The Republicans recently suggested replacing Federal income taxes with a 30% sales tax on all consumption. After careful consideration, the GOP decided to abandon this idea, at least for now.
It’s good the GOP won’t push this because it is a very bad idea. Even with the gimmicks, it is still a regressive tax, meaning the lowest income earners will feel the tax burden heavier than everyone else.
Low-income earners spend all of their disposable income. So, every dollar of income would be taxed. High income earners spend only a portion of their disposable income and save or invest the rest. The savings dollars are not taxed.
And besides, there is a much better idea.
Any tax on consumption is a regressive tax. Low-income earners spend all of their disposable income. So, every dollar of income would be taxed. High-income earners spend only a portion of their disposable income and save or invest the rest. The savings dollars are not taxed.
That means for high-income earners, only a small portion of their disposable income is taxed. For lower-income households nearly all of their deposable income is taxed.
Proponents say they will fix that by giving every household a pre-bate. That means the government would send every household a monthly check. A family of four would receive almost $500 per month. This is meant as a rebate for the taxes paid on consumption for necessities.
That alone would be an enormous task to administer and would likely be recalculated every year.
Proponents also say the tax rate could be progressive, meaning the tax rate would be higher on luxury goods, perhaps 40% or even 50%. That means, of course, the government has to classify all goods and services. That, too, is an enormous take, which would require annual revisions. It will also distort markets.
There is a much better idea.
When formulating a tax policy, the first consideration is what to tax. The national sales tax is applied to spending. Currently the Federal tax is applied to income. Since the tax revenue generated is used to pay annual expenses, it makes sense to tax annual income. As long as it complies with the goals of a tax system.
The goals are to have a policy that 1) raises sufficient revenue, 2) does not cause market distortions, 3) is easy to administer so tax forms should be simple, 4) promotes economic growth, 5) is flexible so fiscal policy works and 6) is viewed as fair and equitable.
There is only one tax system to replace the current federal income tax system that meets all of these goals, although admittedly the last goal can be debated. That is this:
A 15% single rate tax on all income above a livable minimum (twice the poverty level) with no deductions for anything. All income is taxed the same whether earned from wages, rent, interest, profit, dividends or capital gains. The corporate tax rate is also 15%.
For a family of four the livable minimum would be about $50,000. The median household income in the US is about $71,000. So, the median household would simply subtract $50,000 from their income of $71,000. That leaves $21,000 in taxable income. Multiply that by 15% and the tax is $3,150. That’s it. This is very easy to administer and very easy for Americans to file.
This plan raises about the same amount of revenue as the current federal income tax code but would raise much more revenue in the future. That’s because this plan would add significantly to growth in GDP, simply because a 15% marginal tax rate creates more incentives that the current marginal rates which could be as high as 37%.
This plan causes no market distortions since all income is taxed the same and there are no deductions. It is also flexible, because the 15% rate could be raised or lowered to stimulate or slow down the economy. And the livable minimum can be adjusted.
All of the goals are met, although the equity and fairness issue can be debated. Most Americans believe that higher-income earners should pay more taxes. With this plan higher income earners pay proportionately more taxes. With progressive taxes, higher-income earners pay disproportionately more since the tax rate increases as income increases.
This plan means that, above the livable minimum, each dollar earned is taxed at 15% no matter how the dollar is earned, how it is so disposed or how many other dollars you have earned. That means as income increases tax liability increases proportionately.
That seems fair and equitable.
Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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