Potential Alternative to the Current Tax System
Some have proposed that a change in the US tax system be implemented along the lines of a “National Sales Tax” (NST). Such a change in the tax system of the US (or other nation) could have some benefits, but, there are also major problems with such a system, at least as such systems are, generally, currently proposed. One of the most compelling examples of the way in which a NST system is deeply flawed, is the fact that it would require the poor to pay precisely as much as the wealthy for each dollar spent. Since the poor must to pay more of their total yearly earnings each year to sustain their existence, a NST would increase the tax rate as a percentage of yearly income for the poor, while lowering it for the rich. In other words, a NST would effectively be increasing taxes on the poor and lowering taxes on the rich. This would be grossly unjust it it were to be put into practice, and is therefore unacceptable.
As will be elaborated in what follows, the problematic feature of the NST just referenced can be eliminated by establishing a curve in the sales tax rate which applies to the level of spending of the individual citizen to the effect that for individuals who spend less (like the poor), the sales tax will be lower, whereas for individuals who spend more, the sales tax will be higher. In what follows, we will examine some of the potential benefits of such a modified NST system, as well as the necessary changes in the current money system which would be requisite to its establishment. From here on, I will refer to this modified NST as a “Just National Sales Tax” (JNST).
Prerequisites of a JNST System
In short, the JNST requires the elimination of cash as currency in the economy. As of now, various countries around the world are already considering “going cashless” on account of the benefits which it will provide on its own. That is, even without considering a JNST system, the advantages of a cashless society are numerous: The elimination of illicit income streams (and processes) in the economy and the simplification of accounting processes for tax, business and private purposes are a couple of important such benefits.
Some might argue that a cashless society is less convenient, because payments can not be made for small favors which people might do for each other. Besides the fact that new technological innovations will be made to make any transaction between private citizens very easy (that is, even easier than it already is), personal checks can still be used just as easily as cash for purposes where electronic transfer of funds is not possible. For example, if Little Johnny shovels the driveway for Little Old Granny Anderson, and Granny Anderson wants to pay Little Johnny $20 for his work, but neither of them have -or know how to use- a smartphone to facilitate the transaction, Granny Anderson can simply write Little Johnny a check, which he can deposit it at his bank and subsequently claim the $20 worth of goods from the economy using his bank card (anyone who can understand how to use cash can understand how to use a card).
-Centralization of Spending Data
Since all transactions in the economy, for both individuals and businesses, will be cashless and take place as transfers of electronic dollars from one bank account to another, it is required that all transactions be recorded in a centralized system such that every penny which an individual or business spends will be accounted for, and used to determine the sales tax on whatever purchases the individual might make. Just as we currently use credit and debit cards today to make payments which are informed -at light speed- of the available balance in our account to determine if a payment we attempt to make will clear, so too will the sales tax rate be nearly instantaneously determined at the point of sale, as the information respecting the dollar amount of the product will be transferred to the centralized spending data center, and the corresponding unique sales tax rate sent back to the point of sale.
A simple federal law stating that all the bank, credit-card, and related financial accounts which an individual might own must interface with the centralized sales-tax determining sales-data collection facility (perhaps run by the IRS) should do the trick. Any purchase made by the individual, whether it be by debit or credit card, whether from one bank account or another, will thus be registered in the central facility and added to the individual’s account of accumulated total spending over the designated timespan (one year for example) which determines the sales tax rate for that individual. In this fashion, we can ensure that individuals can have as much freedom as they have today in deciding what bank or credit card company to use, without being required to register at one single financial institution in which their total spending data is housed.(Fn. 1)
Implementation of the JNST System
Once the requisite institutions and infrastructure are set in place, the fully automated tax collection process should function very efficiently, vastly reducing the expenditure of resources currently spent on tax preparation services, tax collection agencies and related costs. There are widely ranging estimates as to what the total dollar expenditure per year on such operations are- but, by all estimates, it is very significant.
The JNST system will also encourage saving, especially on the part of the wealthy, and thereby increase the credit available to the banking system for productive lending. This would increase the ratio of productive economic activity (or at least what is intended to be productive economic activity) to non-productive activity.
-Constructing the Curve
As said before, the way in which each individual’s unique sales tax rate will be determined will be by the level of spending on the part of that individual over the course of a designated period of time. Each penny spent by an individual will be taxed at a certain rate depending on how many pennies the individual spent prior to the current purchase over a certain period of time. For example, the first one thousand pennies which an individual spends could be taxed at .001%. The next thousand could be taxed at .002%. In the case of an individual who has spent ten million pennies over the designated timespan (a fiscal year for example) the next penny they spend could be taxed at 100%. etc. As a visual example, reference the crude chart below. (The real curve doesn’t need to be so linear. I just made this one in about 30 seconds by plugging in a few numbers. The real curve will probably be much more smooth, as well as mathematically determined to be of the precise curve so as to mimic, in effect, the best income tax rates as translated into sales tax.)
Proper time spans for “resetting” an individual’s sales accumulation level can be determined. It may be found to be best to set the sales-tax determining sales accumulation level of the individual to “reset” back to zero every fiscal year. (Fn.3)
Clearly, the curve will be constructed such that the less cumulative dollars spent first will be taxed less than the cumulatively greater dollars spent later. This will ensure that the poor will not be burdened with excessive tax, but it will also insure that the wealthy, to the extent that they spend their money and exert greater demands upon the economy, will pay increasingly greater taxes on their personally decadent spending. (It may be useful to look at the disproportionate increase of physical resources demanded by excessively increased spending. There may be a physical economic rationality to this besides the intuitive/moral one.)
Using the JNST
The sales tax curve, once established, will become an economic instrumentality available to whichever minds will be engaged in management of the national economy and in setting the course of the nation’s economic future. For example, it could play a useful role in curbing inflation, without depriving low wage or average wage citizens of purchasing power, by increasing higher spending sales tax rates while leaving the lower spending rates untouched.
It will likely be feasible to use the JNST curve to discourage wasteful economic activity. Higher sales tax curves could be put on individuals who are employed in certain usurious economic activities, like hedge funds for example.
Products whose consumption is economically deleterious can be pinned to a higher tax specific to that product in addition to the JNST. For example, cigarettes, which carry an extra tax today, will be taxed at the unique level specific to each particular individual’s spending, plus whatever additional tax the government decides to impose upon their sale.
Similarly, certain services which are vital to the public well-being, like health-care services for example, can be taxed at 0% on each sale. (However, it would probably be best to have a single-payer national health system to avoid this altogether.)
The JNST can be adjusted for specific groups of people who need more assistance. For example, people who live on Social Security and who have total net worths below a certain level, may be given an individual sales tax rate of 0% or perhaps a low flat rate. Because there are many ways in which the JNST curve can be manipulated, the particular manipulation, either higher or lower, which is attributed to some specific group of people in the population can be “tailored” to the specific kind of relief which the government sees fit to bestow upon each particular group of people. For example, if a person has a child, then that person should be given a tax break. How will that tax break be bestowed upon that person? Obviously, we would not lower the tax for that person’s higher levels of potential spending, we would estimate the additional costs per year associated with the raising of a child, and we would modify the tax rate at the first part (low part) of the spending level such that that amount -or at least a portion of that amount- would be “taken out” of the taxes that person would have paid if they did not have a child. If that person has another child, then the same procedure would be applied again to the lowest portion of the taxable sales levels of that individual as found best. After the point at which the curve was adjusted the tax rate could return to normal, or the curve could simply be translated such that the origin is at a higher level of individual spending for such a person (as opposed to being a 0 for everyone else). So we see that there is more flexibility to the taxing process which enables us to better suit tax breaks to the population sectors which might need such breaks for different reasons.
Because the JNST is intended to replace all personal income and business revenue tax, the business/corporate tax rate in the US will be 0% under the JNST system. This could be very useful, as it would eliminate one incentive for corporations to move to other countries for a lower tax rate. But, it is likely that a corporate/business tax should also be levied on all purchase payments by businesses. It seems likely that this rate should not increase as the total spending of an individual business increases, as the JNST rate does for individuals, for this might discourage useful business activity. Rather, it may be best that there be a flat tax rate on all business sales. As today, we would need to provide incentives to businesses to engage in research and development to facilitate the economic growth specific to the private sector. This could be done by lowering or cancelling the federal sales tax on businesses purchases for R&D. (Fn.4)
Other modifications might be useful. For example, It may be beneficial to remove the sales tax from purchases made by start up businesses for a certain amount of time, to encourage the creation of new useful enterprises. This could have the effect of creating more of a “mittelstand” in the US, as skilled workers and professionals, currently employed in mega-corporations, will see such tax incentives as an impetus to start their own firms. This process could diversify the economy in beneficial ways.
In order to spare ordinary citizens unnecessary tax burdens which might result from the JNST, it may be necessary to exempt certain purchases from the JNST. For example, buying a home is a major purchase. If an individual or family were to purchase a home, then that would immediately put them on a high level of spending for the fiscal year. Thus, they would have a high JNST and they might find themselves in a hopeless situation in which they were unable to afford the necessities of life because of the high sales tax which they would be required to pay on all their goods for the rest of the year. It may be necessary, then, to nullify the sales tax for purchases of homes. However, in order to prevent major inflows of money into the tax free housing market which could lead to major bubbles and housing inflation, we could calibrate the amount of money spent on each successive home which will be counted towards the individual’s yearly spending account (which determines their sale tax rate). Here is a possible scenario which could address this problem: Zero percent of the sale amount for the first home purchased will be attributed to the individual’s yearly spending account; 35% of the sale amount for the second home purchased (if still owning the first) will be attributed to the individual’s yearly spending account; 70% of the sale amount for the third home purchased (if still owning the first two) iwill be attributed to the individual’s yearly spending account for the second home; 100% of the sale amount for any home purchased while still owning 3 or more homes will be attributed to the individual’s yearly spending account. (This kind of procedure could be utilized whether or not the homes were purchased outright or through mortgage contracts.
How are we to apply this system to a national economy in which the individuals living there also have access to other national economies (as when people go on vacation to other countries). A JNST might induce more citizens of the US to go to other countries where they can spend all the money they want tax free. Various kinds of “tax-hustles” might be conceived of for utilizing this loophole. The solution is simple: simply close the loophole. A simple law stating that all purchases by american citizens drawing on accounts in the US will be taxed at the JNST rate regardless of where the purchase is made. In cases in which a US citizen travels to another country which does not use a system which accepts an US debit or credit card, the US citizen will need to acquire the local currency. But, the only way that they will be able to acquire the local currency is by purchasing that currency from a currency trading post. They will need to use their own US credit or debit card to do so, and the purchase of foreign currency in this way will be taxed just as would a purchase of any other product or service in the economy. In cases in which US citizens open bank accounts in other countries intending to transfer money from their US banks into the foreign bank, such that they can spend tax-free money abroad by drawing on their foreign bank account to make purchases, a simple law will be passed which will tax all transfers of money from US banks into foreign bank accounts as if an equivalent amount were spent and taxed according to the JNST. These, and similar measures, will ensure that there is no funny business happening with international purchases by US citizens attempting to slip under the JNST.
1.)However, if the US were to establish a new National Bank -to replace the Federal Reserve- at which individual citizens and companies could open accounts, it may be convenient to have the centralized sales-tax determining sales-data collection facility be located as an operation within the National Bank itself.
2.)From wikipedia: “According to a 2005 report from the U.S. Government Accountability Office, the efficiency cost of the tax system—the output that is lost over and above the tax itself—is between $240 billion and $600 billion per year.” Here is the link to the study: http://www.gao.gov/products/GAO-05-878
3.)(It may be better, however, to look at the seasonal patterns in consumer spending and to find the points at which there is the greatest change from low spending to high spending and to reset the JNST there- such as, perhaps, at the end of winter, where spending might be lower relative to spring and summer spending.)
4.)As a side note, it would probably be best to vary the R$D sales tax rate depending on the kind of R&D which is being undertaken. If the business is a manufacturing firm which is trying to discover more efficient and productive ways of producing physical goods, then the R&D sales tax-break should be greater. But, if a hedge fund is doing “R&D” to find out how better to make money out of nothing, then they should have a 0% R&D sales-tax break. This requires the government to differentiate between production of usefull goods and essential services, versus economic waste. This is a great responsibility, and so the arbiters of such policy should be well versed in physical-economy.