The leading candidate for the Libertarian Party advocates a national sales tax for the USA. The American colonies rebelled against the United Kingdom because of the imposition of taxes on goods, and the progressive movement in the late 1800s advocated an income tax to reduce federal taxes on goods. Despite the history of popular opposition to taxing goods, some conservatives and “libertarians” seek to go back to the tax policy that sparked rebellions and political opposition.

What is worse is that some of the followers of this candidate defend the sales tax as a voluntary charge. Their argument is that since the purchase of a good is voluntary, so is a tax, because the buyer can avoid the tax by not buying the item.

By that argument, one could say that robbery is voluntary. Suppose you and a friend are in a park, and you agree to buy his pen for $10. But just as you are exchanging the pen for the money, a robber suddenly appears, and demands to have a dollar when the exchange is accomplished. He has a gun, and will shoot both of you if he does not get his dollar. However, if you and the friend cancel the transaction, he will not demand the dollar. The robber does not care who pays him the dollar. It can be you, or your friend, or you both can split the payment.

If you decide that you will not pay an extra dollar for the pen, and the trade is cancelled, have you been coerced? Or is your decision to not buy the pen voluntary?

An act is coercive if it changes the action that would otherwise have taken place.

An act is coercive if it changes the action that would otherwise have taken place. The change in voluntary action, from doing the transaction to not doing it, makes the attempted robbery and the robbery that would have taken place, coercive, or involuntary.

Now suppose that you buy the pen for $10 plus $1 sales tax. The intervention changes the cost you pay. This price change relative to what would have otherwise have been paid constitutes coercion. Therefore the theft is involuntary to the exchangers, and so is a sales tax.

Libertarians who believe that a sales tax is voluntary, while an income tax is involuntary, have also not analyzed the economic implications of taxing sales. The sale of a good is also revenue to the seller. Suppose a haircut has a before-tax price of $15. The purchase of a haircut by the buyer is $15 of revenue to the seller. The sales tax is equivalent to a tax on the gross revenue of the seller. If a sales tax is voluntary, so is a tax on gross revenue.

If there is a $5 tax on a haircut, then whether the barber passes it on to the buyer, or whether the barber absorbs the tax, depends on responsiveness to a change in the price. If the barber knows that the customers are willing to pay $20, then whether the tax is on the sale or on the gross receipts, the tax will be passed on. If the barber is willing to do the haircut for $10, and the customer refuses to pay more than $15, the burden is on the barber. It does not mater whether the tax is on the buyer or seller, or on a sale versus on gross receipts; the burden depends on their response to the price.

Another aspect not understood by the sales-tax advocates is that, when closely examined, there is little difference between consumption and income. Indeed, economists Haig and Simmons both concluded that income is essentially consumption.

Another aspect not understood by the sales-tax advocates is that, when closely examined, there is little difference between consumption and income. Indeed, economists Haig and Simmons both concluded that income is essentially consumption. Suppose you have no money income during a year, but your friends and family provide you with food, shelter, transportation, and medical services. Those goods and services would be your income. Income is stuff that comes in, whether in money or in goods. The economic, or Haig-Simmons, definition of income is consumption plus a change in net worth. Therefore, the taxation of consumption is also the consumption of income. If a tax on consumption is voluntary, so is a tax on the portion of income that goes to consumption.

Another aspect of taxing goods not understood by sales-taxers is that much of the sales tax either comes from land rent or is at the expense of rent. In a competitive industry, when the costs of labor and capital goods are equal for all the firms, firms make only normal profits, and the surplus gets captured by land rent, as firms that have lower costs are more productive because of better locations. On the producer side, the sales tax takes what would have been rent, and on the consumer side, the tax takes some of the income that comes from rent. By taxing rent indirectly, the sales tax imposes a deadweight loss, whereas if the rent had been taxed directly, there is no deadweight loss, since land does not shrink, hide, or flee when taxed.

Another aspect of taxing goods not understood by sales-taxers is that much of the sales tax either comes from land rent or is at the expense of rent. The gain from exchange consists of what economists call a “consumer surplus” and a “producer surplus”. The “producer surplus” equals the price sold minus the cost of producing an extra unit at that quantity. In a competitive industry, when the costs of labor and capital goods are equal for all the firms, firms make only normal profits, and the surplus gets captured by land rent, as firms that have lower costs are more productive because of better locations. On the consumer side, the loss of surplus is a reduction in the income of consumers, and that portion of spending that comes from rent is lost to taxation.

Therefore, on the producer side, the sales tax takes what would have been rent, and on the consumer side, the tax takes some of the income that comes from rent. Thus, much, or maybe even more than half, of the loss of surplus either comes from rent or is at the expense of rent.

By taxing rent indirectly, the sales tax imposes a deadweight loss, whereas if the rent had been taxed directly, there is no deadweight loss, since land does not shrink, hide, or flee when taxed.

The sales taxers do not understand that there would be about the same reduction in rent from a direct tax as in a sales tax, as a sales tax creates some loss of surplus that is a deadweight loss, not offset by any tax revenue gain.

Thus sale taxers don’t understand that taxing sales is equivalent to taxing the gross revenue of firms, that when they tax consumption, they tax income, and that much of the sales tax comes from rent and adds a deadweight loss. Finally, the payment of a sales tax is no more voluntary than the forced payment of money to a thief in the course of a transaction.

Thus sale taxers don’t understand that taxing sales is equivalent to taxing the gross revenue of firms, that when they tax consumption, they tax income, and that much of the sales tax comes from rent and adds a deadweight loss. Finally, the payment of a sales tax is no more voluntary than the forced payment of money to a thief in the course of a transaction.

There are economic puritans who think that consumers are indulging in excessive accumulations, and that every buyer of goods hurts society by reducing its stock of goods. They think that production is good, and consumption is bad, and so consumers should be punished with taxes. If that is their religion, at least they should think it through and not claim that the taxation of an exchange of goods for money is voluntary, while the taxation of an exchange of labor for money is not voluntary. The purpose of production is consumption. The taxation of consumption attacks the purpose of the economy.

However, those who insist on taxing consumption have a good option: they could place the tax on the consumption of spatial service. Land provides a continuous flow of service as space and location, a service that is simultaneously produced and consumed. The taxation of spatial service based on the rent of land does not reduce the land, so if consumption taxes there must be, logically the taxes should be on the consumption of land, valued by its rent.

However, those who insist on taxing consumption have a good option: they could place the tax on the consumption of spatial service. Land provides a continuous flow of service as space and location, a service that is simultaneously produced and consumed. The taxation of spatial service based on the rent of land does not reduce the land, so if consumption taxes there must be, logically the taxes should be on the consumption of land, valued by its rent.

© Text Copyright Fred Foldvary, Ph.D. rights reserved.
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