Question of the Day - National Sales Tax

« Stocks and Inflation - An Interesting Indicator | Main | The United States of Subsidized Housing »

Question of the Day - National Sales Tax

By JLP | February 27, 2008

Meg’s post from the other day mentioned the possibility of a national sales tax (consumption tax) and the negative impact it would have on the Roth IRA and 401(k) since the contributions to those plans were already taxed and would be taxed again when spent during retirement. This leads me to today’s question of the day:

Do you think the national sales tax will ever fly?

Personally, I don’t ever see us going this route (and I’m not necessarily saying that a national sales tax is a bad idea). I think there are just too many hurdles to overcome and I don’t see our government embracing something so different. In other words, I wouldn’t let the thought of a national sales tax keep me from contributing to a Roth IRA or 401(k).

Now, what are your thoughts?

Topics: Investing, Taxes |

Comments to “Question of the Day - National Sales Tax”

chris Says:
February 27th, 2008 at 11:02 am

Well, considering the current liabilities that our government is carrying. I wouldn’t be surprised if we ended up with both. Or maybe we just inflate our way out of our current money problems, which is similar to a sale tax.

Matt Says:
February 27th, 2008 at 11:10 am

What if they made senior citizens exempt from the sales tax, or charged them a lesser rate?

Stores already have a tax-exempt option on the cash registers for orders placed by schools, churches, non-profits, and so on.

LiveWell Says:
February 27th, 2008 at 11:46 am

I think a national sales tax is in the US’s future. National sales tax is common in most other countries. There are already a lot of states that impose a sales tax so the mechanisms are in place. It would be a very easy tax for the fed to implement and like chris says, the govt has a lot of liabilities that it’ll need to pay somehow someday. The federal govt. will probably get buy-in from the people by lowering income tax or by saying it is “temporary” to fix some emergency (e.g. health care or social security).

Sam Says:
February 27th, 2008 at 12:03 pm

I have my doubts. I sort of like the idea of a national sales tax because it is so broad based (everybody buys something so everyone pays the tax). But at the same time I think that the electorate is going to be leery of it because it will be perceived to be an additional tax rather than a substitute tax. Also, people that are affected more will scream bloody murder. I think a substantial portion of the US population likes that they pay little or no income tax, and won’t take kindly to a sales tax.

Andy Says:
February 27th, 2008 at 1:02 pm

No, we’ll never have a national sales tax. However, we might have a national VAT, like many European countries. Since their citizens don’t mind paying > 50% of GDP in taxes it’s likely we won’t either (the US pays around 30%).

Jesse Says:
February 27th, 2008 at 1:40 pm

I’d encourage readers to study the FairTax in depth as it answers these concerns quite readily.

JLP > “I think there are just too many hurdles to overcome and I don’t see our government embracing something so different.”

Those same things could have been said for Civil Rights, Women’s Right to Vote, and…the independence of America.

Ernesto@InsuranceYak.com Says:
February 27th, 2008 at 2:44 pm

I can’t imagine this ever seeing the light of day:

All the lefties in Congress will complain about the poor paying too much, all the right-wingers will never sign off on any new taxes.

Even if all the ‘fair tax’ folks in the country got together and answered everyone’s questions, there would still be a long line of special interests lobbying congress for exemption from the tax.

I feel by tweaking the current tax code and exploring additional revenue sources, the US could get back to financial solvency without a sales tax.

Jonathan Says:
February 27th, 2008 at 2:50 pm

I support the adoption of the revenue-neutral FairTax. These are my thoughts (correct me if I am wrong):

It would slow down the economy in the short term, due to the fact that all retail goods would “feel” as if they were priced higher. After all, ours is a consumer-based economy. We would also have a sudden flood of out-of-work tax accountants, tax lawyers and IRS workers who would need to find something useful to do with their time. (That bump could take a couple years to ride out).

Having said that, the long-term effects are desirable:

First, we would see a large shift towards re-use, buying second hand, etc. Your old TV would suddenly command a more valuable asking price due to the higher demand for non-retail goods. So in this sense, its a “green” idea (not that I am an enviro-maniac).

Second, it rewards people for carefully managing their spending. Our low national savings rate is an unfortunate tribute to the average American’s addiction to living at (or below) one’s means.

In short, it encourages the average American to be a responsible steward, instead of paying the government (i.e. the IRS) and an entire industry (i.e. tax accountants) to do it for us.

Jonathan

Minimum Wage Says:
February 27th, 2008 at 11:17 pm

Jesse -

As an involuntary renter with no hope of ever buying a home, I am completely unwilling to support a huge tax penalty on those unable to buy homes.

Minimum Wage Says:
February 27th, 2008 at 11:44 pm

How many boomerang kids would this create when young adults move back in with their parents to avoid the tax?

How much would homelessness increase? Wouldn’t there be a free speech right to be homeless as political protest?

JimmyDaGeek Says:
February 28th, 2008 at 9:07 am

It it short-sighted to think that any national sales/consumption tax legislation would not address the issues surrounding pre/post-tax retirement accounts.

A tax like this make sense. Why should someone making $100,000 per year who only spends $10,000 during that year pay more tax than someone who makes and spends $10,000? Money is, as economists say, a *store* of value. Until you spend that money, you get no benefit.

No CYA politician would pass this legislation without making sure they can distribute their political largess. A flat tax rate? Hell, no. These politicians will make sure to create different tax rates for different classes of goods and services. Look at the BS that is in the tax code now. It has language that targets specific companies for favorable tax treatment. Don’t ever expect this to go away.

Jesse Says:
February 28th, 2008 at 10:43 am

“Jesse -

As an involuntary renter with no hope of ever buying a home, I am completely unwilling to support a huge tax penalty on those unable to buy homes.”

>Minimum Wage

A few things:

1) The sales tax would only apply to new homes and
2) Consumers of new homes are already paying an embedded tax on that house. Housing prices would go down to reflect the fact that those taxes would then be gone:

The lumber mill pays tax, the subcontractor pays tax, the developer pays tax, the builder pays tax, etc. Tax is paid along the entire creation-chain of that new house. If all of those business didn’t have to pay taxes, natural competition would drive the price down.

I’d encourage you to read the FairTax book. It really is enlightening.

Geoff Says:
February 28th, 2008 at 10:46 am

This probably wouldn’t be favorable, but to clear up problems with the Roth IRA/401k, the government would just need to take the balance of the account, see the amount of tax that would be paid if that money was used to buy something with the national sales tax, and cut a check to the Roth IRA/401k account to cover that amount. It would be a huge hassle for the government, but once it’s taken care of it would never be thought of again.

Jesse Says:
February 28th, 2008 at 10:46 am

“No CYA politician would pass this legislation without making sure they can distribute their political largess. A flat tax rate? Hell, no. These politicians will make sure to create different tax rates for different classes of goods and services. Look at the BS that is in the tax code now. It has language that targets specific companies for favorable tax treatment. Don’t ever expect this to go away.”

>JimmyDaGeek,

That’s probably my favorite part about the FairTax. The bill is 133 pages long (as it sits now) whereas the current tax code is 65,000 pages long (not exaggerating there). It would be MUCH more difficult for congress to maintain their powerbase if the law were so much easier to understand.

I do agree that it would be an extremely large shift of power from politicians back to the people. All the more reason to fight for it.

Even if there were different rates for different classes of goods, it would still be leaps and bounds more of an improvement than our current tax code.

Oh, and this is all coming from a CPA

thomas Says:
February 28th, 2008 at 6:52 pm

I’d just assume one would file an exemption for Roth money. So, if i took out 20k last year, i’d be able to deduct 20k from my taxes (or whatever filing system there is). Basically one would be loaning the gov’t tax money through the year.

Of course, you could file expense reports every month to minimize that

Harold Says:
February 28th, 2008 at 8:20 pm

Economists have determined that with the FairTax the price of products will be 18% to 25% less (averaging about 22%) because the embedded costs will disappear. Also, only new items at the final retail sale will be taxed, used products will not be taxed. In addition, every household with valid social security numbers will receive a monthly prebate to pay the tax on the necessities up to the poverty level. All savings that generate interest will not be taxed as they are now with the income tax! So, the people with 401K’s will not suffer because of the FairTax, it will almost be a wash.

Hank Van Gieson Says:
February 29th, 2008 at 5:51 am

The Fairtax as represented by HR25 will not be approved by the Congress. Last year I sent the following letter to AFFT and it explains my reasoning as well as offers an alternative I call “Fairtax-Lite” for consideration.

“In my opinion, your group that put HR25 together badly overreached. You taxed governments at all levels in order to reduce the sales tax rate and reduce government competition with the private sector, but incurred the strong possibility that that portion of the legislation will be found to be unconstitutional under the doctrine of intergovernmental tax immunity. State and local taxes will have to be increased significantly in order to pay the federal sales tax. You added payroll taxes to the mix and created a large class of an estimated 30 million Social Security net non-contributers due to the prebate feature, all of whom will still qualify for full pension and health care benefits. You treated all current retirees very unfairly by forcing them to resume paying into the trust funds with their sales tax dollars. You completely untaxed businesses, a major political mistake even though quite sensible. You added gift and death taxes to the mix, and left yourself open to political criticisms that you are unfairly reducing the tax burden on the wealthy. You adopted a prebate, the largest cash grant entitlement in the history of the country at a time when entitlements are squeezing out discretionary spending, including critical Defense spending. You adopted an inventory tax credit which will contribute $600 billion to a staggering federal budget deficit in the first year of Fairtax implementation. You excluded education tuition, thus allowing the “camel’s nose under the tent flap”. That precedent would certainly encourage future politicians to try to exclude such things as medical expenses, home ownership or anything else they might consider equally important to education tuition. And finally, you chose a “cold turkey” implementation schedule. The Congress is basically conservative and far prefers evolutionary change to revolutions such as the Fairtax.

Fairtax-Lite is a broad based 14% national sales tax with (1) no exclusions, (2) a targeted prebate, (3) no government taxation of itself, (4) leaves payroll taxes and gift/estate taxes alone, (5) no inventory tax credits, and (6) implements the plan over five to ten years. If you are really serious about getting rid of the income tax and the IRS, I suggest that Fairtax-Lite has a far better chance of gaining Congressional approval than HR25.”

I don’t support the Fairtax, but I do believe a consumption tax of some sort would be better than the income tax we have had for 95 years. How we change over is the hard part, and HR25 isn’t the way to go!

Tkrop Says:
February 29th, 2008 at 10:03 am

The FairTax has had eleven years of research done by top economists in the country put into it’s construction. As far as it’s passage in the congress to make it law goes, it is up to we the people. If 30 million of us get behind the FairTax it will surely pass. If 30 million of us come up with different tax plans or variations of the FairTax we get nowhere.

Rich Says:
February 29th, 2008 at 11:30 am

I support a National Sales Tax. Two points from the posts here. The FairTax is a bill before Congress, HR25 and s1025. It can and will happen if we all remember that this is still a Gov’t by and for the PEOPLE! Not for the politicians. We do have the ultimate say-so in this. It is called a vote. If they will not pass the FairTax we can vote them out of the office!
Also, as far as the out of work accountants etc mentioned here. I am glad so many are worried about this group. But they are going to be fine. Doing tax returns and keeping corporations out of trouble tax-wise is not what accountants are consumed with. Many, if not most will continue to work advising companies and individuals how to invest, work, and grow their personal wealth as well as their businesses. That is the beauty in the FairTax, the work effort in this country can go towards PRODUCTIVE means, not towards figuring out how to avoid the 65,000 pages of the US tax code.
Oh, and the seniors we are all concerned with. I am one and I support the FT. Why? Because it will be good for my children and my grandchildren, who are facing catastrophic economic problems resulting from current and past administration’s economic policy’s. Yes, I will be subject to the FT after I have paid taxes all my life. But it is not about just me, it is about the good of the country as a whole!
Besides, each and everything we buy now is embedded with the complicated tax code we comply with so I am paying the cost anyway. It is just hidden in the price of the goods and service! I speak all over central Florida on the FT and the one group who is consistently behind it is the seniors!

Jesse Says:
February 29th, 2008 at 2:21 pm

>>State and local taxes will have to be increased significantly in order to pay the federal sales tax.

Remember that corporate taxes are already embedded in everything the states buy, so prices will be lowered (pre-FT) and then rise again as a result of the FT - I’m not saying it’s one for one, but it’s significant. If you factor in the economic growth that will happen as a result of eliminating the waste of income tax compliance and incentivizing individuals to invest, state coffers will be just fine.

>>You added payroll taxes to the mix and created a large class of an estimated 30 million Social Security net non-contributers due to the prebate feature, all of whom will still qualify for full pension and health care benefits.

I agree that the social security benefits/health benefits promised will bankrupt us if we stay on this current path. Moving to the FT would allow our economy to grow and seriously help us buy some time to fix those programs so we’re not saddle with so much debt that we can’t fund anything critical (national defense and infrastructure come to mind immediately).

>>You treated all current retirees very unfairly by forcing them to resume paying into the trust funds with their sales tax dollars.

They still pay income taxes now if they’re earning income — even paying Social Security (which the FT would remove). And keep in mind that the embedded taxes would go away.

>>You completely untaxed businesses, a major political mistake even though quite sensible.

It is quite sensible, and that’s why it’s worth fighting for even if it isn’t politically expedient. People have come around since the FT idea was first brought up. It’s gaining traction. When people understand that the consumer pays the corporate taxes with embedded taxes and that the shipping of jobs overseas is, to a large degree, due to our unfriendly corporate tax structure, they accept it quite readily.

>>You added gift and death taxes to the mix, and left yourself open to political criticisms that you are unfairly reducing the tax burden on the wealthy.

Wealth is spent and when it’s spent, it’s taxed. The portion that is not spent is invested in new ideas, inventions and initiatives which raise the standard of living of everyone. Those things create jobs. Let people criticize. When they understand the FT, they’ll stop criticizing (unless they have a vested interest in the tax code as it currently stands: lobbyists, politicians, and special interest groups)

>>You adopted a prebate, the largest cash grant entitlement in the history of the country at a time when entitlements are squeezing out discretionary spending, including critical Defense spending.

Agreed that our discretionary spending is being dangerously squeezed. The IRS currently estimates that it is paid 16% less than it’s owed — that’s not considering the illegals, drug dealers, gamblers, etc. that don’t pay any income tax. They would be added to the tax base. The prebate is there yes, but it is more than offset by the additional revenues. Remember, the FT has been studied and the object is for it to be revenue neutral. Once we get it passed, then we can work on government spending. Believe me, I am all for less spending and a strong defense.

>>You adopted an inventory tax credit which will contribute $600 billion to a staggering federal budget deficit in the first year of Fairtax implementation.

The pain is temporary and will go away when the FT boosts our economy and we see capital flow to this country like we’ve never seen before. Not just the repatriated money that would come flowing in, but the foreign corporations that would want to headquarter here because we would be the best business tax haven in the world. Remember, it’s set to be revenue neutral.

>>You excluded education tuition, thus allowing the “camel’s nose under the tent flap”. That precedent would certainly encourage future politicians to try to exclude such things as medical expenses, home ownership or anything else they might consider equally important to education tuition.

Tuition is seen as an investment, not an expense. While I have no doubt that we would see politicians try and get other special favors through for groups that help them buy votes, the FT would be vastly, infinitely, more transparent and we’d be able to sniff them out and kick them to the curb.

>>And finally, you chose a “cold turkey” implementation schedule. The Congress is basically conservative and far prefers evolutionary change to revolutions such as the Fairtax.

Just because something’s cold turkey doesn’t mean it’s not worth doing. A few things in our history were also cold turkey!

Rich Says:
February 29th, 2008 at 4:11 pm

Join the FairTax movement. Your so-called FairTax lite has a powerful support base of one. Join with us; use the research that has been done to answer questions like yours several thousand times before. Most that do not like the FT do not like it because they refuse to accept the research done on it. If that is your beef, how can you support your suggestion since it has no research to support it whatsoever? Take your energy and put it behind a real legislation, HR 25, S1025.

Jim Says:
February 29th, 2008 at 4:25 pm

It depends on WHERE the national sales tax goes. Does it go to the government or does it go to the international bankers? (which is where our income tax goes).
Get rid of the FED.

Minimum Wage Says:
February 29th, 2008 at 9:52 pm

Jesse -

Services are taxed under the FairTax, and rent is considered a service and is therefore taxed - WHETHER THE PROPERTY IS NEW OR USED. (You can look it up.)

The current tax code allows landlords a writeoff for “depreciation” on rental properties. This affords many landlords a tax REDUCTION which would disappear under the FairTax.

Low-end rental housing has inelastic demand, so landlords will have no economic pressure to reduce rents. Historically, large property tax cuts did not result in lower rents, so why would anyone expecxt it to happen under the FairTax?

evermann Says:
February 29th, 2008 at 11:13 pm

Huge fan…get rid of alot of this BS and make a real long term change for the best America…wake up!

Rich Says:
March 2nd, 2008 at 4:50 pm

To the person on the post regarding rent:
Why worry about landlords write offs if the FT is reality? There will be no tax on income at all so there will be no need to deduct. The landlord keeps all his income so he can afford to pass it on if he chooses, as he can chose now to pass on savings from a write off which no landlord I have ever spoken to does. Yes rents should be taxed under the FT. Why should renters be treated more specially than a person buying a home under any tax system?. The FT treats all equally. Just like now where renters get no write off under the current system, yet I hear no complaint about that from you, do I? There should be no difference between renting and buying as it is under any tax plan. Of course, under the FT, you will have more of your paycheck to pay these rents. Then when you save you can buy a pre-existing home (as 70% of America does now) and pay no tax on the purchase of you new home, because it is not a new good or service. No one “expects” lower rents under the FT unless economic forces come into play. For example, one landlord passes his income saving as mentioned above in the form of lower rents and then renters in that area flock to his units for the loser price. Simple economics then forces his competitors to match the rent also. Simple economics. Do not make it harder than it is to understand.

Minimum Wage Says:
March 3rd, 2008 at 11:53 pm

When the current tax writeoffs enjoyed by landlords disappear under the FairTax, a landlord who continues to spend the same amount of money will pay more tax under the FairTax.

Therefore he will have less purchasing power under the FairTax than he has now, and will not be able to “afford” to reduce rents.

Even if landlords could afford to reduce rents, they have no competitive pressure to do so. The small landlord with, say, 1-4 units cannot afford vacancies, so he tries to keep his units fully rented. If your units are fully rented, it is illogical to reduce your rents.

If you’re a large landlord with, say, 100 units, you maximize profit at some occupancy rate below 100 percent: if you 100 units are fully rented, you’re not charging enough for maximum profit. For example, raising your rents 10 percent might result in 5 percent vacancy, increasing your net profit.

It takes a HUGE disruption in the rental market for rents to decrease significantly. The recently-ended real estate boom did cause such a disruption, as millions of renters were able to buy homes, often with toxic mortgages which are currently blowing up.

But tax cuts - not even California’s Proposition 13 which cut property taxes on average by more than half - have never resulted in lower rents.

Indeed, tax cuts make rental properties more valuable, which means they sell for higher prices, which means the new owners have a higher cost structure and cannot afford to reduce rents!

Now if you buy an existing home, under the FairTax, your purchase is not taxed. So if I rent an existing home (because I cannot buy one), why should my rent be taxed?

Jesse Says:
March 4th, 2008 at 11:21 am

Minimum Wage, I’m sorry I thought you were addressing purchasing a home, but you were addressing the rent question.

Yes, it’s true that landlords will have their tax deductions go away, but they’ll also have their income/FICA tax go away, and the operational costs will decline because the landlord will no longer be paying the embedded taxes associated with the maintenance and repairs of the home. As a business, the apartment complex would pay NO taxes (nor would they pay costs associated with complying with a horrendously complex tax code).

If a landlord decided to raise rents, there’d be another that would decide to keep rent the same or raise it just a little bit. At the same time, the person renting would no longer be paying income tax (they may not have paid that before) and wouldn’t have to pay 7.65% to FICA — notorious for hurting the poor the most. The employer of the renter would also not have to pay the 7.65% FICA, so it would/could either lower the price it requires to make a profit, or it could raise the renter’s wage. Either way the renter benefits.

Also, don’t forget that with you addressing the landlord’s cost of living, wages will rise and/or prices will fall after the FT is enacted. The cost of living would not see an increase unless wages also increased for the Landlord.

And since tax cuts make rental properties more valuable, then you could also flip that and say that a lack of tax cuts make properties less valuable, making a home more affordable than it was before, maybe giving the renter an opportunity to buy eventually.

LVTfan Says:
March 6th, 2008 at 6:28 pm

Sales taxes are a terrible idea! Chicago has just announced that their sales tax will be 10.25% soon. A $10 item will cost over $11. This is a deadweight loss — excess burden — the last thing our economy needs!

If the goal is to increase wages through tax reform, we need to be utilizing land value taxation. That may not seem like a straight line, but the dots do connect.

And when we tax land value — even if we tax it heavily — not a single acre is going to leave town. Not a penny of value will be taken from an individual who created that value; rather we will be collecting back for the commons value created by all of us. The only incentive effects are positive ones: those who are sitting on unused land in choice neighborhoods, waiting for someone to do something that will make them rich, will stop waiting, because their carrying costs will have risen above trivial to the point where either they themselves will be motivated to do something productive with that choice site, or they will be motivated to lower their asking price, allowing someone else to do some useful with that land. Either way, putting land to productive use creates jobs — first in construction, and then in the buildings that get created — be they residential or commercial or mixed.

And all that economic activity will create a demand for labor which will drive wages upward. But with the higher land tax, workers won’t be speculating in land, so the choice land will be held only by those actively putting it to use.

Sounds far more like the kind of society I’d like to live in, and which I’d like to leave for my children and grandchildren.

Jeff Layton Says:
February 12th, 2009 at 9:53 am

I am in favor of a small National Sales Tax, say 3%, and force all proceeds to go towards principal payments on the National Debt. Take a look at your annual budget and think about what you could do with all the money that currently goes to paying your personal debt (cars, credit cards, personal loans). Now imagine what the govenernment could do. Fix SS, Medicare, Medicaid, lower taxes, maybe even do away with FICA completely. Would it be hurt? Yes. But America needs a plan to become debt free and Wall Street loves plans. Americans need to see a light at the end of the tunnel…

You can’t dig yourself out of a hole and America can’t borrow it’s way out of a recession.

Comments

Name (required)

Mail (will not be published) (required)

Website

AllFinancialMatters

A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.

Site Sponsors

Recent Posts

Archives

Topics

Subscribe to AFM

Site Sponsors

Some of my Friends are Authors

AFM in the Media

Blogroll (Daily Reads)

Blog Stats

Search

Question of the Day - National Sales Tax