Eliminate the IRS?

Matt Drudge is reporting that a "centerpiece" of a 2nd Bush term would be a proposal to eliminate the IRS. This is not a call for the elimination of all taxes, but it sounds as if Bush might propose the elimination of the income tax. The thinking is, I assume, that if we eliminate the income tax we would not need the IRS; I do not think one logically follows the other, since the IRS levies and collects all sorts of taxes, but that is beside the point.

In place of the income tax, the Administration would supposedly seek substitute either a national sales tax or a "value added tax" (VAT). A VAT is a system (found mainly in Europe [why didn't John Kerry propose this first?]) where increments of tax are added to goods and products along the chain of manufacture and production until the product is purchased by the ultimate consumer who, of course, swallows all the incremental taxes which have piled up along the way.

Opponents of a national sales tax always claim that it discriminates against poor people (in much the same way that the liberals never tell us who the "rich people" are, no one ever defines "poor people"). They claim this will be a regressive tax, meaning that it will hit low income people proportionately harder than it hits upper income people. (I never hear a liberal complain about the most regressive tax of all, the federal tax on gasoline, running barely ahead, I suppose, of cigarette taxes.)

Leaving aside the obvious, mainly that EVERYTHING hits low income people harder that it hits upper income people, it seems that we can minimize much of the impact on the poor caused by a national sales tax if we exclude from its levy those items which make up a disproportionate amount of a poor person's purchases, i.e. food. Most state sales tax schemes do not levy a sales tax on food. In some states, the exemption from sales tax applies only to food items which must first be "prepared" in order to be consumed. For example, meat and eggs are excluded from sales tax, but a Big Mac is taxed.

The person who makes a million dollars a year probably does not spend it all, whereas the minimum wage worker with a family of 4 most certainly does. Is it fair to exempt a huge percentage of Taresa Heinz's income from taxation, while struggling Joe Smith has to pay tax, in effect, on most of what he earned? That is certainly an argument that can be made, and with some justification.

We are kidding ourselves if we think the implementation of a national sales tax will eliminate all disputes about taxation. Think of the arguments from manufacturers, retailers, and consumers as to which products should be exempt from the sales tax. Should we tax golf clubs but not basketballs? Gas guzzlers but not super economy death traps? Pianos but not guitars? Nintendo but not Barbie? Are goods taxed but not services? Are all services taxed? Do you want to pay a sales tax on open heart surgery? Would that be covered by your medical plan?

I think the biggest attribute of the national sales tax is that it is collected at the point of sale. You buy a stapler and the tax is rolled in and you walk out the door with it. Bingo. You've just paid tax on the income you had to earn to buy the stapler. Sure, it jacks up the cost of the stapler, but by how much I can only speculate. Perhaps there is some equation to be calculated whereby the amount of money to run the national government is divided by the total of the GNP which will be subject to the tax. The resulting percentage will be the tax rate. How often will this be adjusted? Sadly, that will be up to the politicians.

April 15 will cease to have special meaning to Americans. Local TV news crews will have to find something else to do that night besides setting up a camera outside the post office and asking people why they waited until the last minute to file. No income tax return will be due that day because there is no income tax. You paid your taxes throughout the year when you made your purchases.

There is, however, a downside to the "point of sale" collection of the tax. Right now, because of the genius of income tax withholding, most Americans are blissfully unaware of how much income tax they are actually paying. The amount that is withheld from every pay check is “money you never had” and most of us do not look at it as "money spent." On the other hand, with a national sales tax, whenever a taxpayer buys something, the tax will be paid right then and there. The tax could have a noticeable impact on the sales price or large items like cars. Can't you envision Americans complaining about paying taxes every time they buy something? Can't you see politicians demagogue about it by saying something like this: “I don’t see what was wrong with the old system. Now, Americans every day are shelling about more and more of their hard earned money to pay taxes. I've heard a lot of complaints.”

A national sales tax would make the burden of taxation visible instead of invisible. (This could be a good thing for those who want taxes cut, since the more aware the public is of how high taxes are, the more likely they will demand tax reduction. Hmmmm . . . do you think this is what the Republicans are really after?)

The government is now dependent on receiving withholding taxes remitted by employers on a quarterly basis. Would it be feasible to require merchants to remit sales tax receipts on the same timetable? I don’t see why not.

With no income taxes to pay, there would be cheating on income taxes. Surely there would be some cheating by merchants on the sales taxes they collect and remit, and there is little way to gauge which type of cheating would be the more pervasive and costly. It does seem, however, that whatever government agency ends up with the job of tax collection, it would have an easier time auditing a merchant to determine if it submitted its sales taxes than the IRS now has auditing individual tax returns.

Whereas I think the national sales tax has its benefits, I frankly do not see the benefit of a VAT. It seems that such a system would be far more open to fraud and manipulation than would a national sales tax. It also seems that it would be more difficult to apply exemptions in a VAT system.

Last but not least, the heavy hitters who would most oppose a change to the current system are the lawyers, lobbyists, and accountants who now make lucrative livings off of manipulating the current tax system. These groups have immense money and exercise huge influence in our government. Do you think H&R Block has an opinion on this issue? You better believe they do.

To end where I started, the IRS will not go away. It may be morphed into some other agency, but there is still a job to be done. Someone must monitor whatever system we have and enforce its rules. The government needs money, lots of it, and the efficient levying and collection of taxes is the lifeblood of the public good.

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