but you can buy one on Amazon for $12,800. Should they both be taxed, or neither? Or should there be a line between them? If there’s a line between the “necessary” coat or food and the “luxury” coat or food, who draws the line, and how is decided?

I’ve lived several places where owning (or at least having access to) a car was a necessity — just to get to work, but it’s a luxury in a city like New York where most people use mass transportation. Should cars be taxed as a luxury in some places but not in others? Also, you can buy a dependable used car for $2,000 or a new one for $100,000 or more. Should the luxury tax apply to only high-end models? Where would the cut-off be?

It is also extremely difficult to predict how such a tax could be gamed, if there are any exemptions. For example, if churches are exempt from paying the sales tax (as they currently are), would there be any safeguards against everyone starting their own churches? Who or what would determine which are “real” churches and which are not?

3. What Would The Rate Have To Be?

I’ve seen various estimates, like this one, showing the rate would have to be 31%, if everyone paid it, or 44% or higher if some people were given exemptions. Some estimates go as high as 89%.

Even keeping in mind it would replace the income tax, so the amount of money you start with would be higher, 31% is pretty darn high. Of course, all these estimates depend on what would and would not be taxed, and whether anyone (or any organization or institution) is exempt.

◊ Conclusion

For me, there are too many issues with a national sales tax, though I assume someone could — eventually — work out a solution. It would be a tough sell any way we go.

To recap:

1) A national sales tax on everything would be unfair to the poor.
2) A luxury tax introduces many tough questions for which I haven’t seen satisfactory answers.
3) Either way, the rate would have to be quite high to replace the income tax.

(To read what I propose instead, click here.)

  1. Shari says:

    When I was checking out Presidential candidates, Mike Huckabee linked to a “Fair Tax” website which suggested a flat sales tax with a “simple” form for “poor” folks to fill out and get a “prefund” – a check at the beginning of the year to offset the taxes they’d be expected to pay on necessities. (It was one of the few things on his platform that made sense to me at the time).
    Another alternative solution to sales tax being unfair to the poor that came to me just now is simply increasing the current assistance programs (SNAP, housing assistance, etc). But those systems need their own set of reforming, based on my own experience, plus the very folks who’d be inclined to support sales tax would be unlikely to support an increase in “welfare.”
    Just thinking out loud…

    • Wil C. Fry says:

      That last bit, definitely. As for the prefund idea, I suppose that makes the idea more palatable. But I wonder if there would be a hard cutoff point… Make one more dollar and lose the prefund?

      I’m sure someone could work out all the kinks, but it sounds more complex than the reforms I’m suggesting.

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