Some notes on What if we made a national sales tax and eliminated income taxes?
Nobody really knows what the answer to this question is. No country has ever tried it. But here are some notes. The numbers below are not a solution to taxes but simply numbers that one would need to know before coming up with a solution to replace the current system.
Some of the issues of any new system are:
A) can enough be raised to balance the budget ? Currently we do not have a balanced budget nor is one expected any time soon.
B) would it be regressive (benefit the rich and hurt the poor) ?
C) would it create less or more incentives to spend and on what?
1. What are government revenues from taxes
About $4.5 trillion last year from income taxes, corporate taxes, payroll taxes, estate taxes, etc.
Any plan to eliminate this would have to roughly replace this amount.
2. How much does the government spend
Over $6 trillion per year, which is why we alway hit the debt ceiling since the US spends more than it makes.
3. Consumer spending is $16 trillion per year
This number excludes home buying. Important to know this because if you replace income taxes with a national sales tax, this is the number one would go off of.
The reason you would exclude home buying is to encourage people to buy homes. The home building industry is something like 30% of the economy.
So a 10% national sales tax would raise $1.6 trillion. 20% would raise $3.2 trillion, etc.
4. Would a national sales tax be "regressive"?
In other words, would it be unfair to the poor and benefit to the rich. Forget the fact that the current system is currently regressive (since the rich benefit mostly from untaxed unrealized gains in their wealth).
The answer is yes but... It's "yes" because the % of one's income one would be taxed would be far higher for people making < $50,000 than for people making > $1,000,000.
The solution would be to rebate some amount per year based on the first $5,000 in expenditures. So a family of 4 could spend $20,000 in goods without being taxed at all (they would get their money back). This would be equivalent to someone making $50,0000 today and paying $0 in taxes.
So that's how you would solve the regressive issue.
5. Tourists spend $1.1 trillion per year in the US
I mention this because it would remove some of the tax burden from US citizens to foreigners who visit the US.
6. The IRS budget is about $200 billion.
Although a tiny percentage of the $6 trillion spent per year, this amount would be saved if we switched to a national sales tax system with zero income tax.
7. ABout 15% of taxes are unpaid.
Meaning, they are evaded are simply not paid. The lower the income tax, the lower the % of taxes that are unpaid.
I mention this because perhaps some hybrid system of lower taxes plus a national sales tax would be the solution.
If you had a %5 flat tax, for instance, and a 10% national sales tax, this would
8. Personal + Corporate income per year.
Which is the base that creates the bulk of taxes. Personal income is something like $22 trillion and corporate profits before taxes are something like $3 trillion. So $25 trillion altogether.
9. What is the average tax rate per person
About 22% although there are many ways to interpret this number and it's a bit confusing because of issues of many tax brackets and tax evasion, etc.
10. Playing with numbers.
- A flat tax of 10% (much less than 22% for the average family) would generate $2.5 trillion.
- A national sales tax of 12.5% would generate about $2 trillion.
So this xould replace the current system
A) foreigners who are tourists would share some of the burden with the US taxpayer
B) The lower tax rate plus a rebate of $2500 per year for family of four (which would cost about the same amount you would save from eliminating the IRS so would have a net effect of zero) would make this less regressive than current system
C) On average, people who make up to $200,000 would make more money. Perhaps everyone would make more money per year, depending on their spending.
D) less headaches around tax season (one idea is that all elections should be held on April 16 - this would certainly encourage politicians to think more about the tax burden of the average American).
These are benefits that would probably exist but are unclear:
- Corporations would hire more people (since they would be able to keep more profits and so expand more quickly).
- The above would allow the economy to grow much faster.
- if the economy grows faster, the goal would be to reduce the flat income tax to zero and just use the national sales tax, which eventually can also be reduced.
Would this encourage people to spend less...since prices paid would go up? Since there is higher take-home pay (in part because of the rebate on every citizen on the first $5000 purchased) my hope is that this would NOT encourage people to spend less.
13. Has this ever been proposed?
Currently there is a bill in Congress to make a national sales tax of 30% and eliminate all income taxes.
While this is all subjective, my gut tells me that 30% sales tax is too high and too fast. Having a low flat income tax (which avoids issues of evasion and makes collection easier and gets rid of social security taxes, FICA taxes, etc) and a reasonable national sales tax (12.5% vs 30%) makes this easier to implement and fewer disincentives to purchase.
I think something like this is the way to go:
A) 10% flat income tax
B) 12.5% national sales tax (collected by states and including the rebate described above)
C) Furthermore, one can think about how to reduce the US's biggest expenditures: Social security and Defense.
15. Two ideas to reduce the biggest expenditures:
Social Security: it's hard to track down all the numbers here. But if you raise the minimum age for retirement (to receive social security) from 62 to 70 you can save about $800 billion, maybe more (I am not sure).
Why should we do this? In 1940, the average life expectancy was about 8 years less than now and this number is only increasing. So 70 is reasonable.
Defense: Reducing manpower by 20% and forcing allies to foot some of the bill of defense would save about $1 trillion per year.
Just these two initiatives and nothing else would balance the budget or more.