I try to present facts and logic and solutions rather than just opinions.

Please send any reasoned disagreements to me.

---

The USA should get rid of personal income taxes and replace them with retail sales/consumption taxes.

The anti-tax debate is confusing, because some people in it hate certain taxes, some people hate all taxes, some people hate the government, some people hate the IRS.

Why we need taxes and IRS (each of these builds on the steps before it):

1. We need a government (otherwise we'd have anarchy, crime, no national defense).
2. Government needs money (otherwise it wouldn't be able to do anything).
3. Government should be funded by the citizens (as opposed to, say, the state running proft-making businesses itself, as the Chinese military does).
4. The sums are so large that legal mandates (taxes) are necessary (as opposed to, say, voluntary donations).
5. The legal mandates (taxes) have to be enforced by some agency (the IRS, courts and police), or else no one would pay.
6. Tax structure is a powerful way to create incentives for behaviors we want to encourage (employment and productivity, home ownership, education, charity, savings for emergencies and retirement, moderate consumption).
7. The only remaining issue is: what kind of taxes should we have ?

Personal income taxes are bad because:

• They penalize people's initiative, hard work, savings, investing, and attempts to better themselves.
• They reduce the citizen's privacy.
• They are a burden for each citizen to fill out each year.
  (The cost of complying with all taxes [not just individual income taxes] is about 10% of the amount collected.)

Retail sales/consumption taxes are better because:

• They can penalize excess consumption (which depletes resources, adds to pollution, leaves other people in poverty).
• The mechanisms for collecting them already exist (businesses already collect state sales tax and send it to the state).
• The consumption tax is simpler (and thus has less administrative cost to calculate and audit) than the individual income tax.

Retail sales/consumption taxes can be progressive (tax the rich more than the poor) and be engineered to accomplish policy goals; they don't have to be "flat" and anti-poor-people:

• Necessities (basic food, basic clothing) could be tax-exempt.
• Some items (houses, cars, boats) could have a sliding scale: no tax on cheap ones, some tax on mid-scale ones, high taxes on extravagant ones.
• Luxury items (I don't know; planes, second homes, racehorses ?) could have high taxes.

Objections to retail sales/consumption tax:

• Would YOU like to pay a 25% sales tax on everything ?
  [But if you no longer have to pay a 30% income tax, then YES !.]
• National retail sales tax [and any federal tax, including federal income tax] are unconstitutional !
  [But we have always found ways to make things legal or illegal when we wanted to; there are lots of cases where the developing body of law or tradition has simply contradicted language in the constitution, or where the government has simply declined to prosecute other parts of the government that are in violation of laws (such as Iran-Contra). And we could amend the constitution.]
• The transition from income tax to consumption tax would be horrible.
  How should the transition be handled, to avoid having people delay income until after transition, and accelerate purchases before transition ?
  [I doubt it would be that disruptive. The only large purchases made by individuals are houses and cars, and we could phase-in the tax changes for them.]
• The transition from income tax to consumption tax would greatly penalize people with savings (already taxed), including retired and elderly.
  [I don't have an answer for this. Maybe a one-time rebate from the government to people with savings of $200K or less ? Maybe some way to distinguish between old (already-income-taxed) earnings and new (not-income-taxed) money when they're spent; don't have to pay sales tax if you're buying with old money ?]
• Consumption makes our economy run and gives us jobs; we shouldn't discourage consumption.
  [Some consumption is fine and necessary. The current levels of consumption in the USA are extremely high and dangerous, in my opinion. They are exhausting the world's resources and polluting the world, making poor people hate us, and leading the US economy to an eventual meltdown when the rest of the world decides to stop buying our debt.]
• Using taxes to implement policy (such as discouraging consumption) is wrong; the tax system should be policy-neutral.
  [No tax system is policy-neutral, period. So, the question is, what policies do we want to implement ? I think encouraging income and reducing consumption and increasing privacy are good policies.]
• A consumption tax would result in huge black markets as people try to hide transactions.
  [I don't think this problem would be any worse than today's situation where people try to hide income. And we already have black markets where people try to avoid sales tax and income tax, or buy illegal drugs and untaxed cigarettes and such.]

Services could be taxed just as well as goods could be taxed. Consumption of luxury services (first-class plane travel, cosmetic surgery, high-rate legal services, etc) could be taxed at higher rates than basic services.

Web page that matches my proposal:
BalancedPolitics.org's "Should the U.S. Institute a National Sales Tax to Replace the Income Tax?"

Should we keep the corporate income tax ? I think VAT is more complicated to calculate (not sure). VAT penalizes adding value, which is bad policy. Maybe corporations too should pay a "consumption tax", not an income tax.

We allow deduction of mortgage interest to encourage home ownership. But that deduction really rewards home-related debt. Maybe the deduction should be based on the owner's equity in the home (capped at some level such as $500K), instead of the size of the interest payments on the debt.

Good article:
Helen Huntley's "A national consumption tax: How would it change things?"

"FairTax" is different from my proposal. FairTax is a flat 23% national retail sales tax, plus rebates to low-income people. It still requires some kind of form filed to IRS by individuals to calculate rebates, which means government tracking of individual's spending.
Thumbnail sketch of the FairTax
FairTax FAQ's

From article by Peter Singer in the 12/17/2006 issue of "The New York Times Magazine":

... people can earn large amounts only when they live under favorable social circumstances, and they don't create those circumstances by themselves. Warren Buffett acknowledges that society is responsible for much of his wealth. "If you stick me down in the middle of Bangladesh or Peru," he said, "you'll find out how much this talent is going to produce in the wrong kind of soil." The Nobel Prize-winning economist and social scientist Herbert Simon estimated that "social capital" is responsible for at least 90 percent of what people earn in wealthy societies like those of the United States or northwestern Europe. By social capital Simon meant not only natural resources but, more important, the technology and organizational skills in the community and the presence of good government. These are the foundation on which the rich can begin their work. ... his estimate undermines the argument that the rich are entitled to keep their wealth because it is all a result of their hard work. If Simon is right, that is true of at most 10 percent of it. ... Thomas Pogge ... argues that at least some of our affluence comes at the expense of the poor. He bases this claim not only on the usual critique of [trade barriers], but also on less familiar aspects of our trade with developing countries. For example, he points out that international corporations are willing to buy natural resources from any government, no matter how it has come to power. This provides a huge financial incentive for groups to try to overthrow the existing government. Successful rebels are rewarded by being able to sell off the nation's oil, minerals or timber. In their dealings with corrupt dictators in developing countries, Pogge asserts, international corporations are morally no better than someone who knowingly buys stolen goods. ... The situation is, of course, beneficial for the industrial nations, because it enables us to obtain the raw materials we need to maintain our prosperity, but it is a disaster for resource-rich developing countries, turning the wealth that should benefit them into a curse that leads to a cycle of coups, civil wars and corruption and is of little benefit to the people as a whole.

Home       Site Map