The national sales tax is back in the news with Herman Cain’s 9-9-9 Tax and it scares me. It scares me because too many people think that it’s a simple solution to the current labyrinth tax code. It’s not a simple solution because there will always be sales excluded from the tax, lobbyists will insure that, and there will be conflicts and confusion between what the Federal government will tax and what the states will tax. However, the tax’s apparent simplicity could make it easy to get through Congress and leave us with a new tax code that needs regular tweaks to be effective. Further complicating the issue is that any Federal sales tax proposal makes some misplaced assumptions.
Years ago, a client loaned me his copy of “The Fair Tax.” to read. I had some real reservations then and I still have those reservations. If anything, I am more convinced that a national sales tax is not the solution everyone believes it to be because it makes two very questionable assumptions; that a national sales tax won’t change (decrease) discretionary spending and that corporations will do the right thing.
Increased sales tax will decrease what I can purchase to keep within my budget. If I have a $100 to spend on a new watch, I know I can spend about $90 on the actual watch and with my local sales tax (8.8%) still come under budget. But, add on more sales tax and I have to look at less expensive watches. Mr. Cain’s 9% limits me to a watch costing $84.00. However… when they decided on what the percentage for the sales tax would be, it was based on my spending $90 not $84. They’ve lost $0.54 in tax. Extrapolate that across the country and a 9% sales tax becomes 10% or more to generate the needed income. Which causes taxpayers to scale back purchases even more, and that increases the shortfall in projected taxes…on and on. Either the tax has to continually rise or the deficit will grow.
Proponents of the national sales tax usually argue that the proposed savings from the elimination of FICA and Medicare paid by companies for their employees will solve the purchase power concern. Since they will no longer have that expense, the business will pass the savings on to consumers. I really doubt that. Some companies will or use the money to postpone a price increase. But too many will use the savings to pay themselves. Corporations will use it to increase dividends and keep shareholders happy. The consumer will see little of corporate savings in lower prices. And if a company does lower the price of their product by the savings from matching FICA and Medicare, it won’t come near offsetting the cost of the sales tax. I hired for only 6 weeks this year and what I will pay in employee matching would only reduce the cost of a return by $0.25. Let’s say she was a full year employee and I gave all the savings back to clients, the savings on each return would only be $3.00. However, my average client would be paying about $12 in sales tax under Mr. Cain’s plan. The tax savings, if given to consumers, won’t cover the tax increase they will pay.
I have problems with any national sales tax being labeled as “the” tax solution. A small sales tax might be an option to supplement income tax but it’s not a simple solution. It doesn’t matter if it’s being proposed to stand alone or be one leg of a proposal, sales tax isn't a magic bullet.