Tax spending to spend

BY JUSTIN SUGG | JUNE 12, 2009 7:26 AM

I never thought when I wrote my first paper arguing for a national sales tax that I’d write a column denouncing such a plan 10 years later. Like Frankenstein’s titular character, I’ve seen my vision perverted beyond my darkest nightmares.

Ironic as it may seem, certain circumstances have pushed Democratic lawmakers to consider a tax plan they have long denounced.

The recession has created enough shortfalls in our current revenue-generating system that lawmakers are proposing new ways to bring in money. Federal spending at unprecedented levels has exacerbated the problem by forcing a fiscal showdown between the United States and its debt holders. The heightened spending levels have now made issuing debt an insufficient means to funding programs. The current budgets — though massive in their scope — do not include what is perhaps Obama’s most expensive plan yet, a national health-care system.

Democratic law makers have proposed to institute a value-added tax to cover the shortfalls so every American may have health coverage. There are a few variations in the plans proposed ranging from increased taxes on junk foods to legalizing marijuana (though that proposal is discussed mainly in state legislatures), but all of them propose taxing anywhere between 15 and 24 percent of all goods and services purchased in this country.

While this proposal is a relatively fresh idea in the federal government, it’s not a new concept. Countries in the European Union all have some sort of value-added tax; some U.S. lawmakers have actually drawn inspiration from the EU model. U.S. politicians and aspiring candidates have proposed similar measures in the past.

Some form of national sales tax has been around for centuries. Perhaps the most famous example was the hated stamp for imported tea that prompted the Boston Tea Party and the slogan, “No taxation without representation.”

There are some benefits to the traditional idea of a national sales tax. It is simpler and easier to collect. Instead of everyone filing a return, we’d all pay just flat amount to local retailers and other points of sale. The U.S. government would then collect the revenue from those points of sale, rather than every registered individual in the country.

Perhaps the biggest benefit will be for businesses. They would keep more revenue to reinvest in their companies. The tax rate would be super competitive, drawing in more foreign direct and portfolio investment. We already see this in Europe with Ireland. It replaced its corporate tax rate with a 28 percent sales tax and became the “Celtic Tiger.” The Irish pay slightly more for their goods and services but gain so much more in job growth.

Of course all these benefits immediately evaporate if you add a sales tax instead of replacing the current tax code with it. It would be truly regressive and provide more hardship to people already hit by this recession. Lawmakers argue the benefit for people having free access to health care would offset any additional cost at the checkout counter, but what about the people already receiving free health care? Many individuals who qualify for Medicare and Medicaid are also people who do not make enough to qualify for income tax and literally receive free health care. None of the plans I’ve read look as though they’ll see an increase in benefits (in fact some proposals also call for decrease in those benefits), but they would still pay the sales tax.

The increase in government spending is likely to produce inflation. Inflation will hinder consumer buying power. Compound that with an artificially higher price set by the government, and you’ve got a recipe for disaster.

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