The Fairest Tax is a National Sales Tax

Author: Craig Berlin
Created: 15 April, 2015
Updated: 21 November, 2022
7 min read
Taxation and its relation to the economy and quality of life is a major area where there is little agreement. Many of the most important factors are grossly under-reported and widely misunderstood: the role of the

Federal Reserve, a currency based on debt rather than real commodities, the strength of the dollar, fractional reserve banking, the trade deficit, our presumably well-intentioned but misguided Social Security system, and an absurdly complex and overblown tax code. These are all complicated, but the tax code doesn't need to be.

The modern-day "progressive" often focuses on raising taxes on those who “don’t pay their fair share” and cutting defense spending while preserving existing entitlements, not only as a means of balancing the budget but also as a far-reaching panacea and part of desired social engineering.

Today’s “conservatives” profess to understand that over-taxation can be harmful, object to massive redistribution of wealth, and are more likely to focus on limiting the size of government and cutting spending. However, when it comes to the military and their own earmarks, pork and crony capitalism, the actions don't match the rhetoric.

One thing absent from the current debate is the idea of simplicity. Without it, a cogent analysis of problems and solutions is challenging. One doesn't need to believe in “limited” government to acknowledge that the tax code is the easiest and most logical place to start.

So egregiously long and fraught with accommodations for special interests, the current tax code simply facilitates a failure to focus on other things, keeping Congress occupied with legislative battles over who deserves a favorable tweak. Meanwhile, individuals and pundits continue to battle over who should pay, who actually does pay, but rarely demand a solution that the average American can easily understand.

No one credible believes the wealthy shouldn’t shoulder a larger burden than those of lesser means. However, the key to preserving our democracy should not be penalizing those who legitimately earn a lot of money.

Instead, the goal should be to insulate the system as much as possible from being bought. This begins with a simplified tax system that assigns a very low burden across a broad spectrum and can potentially eliminate a large part of the unwanted influence on Congress by removing their ability to pander to special interests via tax accommodations.

A simple and easily decipherable tax code would also allow us to easily examine our competitiveness worldwide and with luck, eventually the momentum could lead to greater scrutiny of the complicated process of passing spending bills.

Understandably, there is resistance to change. For Congress, it seems largely about control and opposition from those who benefit disproportionately from special accommodations. Perhaps most obvious is the tax industry that includes certified public accountants, tax attorneys, and related professionals.

If the tax code were simplified, it’s true that jobs in these areas might be lost, and there would be an appropriate downsizing at the IRS. Sometimes such losses are to be applauded: we would not lament the demise in jobs for oncologists if we found a cure for cancer.

The importance of this possibility cannot be understated because the complexity of what we have prevents us from making a salient analysis about what needs to be done and reduces much of the conversation to partisan finger-pointing steeped in ideology rather than the actual numbers.

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While many worry about the rich and corporations not paying "their fair share," an outside observer might assume that it would be a bigger priority to find a way to tax those who earn unreported income. From street thugs and drug dealers, all the way up to cartels and organized crime, the entire “shadow” economy pays ZERO in federal income tax, yet gets no scrutiny from most of those who ostracize the legally wealthy for not paying enough.

The Washington Post reported as recently as 2011:

“8-19 percent of total reportable income is not properly reported to the IRS. That's as much as $2 trillion in underground economic activity, with about $500 billion in taxes that aren't being paid to the government."

But that isn’t what is in the media nor has it been addressed by either party.

An additional fundamental misunderstanding is in the perceived need for businesses to pay more. Proponents of the FairTax advocate a 23 percent tax on consumers and no tax for businesses, which is problematic because it is a setup for rampant fraud.

However, helping people understand business taxes is an important discussion. It is often forgotten that just as with any other expense, business tax liability is essentially passed on to the consumer. A company takes into account all costs of doing business in determining pricing, and taxes are not taken from mythological excess profit -- especially in a small company.

Simplifying business taxes has the same benefits as it would for personal taxes.

Recent scandals at the IRS correctly highlight that the agency may possibly be used as a political tool, but then again, do we really want political groups, whether they are liberal or conservative, to be tax free?

In our longstanding tradition of granting tax exemptions, have we lost sight of the fact that many tax-exempt organizations are involved in political activities, not only on the right and the left, but also by those way outside any reasonable standard of mainstream and acceptable political and social thought?

A very low, broad-based consumption tax on everyone and everything eliminates tax-exempt status for organizations that are actually hate groups or political groups without severely affecting legitimate ones.

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Under a sort of national sales tax, everything would be taxed at a low rate. To get some basic idea of the pool we could be collecting from, we could start with what’s known as gross economic output, which the Wall Street Journal described as:

“...an attempt to measure what the BEA [Bureau of Economic Analysis] calls the 'make' economy—the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. Valued at more than $30 trillion at the end of 2013, it's almost twice the size of gross domestic product. “

We should also include investment transactions, which generally concern only the top half of earners, and would be another selling point for anyone concerned that a sales tax would be regressive. With many brokerages charging less than $5 per trade and even lower fees for large volume buyers, a small transaction tax would not discourage trading.

Information on the volume of individual trades, as opposed to dollars or shares, is hard to come by in some markets but in 2014, the major stock exchanges recorded nearly 7.5 billion stock trades and that does not include other investment options such as mutual funds, bonds, and commodity futures. There were over 7 billion futures contracts in North America in 2012.

While information on the volume of bond trades is more difficult to come by, SIMFA reports the average daily trading volume on the U.S. bond market is $822 billion.

Excluding what we don’t already know, let’s do a little math:

The U.S. budget in 2015 is projected to be $3.9 trillion. If we imposed a 10 percent tax on every dollar spent in the United States, based on a gross economic output of $30 trillion, that could generate $3 trillion -- almost 75 percent of the total budget. A $20 transaction tax on stock trades and futures contracts could generate nearly $300 billion.

Additional revenue could be garnered from similar fees on mutual funds, bond trading, and other investments. Collections in excess of the total budget could be used to reduce our federal debt and/or the consumer/business consumption tax. In addition, there could also be added sources such as luxury taxes on select items or usage fees for interstate highways, air travel, etc.

As an added bonus, 100 percent of actual taxes would be collected without preparing or reviewing arduous returns, a time and money saver for the taxpayer at both ends of the process. The money will be collected not long after people actually make purchases, rather than during a burdensome annual ordeal the following year.

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The collection efforts and non-payers would also be eliminated compared to the current system, where people fall behind and eventually end up settling with the IRS for much less than their original liability or trying to work with tax relief companies that may be running scams.

These ideas are not meant to be a final draft but rather a general direction that focuses on spending rather than income, much of which is undocumented. These changes would include transactions relegated to high earners while still leaving room for specifics that easily fit into a short description rather than thousands of pages.


Editor's note: This article is an abridged version of an article published on Examiner.com on March 24, 2015.

Photo Credit: Mark Carrel / shutterstock.com