SensibleTaxReform Blog

7. A Federal Consumption Tax (A)

Federal Taxation of Income

The Internal Revenue Code (IRC) is focused heavily upon income taxes. [In 2012, more than 46% of federal revenues came from personal income taxes, almost 35% from Social Security and Medicare taxes and another 10% from corporate income taxes.] The mass of complications, contradictions, injustices, etc. of our tax system is primarily income-tax based.

Most of the tax proposals coming out of Washington are mere manipulations of that Code (“rearranging the deck chairs on the Titanic”). That is also where the bulk of the intransigence in discussing serious tax reform exists:

• There is great animosity when our politicians discuss tax reform among themselves.
• There is much heat when constituents discuss tax reform with their congressmen.
• And, tax lobbyists throw billions of dollars every year at politicians to influence tax changes for the advantage of their clients–seldom to the advantage of the American people in general.

The result is that little of real value ever seems to be accomplished to this income tax-based system. Much further harm gets done to the IRC every year.

Federal Taxation of Consumption

Sensible Tax Reform–Simple, Just and Effective is a proposal to replace most of our income-tax-based federal tax system with a very new system that is based primarily upon a federal consumption tax—a national sales tax.

Blog #3 compared taxes paid by Americans with taxes paid in many other major countries. In every one of those other countries a national consumption tax, called a value-added tax, is an important part of their tax system. Only in the United States is their no federal consumption tax (FCT). We do have state sales taxes in most states and some local sales taxes as well. However, the federal government has chosen to not use a federal sales tax.

An FCT has been shown to be very workable in almost every other country in the world. It is time for America to seriously explore the feasibility of a federal consumption tax. Yet, we do not want to add more complexity to what already exists. We do not want to add an FCT to our existing code. We should want to very greatly simplify our federal tax code, as well as make it much more just and much more effective.

Sensible Tax Reform–Simple, Just and Effective will replace most of the existing code. Our tax system will be based largely on what we spend, rather than personal income and business earnings. The consumption tax will be very simple:

• A flat rate,
• Applied to the purchase of most goods and services,
• With only a few preferences and
• Coupled with protection for the poor.

Replacing our existing tax code with a consumption tax would have many advantages:

• For the federal government, tax revenue would be more predictable, since consumption varies much less than does income.
• For businesses, the elimination of their existing federal tax burdens would completely end those tax payments (more than $240 billion annually). It would end their tax-compliance expenses too, which also cost American businesses hundreds of billions of dollars every year.
• For households, there would be the end to withholding taxes. The $420 billion of Social Security and Medicare taxes as well as most of the $1.1 trillion of personal income taxes will actually be received by individuals and households. Take-home pay would increase greatly. Also, real income would be much greater.
• The new system would be much more transparent, much easier to understand and very difficult for lobbyists and their Washington clients to surreptitiously distort the taxes as they do now.
• We would all have a much clearer idea of how much we pay in taxes.

The next post will further discuss the federal consumption tax.

Tags: #tax reform

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