Can the Sales Tax be a Fair Tax?

Over the last few months, we have heard proposals for a new tax system by most of the candidates that want to be the Republican Nominee for President in 2012. Herman Cain has his 9-9-9, Perry his ‘postcard plan’, but all of them come under fire by the opposition with the same argument: “The poor would have to pay more in taxes”. Notice here that nothing is said about the status of the rich. What they are really arguing for is the status quo. Why? Power and Greed.

Sure the ‘fat cats’ on Wall Street are robbing us blind, but then, so are the politicians – whether that be in Washington D.C. or your home town. Insider trading, land deals, kickbacks – and a thousand other ways I don’t have the mental wherewithal to even dream up – but those are all topics of future posts. For now, suffice it to say that the current tax law is all about Congress (and the White House) and the power they wield with their ability to tweak the tax code in favor of their donors and causes. Ultimately that leads to an unfair tax code – whether you are the benefactor of the injustice or the victim.

So could we have a fair tax system? It’s probably easier than you would think – at least to design. I’ve heard some argue that everyone should pay something in taxes, and I tend to agree. For example, no person in your state is exempt from paying sales tax. In most states, businesses purchasing items for resale do not pay taxes, nor do non-profit or government entities. In some states, like Indiana, some items are not subject to sales tax – unprocessed foods and services come to mind.

The Cain and Perry plans both propose scrapping the current tax code for a tax that is ‘more fair’ and, I believe, both with the eventual goal of a national sales tax (NST) system. Let’s skip the middle man and go straight to the NST. Let’s drill down and see how this could be made fair to everyone – at lease, mostly fair.

Since studies show that most people don’t care about the rich, let’s look at a struggling family (or individual) and their basic needs.  Note that I said needs, not rights, wants, desires, preferences or any other semantic parsing. NEEDS – housing, food, basic utilities (electricity, gas, water and sewage). These items will account for at least 80% of the gross income of all low income households. So let’s make them tax exempt. Not the individuals and families – the NEEDS. That means that sales tax would only apply to a persons discretionary spending – cars, cell phones, potato chips, movies, consumer electronics, etc. Let’s throw some numbers out there…

A family of four that makes a total of $50K/year. Assuming that my figure of 80% for NEEDS is correct, this family will have only $10K in discretionary spending. With a NST of 11%, that family would pay about $1,100 per year in federal sales tax – a real rate of 2.2%. When you consider that this family is already paying 7.65% for Social Security and Medicare in today’s tax system.

Let’s face it, millionaires and billionaires have far more discretionary funds than a struggling family – and they spend a lot more for things like taxi or limo service, air fare, hotel rooms, fine dining, and more. Even though they may save while purchasing their lavish homes, they still spend a lot more than the average family and will, by default, pay more in taxes.

If there is no federal income tax and an individual that works for a company like IBM or Wal-Mart does not have taxes taken out of their pay check, it would seem reasonable that monies paid for services would also be exempt. For example: automotive service, manicures, legal fees, lawn care, computer service, etc. It could also be argued that all labor other than direct employees should be taxable. This opens that proverbial can of worms by trying to pin down an air-tight definition of ‘Direct Employee’. Looking to states like Indiana, where professional services are not taxed, and Florida, where they are, may offer a solution.

Reality bites. When discussing abolishing the current tax structure and implementing a new ‘fairer’ system, reality will bite hard. No matter how fair the new system, the odds of getting Congress and the President to sign it into law are so close to nil, I’d say my odds are better at winning the PowerBall (and lotteries aren’t legal here in Alabama). Politicians in a fair tax system are the biggest losers, and this isn’t a reality show – it’s reality.

Please comment on this idea (particularly the NTS plan). I really would like to hear what you think.