It might be my imagination that every four years or so — liberally mixed with campaign rhetoric — we hear talk about the possibility of a Federal Sales Tax. This time the lead instigator is Speaker of the House Dennis Hastert. It is of course coincidental that his new book has been released during campaign season. Nice trick, getting people to buy a hard-bound campaign ad. But the interesting thing is that the President has been quoted as saying “You know, I’m not exactly sure how big the national sales tax is going to have to be, but it’s the kind of interesting idea that we ought to explore seriously.”
The loudest perennial voice in favor of such a tax is American for Fair Taxation, the “FairTax” people. A long explanation of the pros and cons of such a plan — really pretty well balanced — can be found over at About.com.
Once you look through the information, it becomes clear that we are talking about a tax of 23-30%, depending whether you calculate it before or after the price-tag goes on. No exemptions, no exceptions, send roughly a quarter to every dollar spent to the feds.
The advantages, in a nutshell, are that it is very simple and transparent. Better yet, it encourages savings, because after all you don’t pay tax on money you don’t spend. In even encourages productivity, because there won’t be tax consequences to working overtime — no, I never understood looking at the taxes before deciding whether or not to do my job.
Oh yeah, and the IRS could be dissolved, throwing the entire agency and a legion of accountants and tax attorneys out of jobs. Whether or not that is an advantage or a disadvantage depends on what you do for a living.
The disadvantages are, first and foremost, that it would add roughly a quarter to every single dollar you spend. At least most state sales taxes exempt things like food. This tax would be on everything, from Tiffany jewelry to store-brand macaroni and cheese, from healthcare to housing. Even with the expected deletion of Federal Income Tax — and that is no sure thing — it will feel like a one-time burst of inflation. Furthermore, it is regressive. “Increased incentive to save” only works if there is money left over after all the absolute necessities are paid. People who spend all their income will pay a greater percentage of their earnings in taxes than those who do not. Furthermore, people who are in a position to spend their money outside the United States will do so. Border towns and overseas mail order houses stand to benefit. United States tourism will likely be down, since Americans who can will vacation overseas, and foreign nationals will find other destinations.
All this being said, if there is only one thing you remember about the idea of a Federal Sales Tax it is this: it will require a Constitutional Amendment. The Sixteenth Amendment, the one that allows income tax in the first place, very specifically says “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
It’s not going to happen.