Monday, August 02, 2004

Federal Sales Taxes Would Get Rid of the IRS?

One should never use an unreliable and biased source for anything, so don't follow my example here as I'm going to use Drudge for a discussion of sales taxes as an alternative method of funding the U.S. government.

According to his site:

A domestic centerpiece of the Bush/GOP agenda for a second Bush term is getting rid of the Internal Revenue Service, the DRUDGE REPORT has learned.

The Speaker of the House will push for replacing the nation's current tax system with a national sales tax or a value added tax, Hill sources tell DRUDGE.

"People ask me if I'm really calling for the elimination of the IRS, and I say I think that's a great thing to do for future generations of Americans," Speaker of the House Dennis Hastert explains in his new book, to be released on Wednesday.

"Pushing reform legislation will be difficult. Change of any sort seldom comes easy. But these changes are critical to our economic vitality and our economic security abroad,"

""If you own property, stock, or, say, one hundred acres of farmland and tax time is approaching, you don't want to make a mistake, so you're almost obliged to go to a certified public accountant, tax preparer, or tax attorney to help you file a correct return. That costs a lot of money. Now multiply the amount you have to pay by the total number of people who are in the same boat. You can't. No one can because precise numbers don't exist. But we can stipulate that we're talking about a huge amount. Now consider that a flat tax, national sales tax, or VAT would not only eliminate the need to do this, it could also eliminate the Internal Revenue Service (IRS) itself and make the process of paying taxes much easier."

A national sales tax as an alternative to income taxes would not get rid of the IRS. It might even make the IRS bigger, more bureaucratic and more invasive.

The reasons are simple: A system of national sales taxes would be simple to administer only if it was incredibly unfair, causing the brunt of the tax burden to fall on the poor, causing the elderly to starve to death. (A sales tax is something everybody who consumes would have to pay, and as consumption is a bigger percentage of the incomes of the poorer they would end up paying relatively more (as a percentage of their incomes or assets) than the wealthy.) Such a tax would never be passed. Instead, all sorts of exemptions and varying rates of taxation would have to be added, and someone would have to administer all the paperwork that follows from this.

Also, the first thing that would develop in the wake of a general national sales tax would be an illegal market in goods and services, quite likely a very large one. We'd need people to combat this, to investigate suspicious cases and to enforce punishments to those who try to escape the taxes.

National sales taxes would make goods and services more expensive to buy. Consumers would cut back their purchases. Firms would find their revenues fall and then they'd lay off workers. The government would collect less tax revenue than what we'd estimate it would, based on the current levels of consumption. This means that the tax rates would either have to be higher than many people expect or that the government would have to cut back the services it provides. But of course this is one of the reasons for the proposal, the other being the desire to increase the tax payments of the less well-off, including those who earn no incomes.

But no, the IRS would not disappear under such an alternative tax system.