Editor’s Note: Views expressed in guest columns and letters to the editor reflect the views of the author, not the views of The State News.
With the “fiscal cliff” quickly approaching, policymakers in Washington, D.C., are rushing to reach a solution to our government’s deficit problem. It widely is accepted that raising taxes dampens economic growth, and doing so would be unwise and risk sending the economy spinning into another recession.
Conversely, the odds are not good that our representatives successfully will hack away at costly government programs to do the job either.
My solution admittedly is implausible in the short run and, in fact, offers no solution to the immediate budget dilemma.
In the long run, however, here is a great idea — an idea that offers financial stability, steady growth and job creation.
The idea is to replace the federal income tax with a federal sales tax. A national sales tax brings with it a plethora of benefits; but first, a brief overview of how it works.
It functions almost exactly like a sales tax. Wait — it is a sales tax. Just like the one charged by the state on almost everything you purchase.
Today, you might go to the ice cream store to buy a cone for $3. If you do, you will pay an additional 6 percent in taxes to the state of Michigan.
If we added a national sales tax, that amount would go up a bit. Estimates suggest if the federal government were to add from 20 to 25 percent in tax on that ice cream cone, the effect on government revenues would be nil, i.e. our new sales tax would be revenue-neutral.
Keep in mind I offer this idea to replace the federal income tax, not to serve in addition to it.
Think about it. Your paycheck would be completely yours. No federal tax withholding, no nothing. You get a raise this Friday.
Would you be inclined to work more? Would this not provide a financial incentive for people to work more hours and seek to build more wealth? Would risk not now pay a higher return and be more worthwhile?
All work pays, or at least pays better.
Imagine the possibilities if every person’s income increased by his or her income tax rate — 15 or 28 or 32 percent. People might even save more, which benefits the economy, too.
It serves to create the capital required to finance investment in new businesses and business expansion, and that means more jobs.
Here’s another great benefit. No more filing income tax returns. Every working American spends hours and hundreds, if not thousands, of dollars preparing his or her income tax returns each and every year.
The savings in time and expense just in the filing process alone is enough to make you consider the change seriously.
Estimates are that it could save $500 billion per year. That’s some serious cheese.
And wouldn’t the amount of people paying their fair share rise? There would there be less tax cheating, fewer people working for cash under the table and fewer people hiding money in shoe boxes, sock drawers and Switzerland. Ask Mitt Romney if he wouldn’t bring those foreign accounts home.
But, Alex, you say, what’s on the flip side? What’s the downside? There always is a downside.
Well, it is possible that compliance could be a problem with a national sales tax, too. If you buy something under the table, you could avoid a big tax. Black-market purchases might save someone the full tax rate, and that could be as much as 25 percent. So there are issues.
Another prominent argument against a national sales tax is the claim that it is regressive. This means the tax is higher for low-income people than high-income people.
This, however, is not true in the case of a national sales tax. The tax everyone pays is directly related to what they consume.
Presumably, the wealthy consume more and they will pay more. It is instead considered a proportional tax — meaning an equal rate for all.
It is true that low-income people have less income to spare and spend most of their income on necessities such as food and housing.
In this sense, it might be a little more harmful to those with lower income. A commonly proposed solution simply is to offer a rebate for a portion, if not all, of the tax based on some level of income.
And while this idea won’t be implemented any time soon, it certainly seems like a good idea to advance economic growth and prosperity.
Alex Brooks is a guest columnist at The State News and an economics senior. Reach him at email@example.com.