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Pros and Cons of a National Sales Tax

By on November 24, 2011 in Tax

Pros and Cons of a National Sales TaxThe discussion of taxes can make most Americans confused and frustrated. It’s a complicated system that has been developed over the past 200 years. What began as a means to fund a war turned into the way to run the largest nation in the world.

Whether you are Republican or Democrat, rich or poor, you are paying taxes in this country. The state sales tax and income tax are the largest sources of revenue for our states and nation. The debate in recent years has been whether the current method of taxation is effective.

The income tax as we now know it came out of the Revenue Act of 1913. It placed a 1% tax on incomes above $3,000 and a 7% tax on incomes over $500,000. Today, the tax rate holds around 35%.

The suggestion of a national sales tax to replace the current income tax plan came in 2010. It has been proposed that it could drastically reduce the national debt without drastically cutting spending. It was estimated that a national sales tax could bring an additional $17.3 trillion in revenue for The United States. The proposed 23% sales tax rate is equivalent to that of a 23% income tax rate. Other sales tax plans have a smaller sales tax partnered up with lower personal income and corporate tax rates so the country isn’t completely dependent on one segment of tax revenue.

Debate over a national sales tax uncovered a number of potential benefits as well as negative aspects of the plan.

Potential Pros for a National Sales Tax include:

  • The elimination of all income taxes. This means that annual filing of income tax forms through the IRS would also be eliminated as taxes would be paid at the point of sale. A large portion of the IRS would also be eliminated.
  • Encourages saving and investing due to taxes being assessed only when money is spent rather than on what is held by the individual. The trend to consume more would begin to decline while conservation would increase.
  • Those who spend more also pay more in taxes. The wealthy, who have more money, traditionally spend more money so the tax advantage that many wealthy individuals receive from investing would be eliminated.
  • Only new items purchased would be taxed. Conservation would increase as more individuals seek out used items to avoid paying higher taxes.
  • Everyone living in the United States would pay a sales tax, regardless of their citizenship.
  • Those participating in illegal activities would no longer avoid paying taxes as the tax would now come from items purchased.
  • Americans receive more power in how their money is divided up as it is based on what is spent rather than what is earned. (A system more like a “free” society.)
  • Businesses would be able to lower costs and hire more employees due to their own tax rates decreasing.

Suggested consequences to a national sales tax have been:

  • Lower income families would be paying a higher percentage of their income in taxes. This makes a national sales tax a regressive tax.
  • Consumer spending could potentially decrease which could harm the economy. (Some debates have said this would level out after a period of adjustment.)
  • A loss of jobs in the form of attorneys, accountants and human resource employees due to an easier tax system.
  • Mortgage and consumer debt would increase. Due to a higher tax rate on items purchased at the time of sale, a larger amount would then be financed over the course of the loan. This would increase the amount of interest paid on debts thereby greatly increasing consumer debt.
  • Tax advantages to owning homes could cause home prices to decrease drastically. Advantages to improving the efficiency of homes would also decrease.
  • The costs of moving to a national sales tax would be very expensive to the country. Not only would the changes be expensive to implement but new options would need to be developed to fund social security.
  • Retirees who have already paid taxes on the income they have earned would then be taxed at a greater level on items they consume. Essentially they would be paying greater taxes on already taxed income.

Is a National Sales Tax the Right Fix?

A national sales tax could be the answer the government needs to deal with our nation’s tremendous debt. It could allow American citizens more of a sense of power and belonging to their country. A national sales tax could cost the government far too much money to implement and the job loss involved could be tremendous.

However, we must consider history. The income tax started out extremely small and has grown substantially. Would a national sales tax follow a similar path or would the government be able to stick to whatever income was brought in through a fixed sales tax rate. Would a national sales tax lead to a balanced budget amendment as well? Expect the debate to continue on as long as the United States is trillions of dollars in debt.


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