ARTICLE

It’s Time for a Less Taxing Tax System

April 13, 2005 9:01PM

By Drew Johnson A version of this article originally appeared in Human Events As April 15 comes and goes once again, and the hassles of Tax Day subside for another year, one question crosses the minds of many Americans: “Isn’t there a better way?” Given the hours spent fretting over lost receipts, the long nights spent triple checking math over coffee and the last minute race to the post office, filing income taxes has become the Great American Chore. According to the National Taxpayers Union, the average American filing a 1040A spends a mind-numbing 11 hours and 32 minutes preparing their taxes. Unbelievably, the 1040A is known as the “short form.” Preparing a 1040 form with Schedules A, B and D, takes 28.5 hours on average. Fortunately, there is a better way. A federal sales tax. A federal sales tax could entirely replace the federal income tax, thus ending the Internal Revenue Service, audits, paycheck withholdings and the drudgery of filing tax returns. Under a sales tax, workers receive all of the money they earn. Since funds are untaxed until spent, a sales tax does not discourage savings. Pleas from special interest groups intent on preserving their place of privilege in the world of tax write-offs create a large paper trail of attacks on the idea of a federal sales tax. The majority of these attacks cannot withstand the scrutiny of common sense, much less economic theory: Fiction No. 1: A national sales tax would produce the “largest tax increase on the middle class in American history.” The facts: Economic models indicate that current government spending levels would require a federal sales tax ranging from 17-23% (depending largely on whether Social Security taxes are collected through the sales tax or continue as a paycheck withholding). These figures vary little from the 21.4% overall effective federal tax rate for 2005. Federal sales tax proposals include a universal rebate, similar to the safeguard offered by the existing standard deduction. Most proposals set the rebate at, or above, the current poverty level. For a family of four, this means that no federal sales taxes will apply on the first $18,850 spent. Additionally, the abolition of the Internal Revenue Service (IRS) would lower federal spending by over $10.67-billion per year. This translates into an average yearly savings of $104 for each American taxpayer. Fiction No. 2: Small businesses will be hurt most by a national sales tax. The facts: Since a sales tax means businesses would no longer file income tax returns, estimates project the total cost of business compliance with a national sales tax at less than $5 billion per year. This is a distinct advantage, since projected tax compliance burdens on private firms run at least $100 billion annually under the current system. (Some analysts place the total at two or three times that amount.) This means that small business owners could reduce prices to become more competitive while expanding their own margins. Small businesses would be the first to benefit from customers with extra money in their pockets thanks to decreased tax burdens. Fiction No. 3: Collecting a sales tax will place a stifling burden on retail sales businesses. The facts: Administering a national sales tax would be no different from administering a state sales tax, a feat already performed by retail stores in 45 states and the District of Columbia. Mercifully, a federal sales tax ends the onerous task of preparing and filing taxes-a chore that robs Americans of at least 6.7 billion hours each year. Fiction No. 4: Sales taxes on services are easy to elude and difficult to administer. The facts: In addition to an income tax of up to 35%, self-employed service providers face a 15.3% payroll tax. Thus, due to its lower burden, a sales tax drastically reduces the incentive for such an individual to evade taxes. More importantly, even individuals participating in underground and black-market economic activities–people who formerly skirted their tax obligations–will bear their share of the tax burden by purchasing goods and services. Fiction No. 5: A national sales tax will substantially increase the price of goods and services. The facts: Currently, the prices of all goods and services offered by legitimate taxpaying businesses in the United States reflect the costs of the businesses’ tax liabilities, as well as the costs of tax compliance. Under a sales tax system, the tax rate will be lower at each step of production, and the compliance cost is virtually eliminated. This means the final price for consumers, even including the federal sales tax, will increase little, if at all, from current prices. American taxpayers recognize that the current income tax system is broken and desperately needs a comprehensive fix. It is time that Congress seriously considers the benefits of a federal sales tax. Lawmakers in Washington would be wise to write off the income tax, refund the hours Americans spend preparing their taxes and deduct the stress and inconvenience of Tax Day. A version of this article originally appeared in Human Events