National Sales Tax

A friend of mine posted recently railing about Income Tax and saying a Sales Tax would be more fair. Then everyone would have to pay. I’ve heard this argument made a bunch of times and on the surface it seems legit. Everyone pays equally based on what they spend. But there are so many problems with this.

First, there’s wealth distribution. Most of the taxes in the US come from the wealthy. That sounds unfair. But it comes from the wealthy because the wealthy have all of the money. The poor have nothing to give. For a minimum wage family, a sales tax would increase their monthly bills by a significant portion. For the millionaire, their costs will go up slightly more, because they buy more stuff, but not as drastically.

To be considered the 1% is any income over $389,000. We’ll round to $400,000. The poverty line for a family of three is $20,600, so we’ll round to $20,000. That’s a 20X difference.

If they are really bad at money management and blow 50%, or $200,000 annually on “stuff” that could be taxed, with say a 10% sales tax, they are paying $20,000. That’s $62,000 less than they were paying in income tax. That’s an effective tax rate of 5%.

For the family at the poverty line, let’s say they were spending half their income too. Probably less because their housing and other bills is likely much higher than half their income. For simplicity, we’ll say half. $10,000 spent on “stuff” that is taxed. That’s $1000 or also 5%. Sounds fair?

But wait, remember, the 1% is now paying $62,000 less in taxes. Their income has gone up by 3X the poverty line families annual income. Before, the poverty line family didn’t make enough to have to pay income tax. But now their expenses have gone up $1,000. For a family barely getting by to be out $1000 is two months rent.

This brings us to point number two, actual government income. In the example above, the net income in taxes to the government by switching to a 10% sales tax from those two families is -$61,000. That’s a 76% drop.

Now, these are really made up numbers. It’s really hard to give an accurate estimate here. On one hand, there are far more of the poverty line families than the 1% families, so that should generate more. But the income breakdown gets uglier the richer the person gets. The top 1% has 40% of the nation’s wealth. The bigger the effective tax decrease, the bigger the federal deficient. If you try to make up the deficient by increasing the sales tax, the poor people at the bottom end up paying even more money that they can’t afford to pay, while the rich are still paying less than they were and have even more money.

Now we get to the third problem with a sales tax. Suddenly, everything you buy is more expensive. The poor people are going to buy less. The rich aren’t going to notice the price difference. They might buy a little more since their taxes went down but not that much. The vast majority of people are going to be able to afford less and less stuff.

With people buying less stuff, businesses are selling less stuff. They are having to cut back on their workers hours or just fire people completely. Now, people are buying even less. It’s a downward spiral.

This is how you create a recession or depression folks.

So, yeah, a national sales tax sounds more “fair” than an income tax. But it’s only fair if the distribution of wealth were fair. An income tax only takes more money from the rich because the rich have all the damn money.