End the IRS, and Income Tax: The sales-tax solution

Note: This is not an official Libertarian position, but one I think has some merit, at the very least as a transitional solution to restructuring the economy to a freer , more local one.


Jim Traficant has been railing on this idea lately.  I have heard him speak of it at every appearance I have attended, and I think it deserves an examination.  Jim has long opposed the IRS in favor of the "little guy", and now is taking it a step further; We should abolish the IRS!



There has been some academic study on this subject.  A quick search yields this CATO institute study.  Here is the Executive summary:

This study examines the crisis in U.S. saving, its implications for the nation's economic performance, and the contribution our current tax structure has made to the crisis. A computer simulation model is used to evaluate a proposal to raise U.S. saving by replacing all federal personal and corporate income taxes with a national retail sales tax.

The findings are quite dramatic. The shift in tax structures is predicted, in the long run, to raise the stock of U.S. capital by at least 29 percent and potentially by as much as 49 percent and to raise U.S. living standards by at least 7 percent and potentially by as much as 14 percent.
A national sales tax would eliminate many of the distortions of current income taxes. It would do away with the differential tax treatment of corporate and noncorporate businesses, which distorts business decisions; of capital gains and dividends, which affects decisions about retaining earnings; and of investment in equipment, structures, and inventories. A sales tax would also end encouragement of current relative to future consumption, the tax exemption for health insurance premiums, and the work disincentive associated with the progressivity of the present tax structure.

A national sales tax could be made progressive by combining it with a refundable tax credit. Each household could file a form requesting the tax credit and receive a check from the Internal Revenue Service equal to the amount of credit for which the household qualified.

I just want to stress a few things to think about here in regard to the ending of the IRS.  I also want to lay the premise that sales-tax would only apply to new, non-food, non-education purchases made in or imported into the U.S.. (duty free thresholds, I suppose, could stay close to what they are now)

The tax code is insanely complicated, with even the current U.S. Secretary of the Treasury "mistakenly" not paying $35,000 in self-employment taxes.  He is not the only one.  One huge advantage to moving to a sales-tax base system is that it gets rid of all that complication.  Retailers already process sales tax transactions and remit that money to the government.  The infrastructure is already there.  It is straight forward, and everyone pays the same (well except, exempt non-profits).

The complication issue leads naturally into the cost issue.  The enormous complexity of the current system requires an equally enormous support system.  The IRS has a lot on it's hands, as do employers and citizens.  We need not waste money on the IRS, payroll tax departments and tax preparers if we did not have income tax.  The savings from the man hours put into the "tax industry" alone are quite significant.  Those savings would hopefully stimulate the economy enough for the people displaced by the switch to find gainful employment elsewhere.  Would be kind of nice not to be hated though, right guys?

Imagine the implications for trade and industry.  The tax would only apply to new goods sold in the United States.  Domestically produced items would be sold at the same tax rate as foreign produced items when sold in the U.S..  Items built in the U.S. and exported, however would not be taxed in the U.S..  Now remember, there is no federal withholding either.  Think about it for a minute and imagine what sort of advantage this would bring to domestically produced goods for export. Want to stimulate the domestic auto industry? Change the tax structure.

When ever we are encouraged to buy local, it is also good for the environment.  More local commerce means more local jobs, less shipping cost, and a larger (sales) tax base.  Also, this sales tax on new goods only would encourage recycling.  Buy a used bicycle, there is no sales tax.  So, essentially if you chose to live frugally, and conscientiously of the environment, you would have a tax benefit for doing so, without ever having to fill out a form.

Some might argue that such a tax would be regressive, meaning that it would hurt low income Americans more than high income Americans.  I would just like to put forward a few observations on this point.  Typically, people with higher incomes buy more stuff.  The more you consume, the higher your share of the tax burden is.  No more loop holes, no more tax shelters.  Those with lower incomes will have the option of recycling and paying no tax at all.  Remember the tax is only on new, non-food items.  This plan would certainly broaden the tax base to include more people, and might provide subtle encouragement for those who currently choose not to be productive to start working.  The currently unemployed-by-choice would get to keep more of their earnings if they choose to work, won't be taxed on savings, education, or food, and may find it a bit more appealing to move up in the world than it was previously. There could, of course be some sort of exceptions for people in extremely bad positions.  I do not believe that health related expenses should be taxed either.

Not to mention that removing withholding would also eliminate the tax incentive for employer based health care.  I have written at some length on that subject early if you care to find out why that would be a big deal.

Overall, the combined benefits of simplicity, savings, and growth from doing away with the IRS and withholding entirely makes it worth serious consideration.  A move of this magnitude would take power away from the central government, so don't expect them to embrace it.  But, they work for us, and it is our government, and if there is something that can be done that could make things a whole lot better, then we must force the issue.