The Case for a National Sales Tax
This article by Brian McGlinchey first appeared at https://starkrealities.substack.com/ on March 1, 2023:
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Sometime during this 118th U.S. Congress, the long-proposed “Fair Tax” will likely receive its first-ever floor vote in the House. A national sales tax, it would replace not only personal and corporate income taxes, but Social Security, Medicare, estate and gift taxes too.
Though every tax scheme has its pitfalls and moral failings, the net impact of a switch from the income tax to a sales tax could be positive for the citizenry and the economy. While entrenched interests and the opportunity for misleading political attacks on Fair Tax proponents make its adoption in the near-term a long shot, it’s a concept worth keeping on the country’s collective back burner.
Fair Tax Basics
HR25, the “Fair Tax Act of 2023,” advances a national sales tax “on the use or consumption in the United States of taxable property or services in lieu of the current income taxes, payroll taxes, and estate and gift taxes.” The Internal Revenue Service would be sent into history’s dustbin, while a much smaller federal tax bureaucracy would administer the sales tax.
The federal tax rate would be a whopping 30%. The bill and many FairTax advocates describe it a 23% “tax-inclusive” rate, which means they arrive at by expressing the tax as a percent of the total outlay — including the tax itself.
While there’s actually some financial logic to that methodology when comparing it to income taxes, Fair Tax proponents should abandon the practice. Everyday Americans are fully accustomed to state and local sales taxes being expressed as a percent of the purchase price, and will never grasp the arcane reasoning that leads to 23%. They should emphasize the fact that paychecks would have no more federal income tax or payroll tax deductions and make the case for the 30% rate.
Opponents are quick to decry sales taxes’ lack of progressiveness. Setting aside the question of whether it’s actually just for governments to confiscate a higher proportion of money from those who earn or spend more of it, the proposed Fair Tax does include a “prebate” — money sent to every household that effectively negates federal sales tax for spending up to the poverty level.
For 2023, it would be about $6,900 a year for a family of four. It should be noted that the least prosperous Americans currently receive money through the income tax system, via “refundable” credits. If Congress wants to replace that largesse, it will have to create new entitlements.
Ridding America of The Income Tax’s Worst Traits
A federal sales tax would address the worst evils of the income tax, which include:
Complexity. Even for the financially astute, the income tax code is mind-numbing. Congress and the IRS create a wickedly complex maze, and then — with threats of penalties and jail time — put the burden of navigating it on people and businesses.
Wasted time and money. Americans spent an estimated 6.5 billion hours and more than $200 billion to comply with IRS filing and reporting requirements in 2022. While tax preparation fees and effort are top-of-mind, the income tax is a weed that drains time, money and energy throughout our economy — from all the record-keeping required by financial institutions, to the legions of lawyers and financial advisors straining to find loopholes for corporate and individual clients.
Intrusiveness. The income tax requires individuals and businesses to disclose an enormous amount of information — and to be prepared to share much more if the IRS comes knocking. With a sales tax, the government doesn’t need to know about your choice of charities, your marital status, how many nights you slept in your vacation home, how much alimony you paid, which investments you sold and how much you paid for them.
A magnet drawing money into politics. A sales tax would certainly invite corporate lobbying and political contributions aimed at exempting certain goods and services from the tax, but the scale of that effort would be a fraction of what’s goes on vis-a-vis the income tax.
Tax-free criminals and illegal residents. Sales taxes reach those whose income is derived from illegal commerce or otherwise hidden from the government, from drug dealers and illegal immigrants to “under-the-counter” employees. Regardless of its origin, when money is spent, it’s taxed.
No tax system achieves 100% compliance and each one invites evasion, but it seems safe to say sales taxes outperform income taxes on those fronts.
Hiding the cost of federal government. That cost is obscured by the tax code’s complexity, and Americans’ obliviousness to the fact that businesses’ taxes and tax-compliance costs are largely passed on to them in the prices they pay. With a sales tax, the cost of government is printed on every receipt.
Seeking to collect about the same amount of total tax as the array of taxes it would replace, the Fair Tax would be set at 30%. For people used to state and local taxes of say, 4 to 8%, that’s a jarring figure — and that sticker shock is one of the best aspects of a national sales tax: forcing people to directly confront the cost of our enormous federal government and its sprawling military empire.
The rate would initially be set at 30%, but politicians would certainly run on promises to cut it. That, in turn, might make politicians more amenable to actually reducing the growth rate of the federal budget.
On the downside, politicians may seek to exempt certain classes of individuals from the sales tax.
Resetting Americans’ Understanding of Social Security, Medicare
The income tax isn’t the only problematic tax that the Fair Tax would abolish. For example, doing away with Social Security and Medicare payroll taxes would go a long way toward curing Americans of the false belief that Social Security taxes are “contributions” that fund individual “accounts.”
Rather, these programs that are hurtling toward insolvency would be seen for what they are: entitlement programs that redistribute money among Americans. Viewing them in their true light would help foster support for changes that will prevent their ballooning costs from turning into a higher sales tax rate at the register.
Tax-Code Profiteers Will Resist
Any effort to bring about major change must confront the tyranny of the status quo, as those who benefit from the current arrangement rise to preserve it.
Enactment of the Fair Tax would, overnight, render obsolete a great many American businesses and professions. Intuit — the maker of TurboTax — already has a history of lobbying against efforts to make federal income-tax filing simpler and free.
Income tax repeal doesn’t just threaten tax preparation outfits, accountants and tax lawyers. For just one example, consider that repeal of the income tax means no more investment taxes — rendering 401(k) custodians irrelevant too.
There’s a huge political headwind as well: An incumbent’s vote for the Fair Tax is a huge gift to any challenger. As has been already demonstrated, challengers will run alarming ads proclaiming the incumbent supported a new, 30% sales tax, conveniently neglecting to disclose that the tax would replace all the other federal taxes, allowing Americans to keep every penny of their employment and investment income.
Buyer Beware
Even among the most impassioned opponents of the income tax, you’ll find strong resistance to a national sales tax, over fear we’ll end up with the current array of taxes and a new federal sales tax too.
The Fair Tax Act would do away with the income, payroll, estate and gift taxes and the IRS, but with no guarantee against their return. It’s therefore essential that adoption of a federal sales tax be accompanied by simultaneous repeal of the 16th Amendment, which cursed the country with the federal income tax in 1913.
Though every tax scheme has its pitfalls and moral failings, the net impact of a switch from the income tax to a sales tax could be positive for the citizenry and the economy. While entrenched interests and the opportunity for misleading political attacks on Fair Tax proponents make its adoption in the near-term a long shot, it’s a concept worth keeping on the country’s collective back burner.
Fair Tax Basics
HR25, the “Fair Tax Act of 2023,” advances a national sales tax “on the use or consumption in the United States of taxable property or services in lieu of the current income taxes, payroll taxes, and estate and gift taxes.” The Internal Revenue Service would be sent into history’s dustbin, while a much smaller federal tax bureaucracy would administer the sales tax.
The federal tax rate would be a whopping 30%. The bill and many FairTax advocates describe it a 23% “tax-inclusive” rate, which means they arrive at by expressing the tax as a percent of the total outlay — including the tax itself.
While there’s actually some financial logic to that methodology when comparing it to income taxes, Fair Tax proponents should abandon the practice. Everyday Americans are fully accustomed to state and local sales taxes being expressed as a percent of the purchase price, and will never grasp the arcane reasoning that leads to 23%. They should emphasize the fact that paychecks would have no more federal income tax or payroll tax deductions and make the case for the 30% rate.
Opponents are quick to decry sales taxes’ lack of progressiveness. Setting aside the question of whether it’s actually just for governments to confiscate a higher proportion of money from those who earn or spend more of it, the proposed Fair Tax does include a “prebate” — money sent to every household that effectively negates federal sales tax for spending up to the poverty level.
For 2023, it would be about $6,900 a year for a family of four. It should be noted that the least prosperous Americans currently receive money through the income tax system, via “refundable” credits. If Congress wants to replace that largesse, it will have to create new entitlements.
Ridding America of The Income Tax’s Worst Traits
A federal sales tax would address the worst evils of the income tax, which include:
Complexity. Even for the financially astute, the income tax code is mind-numbing. Congress and the IRS create a wickedly complex maze, and then — with threats of penalties and jail time — put the burden of navigating it on people and businesses.
Wasted time and money. Americans spent an estimated 6.5 billion hours and more than $200 billion to comply with IRS filing and reporting requirements in 2022. While tax preparation fees and effort are top-of-mind, the income tax is a weed that drains time, money and energy throughout our economy — from all the record-keeping required by financial institutions, to the legions of lawyers and financial advisors straining to find loopholes for corporate and individual clients.
Intrusiveness. The income tax requires individuals and businesses to disclose an enormous amount of information — and to be prepared to share much more if the IRS comes knocking. With a sales tax, the government doesn’t need to know about your choice of charities, your marital status, how many nights you slept in your vacation home, how much alimony you paid, which investments you sold and how much you paid for them.
A magnet drawing money into politics. A sales tax would certainly invite corporate lobbying and political contributions aimed at exempting certain goods and services from the tax, but the scale of that effort would be a fraction of what’s goes on vis-a-vis the income tax.
Tax-free criminals and illegal residents. Sales taxes reach those whose income is derived from illegal commerce or otherwise hidden from the government, from drug dealers and illegal immigrants to “under-the-counter” employees. Regardless of its origin, when money is spent, it’s taxed.
No tax system achieves 100% compliance and each one invites evasion, but it seems safe to say sales taxes outperform income taxes on those fronts.
Hiding the cost of federal government. That cost is obscured by the tax code’s complexity, and Americans’ obliviousness to the fact that businesses’ taxes and tax-compliance costs are largely passed on to them in the prices they pay. With a sales tax, the cost of government is printed on every receipt.
Seeking to collect about the same amount of total tax as the array of taxes it would replace, the Fair Tax would be set at 30%. For people used to state and local taxes of say, 4 to 8%, that’s a jarring figure — and that sticker shock is one of the best aspects of a national sales tax: forcing people to directly confront the cost of our enormous federal government and its sprawling military empire.
The rate would initially be set at 30%, but politicians would certainly run on promises to cut it. That, in turn, might make politicians more amenable to actually reducing the growth rate of the federal budget.
On the downside, politicians may seek to exempt certain classes of individuals from the sales tax.
Resetting Americans’ Understanding of Social Security, Medicare
The income tax isn’t the only problematic tax that the Fair Tax would abolish. For example, doing away with Social Security and Medicare payroll taxes would go a long way toward curing Americans of the false belief that Social Security taxes are “contributions” that fund individual “accounts.”
Rather, these programs that are hurtling toward insolvency would be seen for what they are: entitlement programs that redistribute money among Americans. Viewing them in their true light would help foster support for changes that will prevent their ballooning costs from turning into a higher sales tax rate at the register.
Tax-Code Profiteers Will Resist
Any effort to bring about major change must confront the tyranny of the status quo, as those who benefit from the current arrangement rise to preserve it.
Enactment of the Fair Tax would, overnight, render obsolete a great many American businesses and professions. Intuit — the maker of TurboTax — already has a history of lobbying against efforts to make federal income-tax filing simpler and free.
Income tax repeal doesn’t just threaten tax preparation outfits, accountants and tax lawyers. For just one example, consider that repeal of the income tax means no more investment taxes — rendering 401(k) custodians irrelevant too.
There’s a huge political headwind as well: An incumbent’s vote for the Fair Tax is a huge gift to any challenger. As has been already demonstrated, challengers will run alarming ads proclaiming the incumbent supported a new, 30% sales tax, conveniently neglecting to disclose that the tax would replace all the other federal taxes, allowing Americans to keep every penny of their employment and investment income.
Buyer Beware
Even among the most impassioned opponents of the income tax, you’ll find strong resistance to a national sales tax, over fear we’ll end up with the current array of taxes and a new federal sales tax too.
The Fair Tax Act would do away with the income, payroll, estate and gift taxes and the IRS, but with no guarantee against their return. It’s therefore essential that adoption of a federal sales tax be accompanied by simultaneous repeal of the 16th Amendment, which cursed the country with the federal income tax in 1913.
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Independent journalist Brian McGlinchey has published a Substack newsletter, “Stark Realities with Brian McGlinchey,” for two years. He had been a financial services copywriter at McGlinchey Communications LLC for fourteen years previously.
From 1994 to 2006, Brian enjoyed a successful career in San Antonio, Texas, with USAA, a diversified financial services company serving military families. At USAA he held several leadership roles, including membership on the Board of Directors of USAA Financial Planning Services, Assistant Vice President for Enterprise Referrals, Assistant Vice President for Life & Annuity Sales, Director for Life & Annuity Product Management, and Director for Tax-Sheltered Annuity Sales & Service. He also served as a personal financial planner.
Brian’s military experience includes serving as a military police platoon leader at Fort Polk, Louisiana, Brian led his unit on an emergency deployment to Panama in the wake of the 1989 U.S. invasion, conducting joint patrols of Panama City with a newly-organized security force formed from the remnants of the defeated Panamanian Defense Force.
Brian holds a bachelor’s degree from Bucknell University and makes his home in San Antonio.
Brian’s newsletter, Stark Realities, aims to undermine official narratives, demolish conventional wisdom and expose fundamental myths across the political spectrum. If interested, you can read more and subscribe at https://starkrealities.substack.com/.
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