The National Sales Tax Disaster

I was watching Fox News a week ago and I witnessed a bunch of hubbub about how Bush wanted to "eliminate the income tax" and replace it with a national sales tax.

It comes as no surprise that the Fox gang would embrace Bush’s proposal. If Bush wants to do something, the people at Fox usually support it, in their own fair and balanced way.

More surprisingly, many libertarians and free-market types not only favor, but spend much of their time advocating, such a reform.

Cutting spending while changing the tax code may very well be better than cutting spending and leaving the oppressive code intact. However, we should be skeptical of plans to change the code drastically while leaving spending rates the same, which is precisely the idea on the table: a "revenue-neutral" sales tax. Instead of focusing on the real problem – government is far, far too large and takes far too much of all of our money – a lot of well-meaning Americans have become distracted into putting energy into trying to get the state to steal our money in a different way.

You got to hand it to the Bush Republicans. They might eschew neutrality in foreign affairs, but they love it when it comes to how much loot the government confiscates from us.

Now, taken for granted that a national sales tax would be revenue neutral, we have to consider what would happen if the program came to pass.

If the income tax were to be immediately abolished and replaced with a sales tax, the results could be devastating, especially in the short term. Before the new tax goes into effect, Americans would be motivated to buy as much as they could, far beyond the exchanges that would occur in the natural market. This would cause shortages, price increases, and the perfect atmosphere to blame economic problems on the "laissez-faire" tax reformers. Once the tax is implemented, buyers and sellers would be penalized a hefty 20% or more on each exchange. This would discourage trading on the market, and instead incite people to become more economically self-sufficient. The division of labor on which civilization relies would suffer a major blow, as economic activity became far more atomized than optimal in a free market. Furthermore, older folks who saved for their retirement and paid taxes on their income their entire lives would suffer a whole new assault on their livelihoods. Whole industries that are currently free from taxation would also take a beating, once the Internet is taxed, which is part of the sales taxes being contemplated.

Since it would likely be a gradualist reform, the introduction of a new national sales tax and the "phasing out" of income tax might well lead, ultimately, to Americans being saddled with both. One of the arguments for an income tax was that it would lead to lower tariffs. However, some of America’s highest tariffs came after the establishment of an income tax. Since the government no longer depended on tariffs for all their revenue, politicians were able to jack them up as high as they wanted, for protectionist purposes, without worry that revenues from tariffs would sink because overtaxed Americans decided to buy fewer products from overseas.

Republicans (Lincoln, William Taft, Hoover, et al.) deserve credit for giving us both the income tax and the high protective tariff. We should hesitate to trust them with establishing yet another kind of government theft, no matter how much they promise to reduce the burden of the other kinds they have introduced in the past.

(Another incidental problem with the national sales tax is its Constitutionality. It is not clear how so many technicalitarian opponents of the income tax can confidently assert that the 16^th Amendment was never ratified or that it never meant to tax American citizens but that, for some reason, it is okay to implement a national sales tax that is nowhere to be found in any of the Constitution’s amendments, properly ratified or not.)

So what are the arguments for a revenue-neutral national sales tax? One is that the government would somehow become more friendly, less invasive and intrusive, and more respectful of our rights. Such a prospect is pure comedy! If the government is still poking its nose in all the retail stores in the country, auditing their records and treating people as guilty until proven innocent – which are the preferred tactics when the government is trying to collect trillions of dollars of revenue – we can expect no more privacy or freedom from a sales tax regime than what we now have.

Another argument for the idea is that a national sales tax will encourage saving. But free-market advocates should realize that the government should not take on the role of encouraging or discouraging any economic behavior. Saving should happen voluntarily, and reflect the personal preferences of the savers in a free market.

Yet another argument contends that sales taxes are somehow more voluntary than income taxes, because people have to earn an income but they don’t have to buy goods and services. This is a bizarre line of reasoning, seeing as how the selling of labor and goods are technically both voluntary, and yet any taxes on them are not.

The most frequent, and perhaps the worst, argument in free-market circles is that the poor would finally pay their fair share. The reasoning further goes that if the poor have to finance a higher percentage of the state’s activities, and if such a tax is visible and apparent every time they buy something, the nation’s poor will have more incentive to shrink the state and not support social programs.

This is just like the cynical argument for the draft! If the nation’s affluent have to see their kids die in Iraq, maybe they’ll oppose the war, so goes the argument. We should keep in mind that if a draft comes, the statists imposing it will not have an antiwar agenda, nor will the statists imposing a sales tax have a tax-cutting agenda. And the pro-tax anti-state argument makes just as little sense as the pro-draft antiwar argument, once put under a moment’s worth of scrutiny.

First of all, it’s not fair to assume that poor people are the principal reason we have a growing government that is readily approaching a total state. It’s not the poor who are in power, who have brought the US federal budget to nearly two and a half trillion dollars with Medicare expansions, explosions in education spending, agricultural pork programs, and a massive warfare state. And even if the poor tended to believe in Big Government, taxing them more wouldn’t do any good. It’s not like they would all of a sudden call their Senators, say they opposed the new expansions of government, after all, and that the government need not grow anymore on their account. It’s not as if the Senators would listen.

Secondly, the poor already pay more in taxes than they should. They pay regressive taxes to the rotten Social Security Administration and to their state governments all the time. The rich are also overtaxed. So is the middle class. And no matter how the government decides to extract twenty percent of the GDP from the productive sector, it will inevitably destroy the wealth of all peaceful participants in the market economy. Just as taxing the rich hurts the poor, so too does taxing the poor hurt all of us. The real problem, once again, is too much government – not that the wrong people are being victimized.

Besides, if we do see a national sales tax, it will likely come with all sorts of gimmicks to relieve the poor of some of the burden, including a check to every American to pay sales tax on basic necessities. So much for making people feel less dependent on the government!

The common arguments for a revenue-neutral sales tax – that in the long run it will increase revenue, or reduce it; that it will shift the burden, or offset the new burdens by eliminating old ones; that it will simplify the tax code and yet have enough built-in mechanisms to soften the blow against fixed-income earners – are quite inconsistent.

However the government taxes us, it is way too big, and it isn’t that way only because of the poor, or the rich, or the Republicans or the Democrats. The reasons it is too big are more complicated than that. One reason is that Americans have become divided against each other by the political process, and instead of focusing their animosity and energy on reducing the power of the institution that has divided us, many of us blame one group or the other, and fall into the trap of trying to use the state against those that we perceive are using it against us now. Such divisive political activism allows the state to expand, widens oppression, and fails to address the fundamental problem. Attempts to reform the tax code are often manifestations of this kind of division.

If we really want taxes to be less painful, we need to cut spending. We could eliminate almost all federal taxes entirely if the government simply obeyed its Constitutional limits, and the remaining taxes, whatever form they took, would be quite tolerable by today’s standards. Moving halfway toward Constitutional government, which would still leave intact a system about as big as we had during the end of the Reagan administration, would be enough to scrap federal income taxes entirely, and any step in this direction would reduce the real burdens of government on the taxpayer and do more good than switching from an income tax to a revenue-neutral sales tax.

Bush and the Republicans probably do not want to cut government at all, so we shouldn’t fall for their Republican trick of "tax reform." Spending increasers make bad tax cutters. Taxes can never be fair or economically neutral or sound. They can, however, be lower – but only if the government is made smaller. Unless and until Bush reduces the size of government, libertarians have little reason to celebrate any of his huckstering tax "reforms."

December 9, 2004

Anthony Gregory [send him mail] is a writer and musician who lives in Berkeley, California. He is a research assistant at the Independent Institute. See his webpage for more articles and personal information.

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