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A Sales Tax is a Horrible Deal

The August 15 issue of The New Republic has an article that I never expected to see in a magazine that claims to speak for liberals. The article by Niall Ferguson and Laurence J. Kotlikoff is called “The New New Deal” and it favors a huge sales tax to replace the personal income, business income, and FICA taxes. For this whopping sales tax they offer us a new universal healthcare and social security system. There are some good ideas here. But to pay for everything by means of a huge sales tax is obscene. It transfers the tax burden from the rich to the poor. A sales tax is a horrible deal.

Of course, we need a new, revamped Social Security/healthcare system that serves all our needs. Thinking of all of this as one big system enables us to build a more utilitarian, efficient and fair system. The authors offer good approaches that I may discuss in the future. For the present I focus on the huge sales tax: 33%.

A sales tax is the worst possible way to collect taxes. Regardless of how it is structured, when you have a sales tax, BINGO - the rich pay less and the poor pay more. Allow me to show you this with a couple of examples.

Let's take a poor person making $400 a week living in California. For each item he buys he pays the federal 33% PLUS the local 8%, or a total sales tax of 41%. To simplify matters, let's call it 40%. Since he spends everything he makes, every week he pays a 40% tax.

The authors say that poor people would get a rebate and therefore this approach is not regressive. Let's look at this. Rich people will have no forms to fill out. Big multinational corporations will have no forms to fill out. Who will fill out forms? People on the bottom of the economic pie. Will they know that they need to fill out forms? Will they do it? Will they do it correctly? Will they need to pay others to help them?

And when will these poor people get their rebates? They were able to buy $400 worth of goods with $400. Now they can't. 40% of $400 is $160. Where will they get $160?

Progressive? No way.

Now let's look at a rich person who makes $1 million per week. There are such people. Some of them are CEOs. Let's assume this guy loves his luxury and spends $400,000 each week. $400,000 X .40 = $160,000. 160,000/1,000,000 = 16%. Actually, he invests the remaining $600,000, so his tax rate is something less than 16%.

The poor guy pays 40% and the rich guy pays 16%. Furthermore, the more the rich man invests the less he pays in taxes. The poor man hasn't got anything to invest so he pays more in taxes. The transfer of the tax burden from the rich to the poor is complete.

Most people in the middle class spend the vast majority of their income. Their taxes are closer to 40% than to 16%.

A sales tax is a terrible idea for everyone except for fatcats. No way can it be considered to be a new New Deal. A sales tax is a horrible deal.

Posted by Paul Siegel at August 9, 2005 5:26 PM