Maintaining Optimism in the Face of Reality. Occasional observations on the state of the world, society, business and politics. Usually anchored by facts, always augmented by opinion.

Star Tribune on Gil Gutknecht and a National Sales Tax  | e-mail post

I was more than a little surprised to see the Strib running an above-the-fold frontpage article on a policy issue such as tax reform. (Of course, had the Vikings defeated the Packers yesterday, I imagine the entire frontpage would have been devoted the battle that far predates red-states vs. blue-states: the purple-state vs. green-state rivalry.) The Strib also provides a sidebar mentioning two alternative tax-reform proposals: a Value Added Tax (VAT) and a flat income tax.

The article largely centered on Minnesota's 1st District Representative Gil Gutknecht's [website] favored idea of replacing all current forms of federal taxation with a 23% national sales tax. This tax would carry no exclusions; food and medicine would be taxed the same as toys and furniture. To ease the obvious regressive sting this could have on lower-income families and individuals, there would be some allowance for monthly rebate checks to be sent to those individuals. The concept was introduced as the "Fair Tax Act of 2003" by Georgia Republicans Rep. John Linder and Sen. Saxby Chambliss. [FTA text from Thomas] It also appears that the FTA would eliminate Social Security payroll taxes as well and would fund the Social Security Trust Fund from general tax reciepts.

The root of Gutknecht's support for the idea seems to stem less from sound policy and more from his personal dislike for the IRS, as he cites the elimination of the IRS as the first chief good of this proposal. And it is not that Gutknecht simply has a garden variety dislike for the taxman; rather he seems to have some sort of libertarian paranoia about the entity, suggesting that the founding fathers are "rolling in their graves to know the federal government keeps track of how much you give to various charities." Yes, God forbid that somewhere buried in reams of paper is the information that I gave money to MPR or the Children's Cancer Research Fund. (On the other hand, wouldn't it be nice to know that someone gave money to charities that might be siphoning funds to Islamic militants? The issue seems to cut both ways.)

Paranoia and IRS-bashing aside, supporters of the FTA point to the benefits of tax simplification (which is a very legitimate goal) as well as enhanced export competitiveness by removing tax burdens from U.S. corporations.

Supporters also deny that net retail prices would increase significantly given their reduced tax burden; this makes some sense when one also considers the labor costs of retailers and the 7-8% they are paying in payroll taxes. In addition, the elimination of federal income tax means that we are all walking around with more money in our pockets so we would be more willing to pay effectively higher prices. Say for a $100 item, a retailer could charge $90 for it (due to a lower tax burden) and we would pay $110.70 ($90 + 23% tax) for the item. Of course, the 11% more we are paying would be fair because we would ourselves be avoiding payroll taxes and income taxes. Actually, we'd come out ahead, given that avoiding payroll taxes alone would cover three-quarters of the increase. And, there is the obvious benefit of encouraging additional saving by consumers (and one would presume a reduction in consumer debt as well).

For me personally, this kind of taxation approach would be great, but any measure of this magnitude would seem to be prone to some very significant unintended consequences. I would love to have one of the many thoughtful blogging economists discuss:
It would seem that all three of these factors would result in a negative impact on the employment situation in the U.S. unless the predicted rise in export competitiveness would cover that gap. In addition, the first and third items would also seem to significantly reduce the potential tax base for a sales tax, and one wonders how well that is accounted for in forecasts of such a change in the tax regime.

These are just a handful of questions that sprung to mind as I read about the national sales tax idea, I am certain there are many other consequences as well, both pro and con. In any event, I was pleased to at least see a meaningful policy question get frontpage status in the newspaper, it can only be good for raising people's awareness of the issues and sparking some tiny fraction of those people to endeavor to more throughly understand the issues.

e-mail post | Link Cosmos | [Permalink]  |  | Monday, November 15, 2004
I like your blog, and not just because I think Minnesotans are nice).

I am a lawyer, not an economist, but I deal a little bit with taxes, so here is my take on the consumption tax:

I am pretty much opposed to it.

First, it is regressive and does hurt the poor and the lower middle class the most. Even with a rebate, imagine the hassle of applying for rebate checks once a month. You would have to keep all of your receipts, prove how much you are making (pay stubs) etc. As it stands now, your taxes are automatically taken out and you only have to deal with the hassle of taxes once a year. It may sound trite, but the people now who have the most complicated taxes to figure out are the people who can afford accountants.

Second, you would have to graduate the rebate according to income level or else it would encourage people to earn less if they are on the cusp. If you get a rebate at $20,000 and under, but get none at $20,001 then it would be cheaper to earn less than earn more. A graduated rebate system? not so "simplified" anymore.

Third, there is a lot of room for fraud this way. With taxes automatically coming out of your check now, you have to defraud the gov through "creative accounting." when you do this, at least there is a paper record with your signature on it. With a consumption tax, it would be like trying to bust people selling counterfeit hand bags on the street. It is difficult to prove and difficult to monitor. When you do your taxes, everything goes to the IRS where accountants can pour through your records to see if there is fraud. With a consumption tax, the IRS would have to become undercover sting agents going out into the field to make sure under the table transactions are not taking place.

Fourth, it discourages foreign tourism. I know a lot of Europeans who come to the US for vacation because it is cheaper than staying within Europe. Whether the loss in tourism revenue (and the taxes they already pay) would be offset by increased taxes on the ones who do come, I don't know.

Fifth, it would grow the income gap (theoretically - I know I am starting to stretch). Not only would it be a detriment to lower income people, but it would benefit the rich. 1) the rich would have more money for investing and therefore more dividends, capital gains, etc. Without a tax on corporations, dividends would also increase. The rich get richer both ways.

Sixth, end to the "ownership society". There would no longer be an incentive to buy a house. Might as well rent.

Seventh, would not work with Bush's (so called) great health plan. If you have no pre-tax dollars, there is no benefit to a "health savings account".

Eight, less incentive to save for retirement. I have to admit, seeing pre-tax dollars go into my 401k is a big incentive for me to save. I am not sure if I would be as keen to do it without a tax incentive. I know it is all psychological, but that's the way humans work.

etc, etc.
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