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13.6.07

Sales Tax Bureaucracy

I think there are a lot of things wrong with the idea of exchanging our income and payroll taxes for a national sales tax being floated by a number of people, most notably presidential candidate Mike Gravel. The most important one is that it's regressive* (albeit with an artificially introduced kink at the bottom through a rebate system). But the one I want to talk about now is the vacuousness of its claim to reduce bureaucracy.

A key selling point of the national sales tax is that it would free us from the gargantuan bureaucracy of the IRS. No more filing tax forms with complicated schedules and deductions, and having some percentage of your money go to pay accountants to process them. The problem is, the tax bureaucracy is a function of having a tax system, not of the point in the economy at which the taxes are extracted.

The income tax is extremely simple in concept as well. You take in X dollars over the course of the year, so you pay Y percentage of that to the government. (And it is that simple in practice for those of us who just earn a wage and take the standard deduction -- most of my federal tax-filing time is spent clicking the "does not apply" buttons in H&R Block's online filing system.) The complications come as politicians add various conditions and hitches for different types of income and different types of taxpayers. Over the course of 94 years, our tax system has accumulated a lot of cruft.

So the national sales tax will start out simpler and less bureaucracy-ridden simply because it's new. But slowly and surely, conditions will be added. At the link above, Steven Puma already proposes lifting the tax on "used" items (whatever the legal definition of that winds up being -- the used versus new distinction is not self-evident), production inputs (ditto for needing a complex definition) and education expenses. The experience of states -- who have been charging sales taxes for many years -- shows some of the ways a sales tax can be made more complex. Many states exempt food and clothing from their sales taxes. And of course gas, cigarette, and hotel taxes are essentially extra sales taxes on certain items. And in addition to varying the tax rate on certain items (either as a favor to their producers/users or to encourage/discourage consumption), there's the option of varying the tax rate for different producers or buyers. For example, nonprofit organizations are often exempt from sales taxes. Then there's the question of how to handle the rebate that sales tax proponents rely on to round off the worst edges of the system's regressiveness. Just sending the rebate will require a substantial bureaucracy (and use of paper), and a check being sent to every citizen every month is a prime target for politicians to add various complexities with respect to the size and eligibility requirements. All of this complexity creates the need for more burdensome reporting and bureaucratic processing and enforcement.

Sales tax advocates may not support these additions and conditions. But the point is that in the political process they will happen. Just getting a sales tax bill through Congress will doubtless require the first load of porkish conditions and complexities. Charging the tax at the point of purchase rather than the paycheck is no proof against tax system complexity.

We should certainly simplify our tax system. But that can be accomplished within the income tax paradigm just as easily as by switching to a sales tax that has many other flaws.

*Sales tax advocates like to point out that the Social Security payroll tax is regressive too -- but the simplest way to fix that is to roll it into the progressive income tax.

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