Economics for 4-year-olds: A Bad National Sales Tax for the Deficit
|June 4, 2012||Posted by Fred Foldvary under The Progress Report|
by Fred E. Foldvary, Senior Editor, 4 June 2012
Everybody above the age of 3 now knows that the United States is heading towards a fiscal disaster unless there is a shift to land value taxation, or a big cut in government spending, or a economy-crushing increase in income and sales taxes. It is politically impossible for Congress to enact the best solution: the replacement of income and excise taxes with public revenue from ground rent. There may be some cuts in the growth of spending by not providing social security and medicare to wealthier folks, but that will not solve the deficit. The policy with the least political resistance seems to be the enactment of a national sales tax after 2012.
Members of the Republican Party will block large increases in income taxes. But many conservatives favor taxes on spending, because they want to encourage savings and investment. In the election campaigns of 2012, the biggest push for a national sales tax will come from the Libertarian Party candidate for president, Gary Johnson. Since taxes and the deficit will be the top campaign issues, tied to policy for the economy, the Libertarian Party advocacy of a national sales tax will push it to public discussion and also remove political obstacles, since if free-market Libertarians are for sales taxes, then conservatives can be for it also.
Whereas the “Fair Tax” advocates want a national sales tax to replace the income tax, with an exemption for business spending, the political reality is that Congress will seek to avoid fiscal disaster with a big tax increase rather than a replacement. So Congress will levy a national sales tax on top of the income taxes, and rather than exempting business, they will exempt government spending, to avoid burdening the state and local government which also are in fiscal trouble. There are already sponsors in Congress who have submitted sales-tax bills. There are Republican candidates for Congress who favor a national sales tax, and Democrats will go along as a tax increase that has Republican support.
Sales-tax advocates that wanted to shift taxes from investment to consumption will find instead that their advocacy will result in the worst of both, greater burdens on business from taxes on their purchases as well as on income. Governments see business as cows to milk and bulls to subsidize. Of course the US already has excise taxes on goods; higher national sales taxes would bring us back to the 1800s when the federal government relied on taxing goods.
The national sales tax will start with a three percent rate, just as did the first sales state sales taxes. They will say it is a small sacrifice, but the sales tax in California grew to nine percent, including local additions. It will be easy for Congress to start at 2 or 3 percent and then increase the rate gradually until it consumes a tithe of spending.
Another source of support for a national sales tax will come from the example of Canada, which has a national goods and services tax. We can be assured that a US national sales tax will exempt politically favored interests. There will be no sales tax on lawyer fees, but I will not be surprised if medical goods and services are taxed to help pay for medicare.
Can anyone doubt that a national sales tax will not be flat rate, but be as complicated as today’s state sales taxes? There will be various tax rates on different goods and services. Government will become ever more intrusive to catch sales-tax evaders. Many small businesses will have to shut down, as the will be unable to pass on the tax, due to global competition. There will be ships offshore that will seek to sell goods without sales taxes, and tax collectors all along the shore to inspect your goods to make sure you are not smuggling in goods tax-free, as all imports will be subject to the national sales tax.
These intrusions and costs could be avoided by accepting nature’s offer to pay for public goods. Nature provides a source of public finance in ground rent, which expands as the population grows. Tapping land rent or land value for public revenue would promote growth and reduce poverty. When people hear about the option of tapping land value, their reaction is not opposition but wonder, why they have not heard about this before.
The political pressure will increasingly be for a national sales tax, and Congress will pass it to avoid both huge spending cuts and the prospect of a Greek-style fiscal crisis. Get ready to lower your standard of living, because goods will become much more expensive. And don’t forget to thank the US Libertarian Party for promoting bigger government with a national sales tax.
– Fred Foldvary
Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.