Sales, Flat, or Spherical, Tax Reform Isn't the Answer

By Callahan, Gene | Freeman, November 2006 | Go to article overview

Sales, Flat, or Spherical, Tax Reform Isn't the Answer


Callahan, Gene, Freeman


Lately there has been a flurry of interest in tax reform, typically aimed at making compliance less onerous, removing the incentive for specialinterest lobbying, and reducing the size and intrusiveness of the tax-collection agency. While few people will reject those ends, that does not imply that the attempt to achieve them is the optimal use of the inevitably limited time and energy that citizens choose to devote to political activities. Of particular relevance to readers of this magazine is whether friends of liberty ought to focus on such reforms to forward the cause of freedom.

There are also schemes circulating for supplementing the current income tax with, for example, a sales tax orVAT (value-added tax), but such plans are unlikely to gain much support from libertarians, given that they pose the obvious danger of providing the government with an additional way to collect revenue. Since they threaten to merely increase the overall tax burden on society without offering, from a libertarian point of view, any compensating benefits, I will not address them in this article.

However, suggestions for replacing the income tax with a sales tax, or simplifying it by taxing everyone at a single rate and eliminating all deductions (a "flat" tax) have caught the fancy of some libertarians. The main attractions of these ideas are that substituting a sales tax or flat tax for the current income tax appears to ease the burden of tax compliance. A sales tax in particular does not seem to penalize savings and investment the way an income tax does, and the promoters of such policy changes contend that their new system of taxation will produce results closer to those that would come about on the unhampered market than does the existing apparatus.

One popular proposal along such lines has recently been described in The Fair Tax Book, coauthored by talkshow host Neal Boortz and Georgia congressman John Linder. Because of its prominence, I will use it as a paradigm for all plans of its kind. I believe that the problems it contains are endemic to other similar schemes; so my case against Boortz and Linder also applies more generally.

The authors under discussion present their alternative to our present system as a virtual cornucopia pouring forth blessings on the American people. Implementing their idea, they contend, will do away with the oft-reviled 1RS, reduce the effort devoted to complying with the tax code to almost nil, greatly lift the living standards of the poorest Americans, reverse the trend of U.S. firms relocating overseas, and provide a tremendous boost to the nation's economy. Clearly, if these promises are realistic, everyone should enthusiastically support their plan. However, a clear-sighted analysis of the proposal reveals that the case for predicting these benefits is constructed on a foundation riddled with wishful thinking and flawed logic.

For example, Boortz and Linder argue that their tax system will greatly boost the purchasing power of most Americans' incomes, since it eliminates the portion of the cost of every good that currently stems from the seller's tax burden. However, their argument relies on a ludicrous assumption as to where the incidence of present taxation actually falls: On the one hand, they claim that eliminating the income tax will reduce the price of what you buy roughly 20 or 30 percent because producers all pass the tax they pay on to you through higher prices. On the other hand, they also point out all the money you'll save by no longer paying your own income tax. Apparently, unlike those involved in making everything you buy, you can't just pass on that tax to others. It seems the incidence of the income tax falls entirely on one special segment of American society: the readers of The Fair Taxi The authors are guilty of counting the savings their readers will see from ending the income tax twice, once in the price of the things they buy and again in their own paychecks. …

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Sales, Flat, or Spherical, Tax Reform Isn't the Answer
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