With national debt issues looming in the background, social programs that are chronically underfunded, and a progressive tax structure that has thousands of pages of complication, many Americans are looking for an alternative taxation solution. One of those options is the implementation of a national sales tax. It may or may not replace the existing national tax system and would be in addition to any state sales taxes.
Before such a dramatic change occurs, the positive and negative key points should be properly evaluated to determine if such a proposal could solve the problems the US faces. Here is a look at the national sales tax pros and cons.
The Pros of a National Sales Tax
1. It creates a truly equal system of taxation.
Instead of having progressive taxes on the amount of money that is being earned, a national sales tax would charge the same amount nationally to everyone for the goods and services that qualify. This would mean that equality would hit the system of taxation so that no matter what someone’s socioeconomic status happens to be, they are all putting equal skin into the game.
2. People could control how much taxation affects them.
Because a national sales tax is consumption based, it would allow households to avoid being taxed if they don’t consume items. For example: if a household wanted to grow their own foods, they could purchase seeds and equipment and be charged the national sales tax. Those one-time charges would be it because they could then eat the food grown without being taxed for it.
3. It would eliminate a lot of bureaucracy.
With a national sales tax in place, the need for income taxes would disappear. This would eliminate the need for tax withholdings from employee paychecks, remove many of the functions of the IRS, and simplify the overall tax structure since everything would be controlled at the point of sale. The amount of time that this would save everyone could increase the productivity of businesses throughout the country.
4. It would prevent many forms of tax evasion.
Whether someone is in the country illegally or they are purchasing items to turn into black market products, the point of sale is still going to happen in some way, shape, or form. This means there are future opportunities to avoid taxation because there is no need to file an annual tax form. Everyone pays their fair share based on the amount of purchasing that they do every month.
5. It would lower business taxes.
In theory, businesses would have more money to spend because their tax rates would be lower with a national sales tax in place. This could be used to create more jobs, invest into research and development, or reduce the prices of goods that are on the market. The end result could be an economic benefit that has rarely been seen in the US or anywhere else in the world.
6. It could create more money even though people are spending less in taxes.
Because more people would be affected by a national sales tax, the end result would be additional funds being raised to meet the needs of the people. More money coming into the budget with the potential for households to be spending less in taxes every year. That potential provides a lot of hope for those who are struggling with their incomes right now.
The Cons of a National Sales Tax
1. Without subsidies or refunds in place, it would become a regressive tax structure.
The progressive system of taxation in place puts a greater burden on those who earn more money. A national sales tax that does not have some system of refunds, rebates, or subsidies would create a regressive taxation system. Although the same percentage would be paid at the register, low income families would wind up paying a greater percentage of their income to taxes than those in the wealthier brackets.
2. It would increase the price of goods and services.
Because the national sales tax would be based on consumption of new goods and services, many households would turn to used products to avoid paying the tax. This would create scarcity in the used market, raising the prices for everything used because there is more demand for it. In effect, this would create a secondary “tax” on household incomes because one either pays more for used goods without taxes or pays more for new goods because of the taxes.
3. There would be huge implementation costs.
A national sales tax would require a new system of reporting and money collection that doesn’t exist right now. Although switching over to this system would save money potentially in the long-term, there would be huge short-term expenses that would come from the building of the new infrastructure.
4. It could cause a mortgage crisis.
A national sales tax would eliminate all of the advantages that come with home ownership under the current system. There is a good chance that this could cause home prices to drop dramatically because there would no longer be a market for a home. With existing mortgages, this could create a lot of underwater homes and high levels of debt that would replicate the same crisis of 2007-2009.
5. It would create systems of double taxation.
Let’s use the Roth IRA as an example. This tax-advantaged account is funded with post-tax dollars. Upon retirement, when distributions are taken from the fund and used to purchase items, that post-tax money would then be fully taxed a second time with the presence of a national sales tax. That would reduce the value of all retirement accounts and potentially encourage households to look at other options.
6. History has taught us that increases are going to happen.
The initial state levels of sales tax started small and have been building upward ever since. Many communities have a state sales tax that approaches 10% – if it isn’t above it already. Now add in the expected 30% that would be required for a national sales tax and every product has a 40% tax upcharge. That means $100 worth of groceries would suddenly cost $140.
The national sales tax pros and cons show that there is some potential for this idea, but there are some problems that need to get worked out as well. How do people pay their fair share? That’s ultimately the question that must be answered. By evaluating these key points, we can determine if a national sales tax is the right way to proceed.