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Taxes, Part II

The benefits of a sales tax.

by James Leroy Wilson
August 29, 2001

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Taxes, Part II_James Leroy Wilson-The benefits of a sales tax. Plato's Republic, based on the question of "What is justice?" is a dialogue featuring Socrates that, early on, concludes that the best society is one which is poor yet free. But since people desire luxury and refinement, the dialogue leads us to a society ruled by philosopher-kings, an elite class that governs everyone precisely because it knows what's best for everyone.

This is similar to the political position of the Left: under the guise of democracy, liberals give more and more power to unelected bureaucrats and federal judges who presume know what is best for us. Liberal intellectuals desire luxury and refinement for themselves, yet romanticize the non-consumerist pleasures and virtues of the poor. The Left thinks it can have it both ways.

Hold on to your chair, but I, too, think we can have it both ways. I think one who wants to live modestly and simply ought not to be punished for doing so. I also think those who want the good things in life should be free to have them - if they are willing and able to pay the price of the extra government needed to pay the social and environmental costs.

The problem is we have everything backwards. Government's chief revenues come from taxing people on what they have and earn; instead, we should tax what they purchase and consume. Income taxes, by diminishing the returns of dollars earned, discourage work, saving, and investment. But working and saving are inherent social goods Creating wealth is good - we can't eliminate poverty just by re-arranging wealth, we must expand it. Allowing your money to be used by others to innovate and expand their businesses, providing lower prices and/or more jobs, is good.

Consumption, on the other hand, is necessary to get by, but is not necessarily good. The bigger TV, the better air-conditioner, traveling first-class, the luxury SUV, the mansions - I don't begrudge the rich or anyone else for having these things. What does bother me is that the rich can get soaked by high taxes on the wealth they generate, the wealth that creates opportunities for others, while they pay fairly low, if any, sales taxes on the frivolities of conspicuous consumption.

And it holds true for middle and lower classes. They, too, are robbed by income and payroll taxes, yet the low sales taxes, along with other government policies and the consumer culture as a whole, encourage them to spend, spend, spend, even into debt, when they should be spending smarter and saving more. Property taxes add to the damage: homeowners pay more in taxes because of what government assessors say - if they can't afford to pay the taxes, they have to sell (perhaps at lower than the assessed value) and move out. Landlords pass the cost of the taxes on their renters, who, too, may have to move out.

Therefore, I ask: What if every municipality, county, and state, and also the federal government, decided to abolish all income taxes from work, all interest income, all capital gains taxes, all property taxes, all surcharges on objectionable items, and all tax breaks, and replaced them all with one flat, percentage sales tax on all purchases of property, commodities, imports, stocks, energy, and services - in short, on all commercial transactions?

Let's look at the advantages at the federal level only. Out of a ten trillion dollar economy, it spends two trillion, which is 25% of the 8 trillion of non-federal spending. A 25% federal tax on all transactions would be imposed - okay, perhaps 15-20%, since the feds wouldn't and shouldn't tax state and local government spending.

It will never happen. The corporations that own the media companies, seeking to preserve the religion of consumerism, will report that such a tax would be unfair to the poor. And that the super-rich, who even with their extravagances spend a far smaller percentage of their wealth than the rest of us, would benefit too much. And then, of course, they will break for commercial.

But what would be the real consequences? At each stage of production, businesses would pay the 20% tax on all expenses, which they would pass on in the price to their customers, whether they are other firms who would then also pass on the cost, or individual consumers paying retail prices. Prices, then, would go through the roof. Then again, individuals would be free to keep all the income they earn. There would then be three pressures in the market and in government, all of them good:
1. Keeping prices low.
2. Encouraging thrift and conservation.
3. Lowering tax rates, even if that meant less government.

Individuals would keep all the income they have earned. Beyond bare necessities, they would have real choices in how much in taxes they want to pay, depending on how much they want to consume. They'd want to keep their bills down. They'd be more inclined, even more than now, to look for deals and discounts, and eschew fashionable, expensive brands. They would desire energy-efficient homes.

Businesses, likewise, would want to keep operating costs down. And, sensitive to a more critical, thrifty populace, they would have incentives to develop products that are both inexpensive and that actually improve quality of life. They would be less willing to spot and exploit a fad, not wanting to risk spending all the money - including taxes - developing something that the market may have grown tired of.

Further, voters would be inclined to vote for lower taxes, knowing that in this case, lower taxes would benefit themselves measurably, and not just the rich. They would be forced to examine their own beliefs, and determine what they really want, and what the public really needs, from government. I, and I think the vast majority, are willing to pay taxes that provide for individual and collective security through law, its enforcement, and defense. What more the people would want and demand, I don't know. But what they would want, they would pay for themselves by their own increased spending, or risk budget cuts. They could not vote for more government services by taking from the earnings of others.

Ultimately, we'd reach a measure of social stability, where the tax rate would have an identical effect on all sectors of the economy, so as to not be a factor at all because it shows no favoritism. The pressures for low prices, thrift and conservation, and necessary government services would reach equilibrium. The culture would adapt to the new system, and if we remain as materialistic and acquisitive as we are now, at least we would have done so under a genuinely free market and not one driven by lobbyists influencing government policy.

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Progressive Conservative writes:
August 29, 2001
They'd be more inclined, even more than now, to look for deals and discounts, and eschew fashionable, expensive brands. They would desire energy-efficient homes, said James Wilson.

I have long been a fan of a simplified tax system. One downside of this one is rather obvious: the unemployment created when businesses that depend on the luxury trade go under. The ill-fated luxury tax of a few years ago did not punish the rich - they simply stopped buying certain items. One one of the reasons they are rich is that most of them can get along quite well, and will, without new luxuries.

Another is that the economy could shrink enormously as retail demand drops off. The stock market would no longer be the savings instrument of choice, because as profits shrink so will dividends - government bonds could become again the preferred means of investment.

Third, increased spending as such does not create wealth - the scriptural bag with holes applies here. The only high sales taxes that are stable sources of income are those upon food, which would make taxpayers out of the poorest of the poor, and upon substances and services with a high rate of addiction, like alcohol and tobacco.

If you begin to make exceptions to a simple idea, the footnotes soon outweigh the text. Then what's the point?


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