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14.6.07

Salex Tax Redux

In the comments to my previous post, Joel Monka brought up another argument for a national sales tax that's worth commenting on because it's structurally similar to my rebuttal to the "reduces complexity and bureaucracy" argument. Monka says that the sales tax will reduce under-the-table payments:

There is a huge underground economy that does not pay income tax- services, from nursing to yardwork, drug dealers,etc.- every time you've ever been asked to pay cash it was probably because it wasn't being reported; none of these people pay income tax. But they all buy things, which means they all pay sales tax.


In my previous post, I said that it doesn't matter where in the economic cycle you withdraw your tax, politicians will still load it down with complexity. Similarly, I would argue that it doesn't matter where in the economic cycle you withdraw your tax, people will still be motivated to create a black market to evade paying the tax. A 23% tax is pretty good motivation to look for someone willing to sell it to you on the sly.

The examples Monka gives of under-the-table income -- yardwork and drug dealers -- are particularly bad ones, because they're not likely to change under a sales tax system. In both cases, the same transaction is being taxed under either system, it's just redescribed from "income for the yardworker/dealer" to "sale of yardwork services/drugs." I don't see why changing the description would change people's motivation to report the transaction and pay a tax on it. This is particularly true for drug dealing, which is illegal independent of the taxes paid on it. People engaging in a drug deal are highly unlikely to want to advertise that fact to the government.

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