Coloradans Push for a National Sales Tax
by Ari Armstrong
On April 14 and 15, Sam Carrubba and Tom Stockman of Colorado Springs will join a national demonstration in Washington, D.C. to call for the income tax code to be dumped and replaced with a national sales tax.
Carrubba is the co-founder and former director of the Colorado Springs chapter of the national Citizens for an Alternative Tax System (CATS). (There is no state-wide association.) Currently Marsha Bartholomew heads the Colorado Springs chapter, leaving Carrubba to handle publicity and other projects.
For the past two years, CATS has organized a protest in Boston in which the national tax code was dumped into the harbor. "We had to post high-tide warnings because the code is so big," joked Carrubba. This year, CATS will rally on the steps of the Capitol in D.C., host a symposium on the issue, and lobby in support of legislation that would impose a sales tax.
Carrubba is also working with State Representative Ron May on a resolution in which Colorado legislators would call on Federal lawmakers to enact a sales tax. Last year, the state legislature passed a resolution laying out the broad requirements for national tax reform. Carrubba believes a sales tax would meet the conditions of the earlier resolution.
Former Colorado Congressman Dan Schaefer sponsored legislation in 1997 to replace the national income tax with a sales tax. His bill, H.R. 2001, is cited by CATS as the benchmark legislation which the organization hopes to revive for a future vote.
Points of Analysis
Real Tax Reform Means Cutting Spending!
On the other hand, changing the hue of the colors is about all that looks immediately viable in Federal politics. So, keeping the broader context in mind, let's get out our color wheels for a few moments.
Life Without the IRS?
Of course, all those who work only on a regular pay-roll would not have to bother directly with the new tax collection agency. This group constitutes the majority of the populace. However, the sales tax would compel every person to seek ways to avoid the tax. The incentive for the average person to participate in the underground economy would increase dramatically. Why pay Joe Fed $100 to mow your yard (or whatever) when you could pay Sam Free $87? The burden of paying taxes is on the seller of goods or services, according to the proposed legislation.
There are also perfectly legal ways to evade the sales tax, though these methods waste productive effort. With a 15% sales tax, fixing one's own car, patching one's clothes, painting one's own house, raising one's own food, etc., become much more appealing. Services you do for others are taxed, services you do for yourself are not taxed. As noted in The Hidden Costs of Taxes, taxation reduces the level of trade, which reduces the benefits of the division of labor, thus making the economy poorer.
Schaefer's legislation would also permit state governments to collect the sales tax for the Federal government. States would get to keep 1% of the collections as a reward. However, I fail to see why a neo-IRS in Denver would be more desirable than a neo-IRS in Washington, D.C.
Indeed, there's something revolting about rewarding state governments to be the goons for Federal politicians. It is conceivable, indeed probable, that we can maintain a higher standard of morality in the State Capitol than in the Federal Capitol. We should leave Federal corruption to Federal agents, not spread it to state agents.
Furthermore, letting Colorado keep a percentage of all taxes collected would create perverse incentives to collect taxes in an over-zealous manner. We have the same problem today with police agencies that are able to seize property absent a trial and spend the proceeds for themselves.
Presumably, the rationale for using state governments to collect the sales tax is that most states already collect their own sales taxes and thus have a base system already in place. However, if the Federal sales tax were collected solely by Federal agencies, the states could then piggy-back on the collection efforts of the Feds, much as they piggy-back on the efforts of the IRS in their income tax systems today. Probably most states would drop their income taxes, as they would be too costly to collect absent the Federal program, and the Federal sales tax would become the model system.
Any reformed tax code should be radically simplified. No deductions, no twists, no loopholes, no complexity. The entire code, plus all additional regulations, should fill no more than a couple dozen pages. No one should have to spend more than a few minutes filling out the tax forms. (Of course, recording revenues and expenses would still take up time.)
In terms of compliance costs, a "flat" tax such as Steve Forbes has popularized would work at least as well as a sales tax. Schaefer disagrees. He wrote in The Wall Street Journal March 11, 1996, "[T]he notion that we can have a 'flat' income tax over the long term is the triumph of hope over experience. Since the 1986 tax reform -- which started as a flat tax -- the federal income tax code has been amended by 40 different acts of Congress. As long as the income tax exists in any form, it can and will grow back."
Schaefer is probably right about the income tax. But the same thing would happen to the sales tax. A summary of Schaefer's legislation distributed by CATS says, "A supermajority vote of 2/3 of both Houses of Congress is necessary to raise the sales tax rate or to create any exemptions to the sales tax." But Congress can, with a simply majority, revoke the supermajority requirement. The desire to exempt certain goods and services from taxation in order to appease special interest groups will, I fear, prove overwhelming to today's politicians. A simplified income tax will fare just as well (which is probably to say, very poorly indeed).
The Question of Progressivity
Of course, the "flat" income tax is anything but flat. It is highly progressive. To see why, let's take an example. Let's say the tax charges 20% of all income above $10,000. Thus, someone making $10,000 pays a tax rate of 0%. Someone making $20,000 would pay 20% on $10,000, or $2,000 annually, which is an effective 10% tax rate. Someone making $100,000 would pay $18,000 in taxes, which is a net 18% tax rate. The virtue of the "flat" tax is not its (non-existent) flatness, but its radical simplicity. It might fly politically simply because it is progressive.
Already there are calls to make the national sales tax progressive. Steven L. Hayes as President of CATS wrote approvingly in A National Sales Tax -- America's Salvation?, "Congressman [Sam] Gibbons suggests that we ensure that the impact of the National Sales Tax is equitable [read: 'unequitable'] by giving monthly cash rebates. If each member of a family received a rebate of $50 per month, a family of four would receive $2,400 per year in cash rebates which would equal the amount of tax on the first $14,500 of the family's expenditures for the year."
It nearly goes without saying that adding progressivity to the sales tax would add a great deal of paperwork and compliance cost to the system. The "flat" income tax seems to have the advantage on this score.
The Impact on Businesses
As Schaefer points out, a sales tax that included funds for Social Security would have to double -- from about 15% to about 30%. A sales tax of 30% would radically increase the level of tax avoidance, so the call is to separate the Social Security tax from the sales tax.
However, look what this does to the self-employed! In Colorado, services are not taxed under the state sales tax. Those who are self-employed in the service industries only have to keep track of their income for the IRS. Under the sales tax proposal, they would have to continue keeping income records for the Social Security Board, but would ALSO have to start keeping sales tax records for the Treasury! This may not mean much to those on pay-roll, but I am self-employed in a service industry, so this looks like the coming of the four horsemen to me.
This single point is enough to strongly oppose the sales tax. If it can be fixed to totally do away with all income taxes, it might be acceptable. But if it's only going to add a sales tax on top of the income tax system, then forget it. If Congress can wreak havoc with one type of tax, imagine what it can do with two!