Why a Consumption Tax?
Excerpted from Campaign for Liberty
When it comes to taxes, especially income taxes, nobody likes paying them. Everyone believes they should be lower. And all kinds of people complain about how taxes are levied and that their respective tax group is taxed unfairly. There is a way to ensure that everyone is taxed fairly though. Abolish the income tax and replace it with a consumption tax. One type of consumption tax is also referred to as a federal sales tax.
The idea behind the consumption tax is that anything we consume with our income, a few examples being clothes, furniture, cars, or houses will be taxed. Our income will no longer be taxed though. This will spread the taxation out evenly. A person who earns $40,000 annually will consume much less than a person who earns $500,000 annually. Therefore, the person who earns more will spend more, and they will pay more in taxes.
Some opponents to this idea say “the sales tax rate would be something like 60 percent” (Suarez, 2005). But as Tony Quain points out, “these are the rates that would be needed if large groups of constituents were rebated the tax and if large sectors of the economy were exempt from the tax, e.g., food, medical care, education, services, etc.” (Quain, n.d.). Reasons can be made to exclude nearly any consumer product for one reason or another. But that is what will drive up the tax to unreasonable amounts. By excluding even one sector, it will only open the door for other sectors to be excluded. All consumable goods need to be taxed to ensure fairness and to keep the tax rate reasonable.
One of the great things about a consumption tax is that it allows you to save your money untaxed. If you make $20 dollars per hour or $40,000 dollars per year, what you make on your paycheck is what you take home. Your gross pay is your net pay. And by having this, you are free to save as much as you wish without being taxed on what you save. With the current income tax, your paycheck is taxed before you receive it. Exceptions are things such as a 401(k). A 401(k) has contribution limits though. With a consumption tax, it would be like having an unlimited 401(k); contribute as much as you like or are able.
Another point those in opposition to a consumption tax make is that those who have been saving, especially those who are already retired and living from their savings will be double taxed. As Len Burman points out, (cited in Suarez, 2005) this is a “reason why people think it's so unfair, you can't get out of it, and it's basically changing the rules after you've been making decisions over a whole life.” Possibly a system could be set up to exclude current retirees. But even if it could not, do we take away a transition such as this from the countless number of people in future generations who would benefit from it? We cannot let an unfair and lopsided tax system continue.
According to the National Taxpayers Union the top 1% of taxpayers, ranked by adjusted gross income, paid 39.89% of federal personal income taxes for 2006; the top 50% of taxpayers paid 97.01% of taxes that same year. That leaves the bottom 50% paying 2.99% of the taxes. (NTU, 2006) Many of the people in that bottom 50% are recipients of the social programs the top 50% pay to support. People have no incentive to work and no reason to try and move up or make more money. The harder someone works, the more hours they put in, and the more money they make forces them to pay more taxes. It also limits their opportunities to take part in social programs more and more until those opportunities are completely gone. If a person were to work ten hours of overtime one week, they could put that money in the bank and save it until they were ready to spend it. Under the current tax system that overtime pay would put them into a higher tax bracket and they would lose a larger percentage of that money than they do of their regular paycheck. Why would they want to put in those extra hours to bring home a smaller percentage of their pay? The incentive is gone. Under the consumption tax system there is a drive to work harder, make more money, and move up. “The general idea is not to punish work, which is a creative force for good in the world, but instead punish consumption, which is necessary but nevertheless destructive.” (Quain, n.d.)
In 1783 James Madison (cited in Norris, 2008) said “Taxes on consumption are always least burdensome because they are least felt and are borne, too, by those who are both willing and able to pay them.” A consumption tax spreads the tax burden out evenly, based on what the consumer uses. It also promotes saving money as well as working harder and striving for more. In this day and age personal and national debt seem to be growing while unemployment and dependence on social programs are also on the rise. A tax system that promotes savings and striving to move up in the work force, while at the same time placing an even burden on everyone just makes sense.