Fixing the Tax System in America

Posted on April 26th, 2006 by Christine.
Categories: Current Events & Politics.

Okay… so this is actually Christopher’s theory and he’s the one who should be writing this post, but he’s in San Francisco right now on a business trip and I’m not patient enough to wait.

So the boy and I often have discussions on how to fix problems in the world and I could literally spend hours listening to his ideas because most of the time, they’re pretty good. A couple days ago, we got onto the subject of taxes (since they were due on the 15th) and how pretty much the only people who pay them are the working middle class. The poor people receive the benefit from our taxes and don’t pay in because they don’t have a high enough income (this group includes illegal immigrants because they are getting paid under the table). The wealthy don’t pay taxes (well, not to the degree that the middle class does because they have the money to hire accountants to find the loopholes for them). The rich often, not always, but often… own their own businesses and it’s much easier to deduct this and that, and spend your money on things that will help your business, than pay that cash to the government. Those deductions save money that someone who gets a monthly paycheck because he’s a floor manager at Target does not. That’s simplifying it a little, but you can see the problems there…

So Christopher suggested a way to solve a lot of tax/government assistance problems in one fell swoop, and I wanted to present it here to see if anyone could come up with a reason why it wouldn’t be a good idea because quite frankly, I couldn’t think of one.

Christopher’s idea:

Instead of having income tax (some states don’t have it already), have a federal sales tax on everything you buy. So basically, let’s say for argument’s sake that the federal sales tax is 20%. If I’m in California, and I go buy a candy bar that costs $1.00, the state sales tax is 8.25% and federal sales tax would be 20%, then I would actually pay $1.28 for that candy bar. If I buy a car that costs $30,000.00, again with the state and federal tax, the car would cost me $38,475.00. That 20% figure may seem high compared to your paradigm of what sales tax should be, but keep in mind, it is replacing income tax. So all that money that they take out of your paycheck if you’re W-4′d would come to you every month and you would be deciding how you spend it. For those of us who are 1099′d and pay our own taxes in April… we wouldn’t.

This benefits us in four major ways:

1. There is no loophole for getting out of paying sales tax. The seller is responsible for collecting and submitting it (which works since when the payer is respsonsible for calculating it, and paying it, there is more of an incentive to cheat than if its the seller’s responsibility). The seller, who could lose his/her business license for not collecting correct sales tax has a stronger incentive to do it the right way, legitimiately, than to not. I am of the opinion that people have an extra incentive to cheat when their income levels fall slightly over the minimum for a higher tax bracket. If you’re taxed 23% for income up to $45,000 per year, but 28% for income above $45,000, and you make $47,000 annually, chances are you will do whatever you can to find a loophole that puts your income under $45,000 in order to save that additional $2,350 you would be paying in taxes since it’s only a $2,000 difference in income and had you learned $2,000 less that year, you’d actually be making $350 more. Screwy system, right? No wonder people cheat.

2. People who have more money, spend more money. Typically, the people who are driving luxury cars ($30,000 and up) are the people who make enough money to afford those purchases. People who buy expensive items like designer clothes and shoes, go out to eat at upscale restaurants, buy season tickets for sporting events, etc. do so because they can afford it. They are the ones in the higher tax brackets. People who have more money, spend more money, and therefore, would pay more in sales tax (which might not even be as much as they would be paying in income tax… they would have more personal control over it since they are the ones that decide how much they want to spend throughout the year).

3. No more rush filing/extensions/penalties/accounting fees on April 15th. The “tax business” is a big one. Companies like H&R Block make a killing because the tax system is America is so complicated and the fear of being audited and having to pay penalties convinces people that they should hire “professionals” to do their taxes. In addition, the amount of time and money the IRS puts forth in processing tax forms, collecting, and auditing could be better spent and more streamlined if they were simply collecting the sales tax from vendors. Americans would save money on tax filing software, the hiring of “professionals,” and penalties. That is money that Americans could put back into the economy in the form of more spending. And the slowed economy around tax time would also be a thing of the past.

4. Illegal immigrants would help to pay for themselves. Illegals, who avoid paying taxes altogether, would be taxed like everyone else based on their spending. Granted, their spending would probably be much less based on lower income levels, but that’s still something going back into the system as opposed to nothing right now.

5. It puts the choice of how earned income is spent, back in the hands of the people who earned it. If you want to horde your money and not buy anything, that’s up to you. But increased disposable income usually leads to increased spending which in turn, leads to boosts for the economy. Instead of the government deciding how much money you’re going to pay in taxes, you would have some control in that based on your own financial situation, which in theory, is how it should be anyway in a free market/capitalist society.

So, that’s the plan in a nutshell. I’d love to hear your thoughts on it because when Christopher explained it to me, I was pretty damn impressed and couldn’t find anything grossly wrong about how this could work.

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