The United States is currently suffering under an unimaginably complex tax system. The maintenance of this beauracratic behemoth costs the taxpayers billions of dollars every year. The direct costs borne by the taxpayers are small in comparison to the costs borne by corporations and individual taxpayers in attempting to comply with all of these Federal government regulations.
The people of the United States and their elected representatives are now looking at two options to replace the current tax system: The Flat Income Tax and the National Sales Tax.
The Flat Income Tax represents a modification of the current tax system, where the National Sales Tax represents a complete re-architecture of the entire tax system.
A National Sales Tax Would Improve the Trade Deficit
This is a bold claim, so I will explain it in simple terms using a small model of the global economic system. In our model, we will have only two companies and two consumers.
Our two companies are Alpha Company and Charlie Company. Alpha Company manufactures widgets in their plant in Plano, TX. Charlie Company manufactures similar widgets in their factory in Shanghai, China.
Our two consumers are John and Chon. John lives in Los Angeles, Califoria. Chon lives in Beijing, China.
For the purposes of our example, let us state that it costs Alpha Company $100 to manufacture a widget. To this $100, we must then add the burden of income taxes. Again, solely for the purposes of our model, let us state that this burden raises the cost of the Alpha Company Widget by $20.
Alpha Company must pass these additional costs on to the consumer. Therefore, if either John or Chon decide to purchase Alpha Company brand widgets, they must pay more for them.
In effect, the Income Tax makes Alpha Company widgets more expensive (and therefore less desirable) than Charlie Company widgets.
Now let’s look at the effects of a National Sales Tax on international trade.
Once again, we will state that a widget costs Alpha Company $100 to produce. However, this time we will not burden Alpha Company with income tax.
In this model, there are no extra costs for Alpha Company to pass on to the consumers, John and Chon. When John decides to buy a widget, he is taxed the same National Sales Tax — no matter which widget he buys. This allows Alpha Company to compete on an even level with Charlie Company.
Moreover, when Chon decides to buy a widget, he does not pay our National Sales Tax for the widget. This makes Alpha Company brand widgets price competitive in the China as well as in the United States.
Let me restate this succintly: The Income Tax destroys our national competitiveness and increases our trade deficit; The National Sales Tax restores our national competitiveness and enables us to compete on an even playing field with the rest of the world.
The Income Tax Discourages Working; The National Sales Tax Encourages Saving
Any good animal trainer knows that animanls do what you reward them for doing and avoid doing what they are punished for doing.
The Income Tax effectively punishes people for working. For every extra dollar you make, you are forced to pay more Income Tax.
If you work for $10/hr, the income tax takes approximately $3.50 of that. You are now working for $6.50/hr. Isn’t that significantly less motivating than $10.00/hr?
By reducing our motivation to work, succeed, and produce, the Income Tax robs our national economy of much of it’s vigor. It hinders our ability to compete with other world economies.
The National Sales Tax, on the other hand, punishes Americans when they spend money. That $2 beer now costs $2.50. The $100 Walkman is now a $125 Walkman.
This acts to discourage spending. Discouraging spending automatically encourages savings. Savings become investment. Investment becomes wealth.
What does American business require to build and grow? Investment capital.
Where does American business currently get that investment capital? From overseas.
Why does American business get its investment capital from overseas? Because Americans don’t save and invest.
Who profits from American business? The investors.
Who ends up owning American businesses? Foreigners.
We must be careful here not to blame the foreigners who now own a large number of American businesses. They took the risks and invested money when we didn’t, and the markets rewarded them for this. What we must do, however, is build a tax system which enables and encourages Americans to save and invest in America.
Building wealth for foreigners is a good thing; Building wealth for Americans is a better thing.
Objections to the National Sales Tax
The National Sales Tax is regressive. It taxes poor people more heavily than rich people.
In many states which currently collect sales tax, basic items are exempted from sales tax. These items include food, clothing, and housing.
Exempting these basics of living from the National Sales Tax has the effect of moving the National Sales Tax from a regressive to a progressive tax.
The National Sales Tax will be difficult and expensive to collect.
Forty-five states are now collecting state sales taxes. The Federal government will be able to outsource the collection of the National Sales Tax to the existing organizations within the states.
Organizations to collect the National Sales Tax will have to be built in only five states.
Switching to a National Sales Tax would require a repealing of the 16th Amendment.
The 16th Amendment allows the Federal government to levy an income tax, but does not require it to do so.
We could switch to a National Sales Tax and repeal the 16th Amendment at some point far in the future.
Our nation is at a critical crossroads where we must choose to stay with our current broken system of taxation, attempt to repair it, or replace it entirely with something new.
The principles of economics show us clearly that the National Sales Tax is the right path to take to ensure the economic prosperity of America for our children and for their children.
Now is the time to build a tax system which encourages American values, supports American business, and builds prosperity for our futures and our childrens futures.