A hard-working American has just finished their 40-hour week. It’s Friday, and the check can’t come sooner. Bills need to be paid, and a family needs to be fed. This individual makes $50,000 a year, but as they open up the letter to see the fruits of their labor it is clear something is missing. Looking down at the list of taxes removed from their paycheck, they find the source of their loss. The federal income tax has stripped 20% of their wages away.
Though on the surface their earnings seem like they should lead to a comfortable life-style, they find themselves once again living paycheck to paycheck, unsure what the next month might bring. No matter how hard they try it seems they just cannot get ahead. This is a problem common to everyone. There has to be a better way, but a solution does not need to come from some new, convoluted policy. In fact, it can be found in a traditional form of taxation well known throughout the histories of civilization, including our own: a tax on commodities, or as we call it, a sales tax. Applying this on a federal level we get the National Sales Tax, or NST, a system that would benefit the economy by encouraging personal savings, stimulating job growth, and simplifying the tax process.
Tax reform is on everyone’s minds today and rightfully so. Many see the current system as a confusing myriad of paper work and bureaucracies – a system so difficult to navigate that entire professions have been dedicated to deciphering and navigating its intimidating maze. With the NST all of this laborious process could be eliminated at the check-out stand, leaving the power of taxation squarely in the hands of people. In practice, the implementation of a tax on all goods at retail would encourage consumers to save money. That money would become untouchable to the government if the practice of income tax was abolished. State governments are already using this method with success (see Figure 1 below).
Under the current system any interest gained on savings becomes taxable income. Taxes gains on investment is an unappealing exercise that hampers economic growth by dissuading reluctant investors. This economic growth diminishes within a consumer culture that demands it, and businesses that rely on those investments become unable to invest in new products, equipment and technologies for the market. An additional effect of our current double taxation of saving and investment income is that it increases the cost of capital. That makes it more expensive for businesses to obtain the financial resources they need to invest in new equipment and technologies (Stansel).
A culture more able to contribute to this growth through personal savings would find these investments returned back to them in the form of jobs, goods, and more money as these businesses expand. Since taxation only enters the scene when a final product is sold, a more meritocratic capitalist system is promoted as consumers and companies alike pay closer attention to where their money is going and whether goods and services are worth the cost. As Joe Messerli states, Consumer prices of certain items would fall since labor and tax compliance costs would be cheaper to businesses, (Messerli).
A fine line is walked by workers and businesses under our progressive tax system. It is a balancing act between tax brackets that can limit productivity simply through the anticipation of paying more for earning more. Hard workers begin to avoid overtime and wage increases in fear of being bumped into the next tier. Every time they go up a tax bracket their hourly work for additional work performed decreases. There are little incentives for the movement within the arrangement. An ideal capitalistic system would rely on merit and quality, but these attributes become meaningless as income drifts between percentages.
The wealthy may find ways to skirt these boundaries, but the average worker is often left to perform this balancing act on their own. Businesses often have to play this game as well, stalling their own growth through reduced production. Again, a NST negates this uneasy practice by focusing on the actual consuming of a product or service instead of the income generated by it. There is more incentive for marketing a quality product, for producing the product, and therefore, more work for the worker. In turn, the worker has more incentive to help achieve these business goals as he knows he will be rewarded for doing so.
While many of the benefits of a National Sales Tax point to a more growth oriented and meritocratic economy, it does involve overhauling a complex tax system built from the introduction of the modern income tax in 1913, a system honored and experimented with as the US economy struggled to finance its war efforts during both World Wars. It may be unclear if an NST would be able to adequately fund such a powerful and important state without drastic budget cuts caused by the loss of income tax revenue. Facing such an incredibly large deficit, it can seem to be an unpredictable way to deal with the financial problems this country faces. Being untested and relying heavily on a free market with limited government interference, it requires a dedicated participation of its citizens and their interest in personally managing their economy through investment.
It can be said, however, that these short-term issues can be offset by the growth such an economy would achieve by a saving populace. Having a direct connection with a simplified economic system would mean that people would find it a necessity to participate in the development of this system, being more intrinsically tied to its success or failure. The opportunity provided by a wealthier population would create a powerful incentive to grow and empower the economy as quickly and as successfully as possible, as all would benefit from such an achievement. As more goods are produced and more money finds its way into the hands of more citizens, the ability to both spend and save would bring about the dual effect of growing economy and supplying tax money necessary to the government, a funding provided by entrepreneurship, innovation and endeavor. This long-term capitalistic system would be strong and stable.
In many ways, being a flat tax, an NST in theory could create a greater wealth disparity as it would lead to a higher percentage for lower incomes than higher incomes in relation to the percentage of the sales tax. However, a flat tax across all products is not necessary, meaning that certain goods could be taxed higher or lower as needed. Certain taxes on goods wealthier citizens might purchase could be raised to compensate for lower taxes on necessary goods such as food and water. More accessible, every-day products could also be taxed lower to make sure the consumption of a particular income level matches it needs. As the tax is in the final product, saving and spending is still in the hands of the consumer without the need to dip into their income.
Another issue that might arise is that the population could begin to over-save. In this case, not enough money is flowing back into the economy and therefore the benefits of using the NST plan disappear. However, in a market full of varying products at different tax levels and prices it would be hard to prevent a populace from consuming at an appropriate level in accordance with their individual wants and needs. The benefits of saving are largely in the anticipation of buying upwards – purchasing that one might consider expensive. That money enters back into the economy in accordance with demand, and if that demand is a luxury (as more expensive products tend to be), that product’s tax level may be higher than more necessary items.
Investment plays another key part in this economic model as well, as businesses will provide consistent tax revenue in the production process as they try to meet the demands of the public. The opportunity provided by a tax-free saving system naturally lead to a population with an achievable end goal of moving upwards as they participate more in the economy. It is possible to gradually implement a Nationals Sales Tax in tandem with a phasing out of the income tax system. In this way flaws and holes in funding possibly created by NST could be identified and addressed without sudden failure in a particular area of the economy, such as social services or military expenditure. As the economic responsibilities on an individual and direct level become more apparent, the possibilities and opportunities created will lead to more money finding its way into people’s paychecks. As products become more affordable, the ability to save money will become much easier.
This sense of security will encourage a consumer culture to produce more, consume more, and invest more. Personal financial responsibility will become less convoluted, and taxes will be much easier to calculate beforehand, leading to more manageable and transparent budgets. Identifying the gaps left by the absence of income tax revenue will be a necessity, but they will reveal themselves with a gradual and steady progression in such an important transition.
The National Sales Tax system is a novel idea and has the potential to create economic growth that is naturally stifled by the current progressive income tax system. Though it relies heavily on the personal actions of citizens, their direct tie will be so apparent they will see the necessity to participate in their economy and their dependency upon it. Supply and demand for certain products can be addressed promptly by a less burdensome tax system on businesses and individuals, and more money saved gives greater opportunity for investment and individual economic movement. Lifting tax brackets will lead to a system based on meritocracy and quality and make higher levels of productivity possible. With time and observation, the market will provide a clear road to a free supply and demand dynamic that could create the strong and stable economy we need.
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