The aftermath of another tax day, that yearly act of civic servility, is a good time to review again the benefits of the national sales tax proposal that I have offered. While it is fundamentally a simple plan, I know that there are many questions about how it would actually work.
For example, many people want to know which, if any, of their deductions would remain under a national sales tax. Actually, the question will no longer have meaning under a sales tax. What are deductions deducted from? They are amounts subtracted from the total taxable amount we report to the government as our income for the year. But under a national sales tax, we will not have to give the government such a statement, because it will be none of the government’s business how much money we have made.
Elimination of the government’s access to this knowledge will restore a very key element of our privacy and of our sovereignty as a people. The government shouldn’t have this information. In fact, it has been one of the cornerstones of socialist and communist control to turn such information over to the government so they can cast longing eyes on the money that we make and the wealth that we build up. In addition to whatever amount they actually take at a given time, they are also able to store up the knowledge of where wealth is, and who is getting it, so that they can move to take as much more of it as they choose whenever they think they can get away with it. Income and wealth reported to the government for purposes of possible taxation are, by that very fact, already only partially owned by the citizen.
Under a national sales tax, there will be the equivalent of a 100% income tax deduction for everybody in America — individuals, families, corporations and businesses — because all the money that we make would be withdrawn from the government’s purview. And it would get back in the government’s purview only after we decide what to do with it. Our wealth will be no legitimate concern of the government until after we make the decision to spend particular dollars on taxed goods.
I am also frequently asked what provision I would make for those who are not able to afford to pay much, if any, tax at all. Isn’t a sales tax “regressive?” Doesn’t it hit hard at those least able to pay? A well-conceived national sales tax would indeed include some respite from taxation for such people — as it would for all Americans. It would do so in a way that creates no new special interest but, rather, empowers the entire citizenry to reclaim an important piece of their sovereignty. One good proposal among several is to structure the system so that there is a market basket of goods and services not subject to the federal tax. In this way, we not only make sure that the needy can avoid taxation on dollars needed for the basic necessities of life. We also make sure that every citizen has the leeway to control the level of taxation imposed on him by the government.
How is this accomplished? Simply by structuring the system to include a market basket of goods and services not subject to the federal tax. This means that anyone who wants to give himself a tax cut can do so simply by confining himself to those goods and services not subject to the tax, covering every area of basic need in this society. There would be food, clothing, housing, and transportation items not subject to the tax. For every basic activity of life, there would be a corresponding set of products not subject to the tax.
Of course, the tax free items will not be fancy luxury products. They’ll be the products that provide the basic requirements needed to fulfill the given purpose of that object. Just necessities. Poor people and people on fixed incomes won’t be subject to taxes if they confine their purchases to these non-taxed goods. But anyone at all will be able to get out from under the federal tax without having to go to an accountant or hire a lawyer. The whole marketplace will reorganize itself in order to help anyone who chooses to avoid taxation to do so.
Imagine the resulting situation — and realize as you do so that it can really happen if we have the political will to choose the right kind of tax reform. The American marketplace will have tax-free “K-marts” — stores that will stock on their shelves only tax free goods. Anybody with common sense will be able to give himself a tax cut simply by confining himself to the tax free economy. With the equivalent of duty-free stores all over the country, people will not need expensive financial advice in order to reduce their tax burden; they’ll just need a little common sense. This will put within the reach of every American financial options that are now only within the reach of those who can afford expensive tax advice.
Such a system will rectify the fundamental inequities of the so-called progressive income tax. It is not entirely true, practically speaking, that the wealthy are taxed at progressive rates under the current system. Along with those nominal rates there exists an elaborate structure — the art of “tax planning” — that allows those with means to avoid some or most of the burden of the progressive income tax. Under a national sales tax, no one can “game” the system to avoid paying his fair share of the tax burden.
In addition, of course, many people who currently pay no tax because they are criminals — either tax criminals who evade taxation by fraud or deceit, or those who derive income from illegal activities in the first place — will have to pay the tax when they use their wealth to make purchases in the open market. Under the present system, those who disregard the law don’t pay taxes. Their ill-gotten gains never contribute much to the welfare of the rest of us. But, under a national sales tax, if criminals want to enjoy the fruits of their illegitimate labor by buying all the nice things available in this society, they will have to pay the tax.
All of these improvements to the equity of the tax system will be combined with a more profound virtue of the system — that it puts in place a natural limit on the government power of taxation. Under the sales tax system, legislators will have to think like businessmen. If they impose a tax rate that’s too high, they will raise the price of the good and their revenues will fall, just the way it does for businessmen. Accordingly, our politicians will have an inescapable incentive not to over-tax us in any given point because if they do they lose their money.
The Founders, including Hamilton in the Federalist Papers, described the system of taxation put forward in the original Constitution in these very terms. They understood the virtues of a system that would encourage both a healthy prudence in the tax policy and unity in the different economic sectors of the society. Right now we have a tax system that encourages conflict between various sectors of the taxpaying public: a “let’s you and him fight” tax system in which the politicians manipulate us into attending chiefly to whether our fellow citizens are paying more or less than we are. The politicians divide us in order to conquer our money. And they’ve done a very good job of it.
We can see an example of the alternative that a sales tax system would provide by recalling the tax on luxury boats that was passed several years ago. When the federal government imposed that tax, tens of thousands of people were threatened with the loss of their livelihood. It was not just the workers, or the managers, or the consumers. The tax threatened everyone involved in the pleasure craft industry. For this reason, the tax had a unifying effect. Instead of class resentment and warfare, all those involved in the industry stood solidly together in its defense. With such unified resolve, they were able to get the attention of the politicians and make sure that the tax was repealed.
This is the kind of result that would follow from a sales tax system. Whenever politicians abused their taxing power under such a system, they would create a coalition of forces that united people in order to save what is precious to all of them — the source of their commercial life and livelihood.
All these advantages would come from the national sales tax system which I advocate. We should not permit it to remain just a possibility merely because it is not always easy to imagine what life would be like under such a dramatic reform. The accomplishment of tax liberation will require that we rouse ourselves sufficiently at least to imagine what tax freedom would be like and that we have the faith to move toward that freedom even if every detail is not perfectly foreseen. In economic as well as political affairs, a free people must sometimes earn that freedom by bearing the burden of the risks involved in change. As with all human action, the risks of intelligent change seem greater than they are and the risk of clinging to the familiar is frequently the greatest risk of all.
We should have the courage to embrace the agenda of tax liberty, confident in the fruits it will bear for the whole society, just as our Founders moved courageously to make political liberty a reality. They acted in the face of much greater risks than we face from a mere change of the form of taxation. The implications of the challenge of tax reform go well beyond the dollars and cents of tax policy and, if we shrink from it, we will be shrinking from the kind of responsible action that constitutes practical self-government. In facing the challenge to reclaim control of our wealth, however, we will demonstrate to ourselves and our government whether we retain the capacity to do what only a free people can — to shape our own future by our own choices in the face of an always imperfectly knowable future. Or, do we prefer to continue letting a jackbooted IRS shape our future for us?