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Monday, October 25, 2004  

Law: National sales tax is bad, backward idea

When I say that discussions in the blogosphere start with a bias to the Right, I can rely on someone denying that. Then the someone will go on to say the South had a right to secede from the Union or there is no difference between a non-viable fetus and a person. Some people in Bloggersville do not realize how far out their beliefs are. Robert H. W. Welch, the founder of the John Birch Society, would be at home here. Language he was fond of, such as 'pinko,' 'Commie' and 'statist,' is tossed around rather, well, liberally. A recent blog entry by Dave of The Big Lowitzki's Random Ravings is demonstrative. Though he is not a Right Winger, he found himself discussing a topic with a far Right bias. Dave considered proposals for imposing a national sales tax. He blogged his analysis at Blogcritics.

There was a lot of talk recently about creating a national sales tax in place of an income tax, supposedly causing more "fairness". I strongly agree with the assumptions that this will create more fairness, and strongly disagree with an idea of a national sales tax. Here is why:

First, we need to take a look at what a national sales tax would look like. Lately there has been much talk centering on the possibility of replacing out current income tax system with a national sales tax system. Fairtax.org has a somewhat clear look at what this look would like. Politicians like Tom Delay (Rep., House Majority Leader) and Dennis Hastert (Rep., Speaker of the House) have begun to address this system, with Hastert saying that he will attempt to push this sometime next year. Even George W. Bush chimed in this week saying that this is an idea "that we ought to explore seriously," though him and his administration have since attempted to back away from those original comments.

There are different national sales tax proposals floating around, but I will try to give an overall summary. The national sales tax plan would set a flat sales [tax] on good[s] purchased. There are different ideas of what this would like - do services get taxed? What about homes? Healthcare? Used goods? But generally, we would expect to pay a percentage on everything that we purchased. Fairtax.org states that a 23% rate on all goods would be necessary to meet the nation's current budget. Along with this tax rate, most proposals include a rebate. In the Fairtax.org plan, the rebate would be a flat amount based on the poverty level, which would mean a family of four would receive a $361 monthly rebate, regardless of your income.

It is commendable that Dave rejects the idea of a national sales tax, which would be inherently regressive. But, it is odd to actually be discussing such a plan, which is a flat tax proposal in disguise. Mainstream thinkers in economics, law and public policy would not consider a national sales tax because it would conflict with federalism, as well as be unworkable. However, in the Rightward blogosphere those issues are ignored.

One of the impressions one gets looking at some of the material supporting a national sales tax is that it has not been considered and rejected. It has been, before the barrier of federalism arose.

The Tax History Project tells the tale.

One of the most sustained periods of interest in a national sales tax came during the early 1940s. . .

Treasury officials evaluated sales tax plans according to several criteria, including revenue yield, equity, and administrative concerns. In addition, resurgent inflation during the early war years prompted officials to consider what effect sales taxes might have on rising price levels.

Generally speaking, Treasury tax specialists consistently attacked federal sales taxes as regressive. As one report put it, "All general sales taxes apply the principle of ability to pay in reverse; they are regressive instead of progressive." Moreover, officials insisted, sales taxes would likely create "very unequal economic effects among taxpayers." As one report put it, "the general application of a constant formula must necessarily induce haphazard and undesirable results."

Treasury also cited various administrative problems as impediments to a national sales tax, including the need for a new collection mechanism. Furthermore, efforts to craft a list of exempted items were certain to prove nettlesome. Some studies saw a future clouded with protracted wrangles over very specific exemption lists.

As the costs of war mounted, the Roosevelt administration considered softening its stance. But, ultimately, it rejected a federal sales tax.

As late as 1942, Roosevelt was still reading to reporters from a briefing sheet entitled "Evils of the Sales Tax." Equity concerns made a federal sales tax unpalatable, Roosevelt insisted. The levy, he said, "violates the ability to pay. It falls more heavily on the poor; it is, in fact, a 'spare-the-rich' tax."

The idea, a very bad one, has, fortunately, remained buried. In the interim decades, policymakers began to take the concept of federalism -- the division of powers between a national or central government and local authorities -- seriously. Federalism confers some powers in the national government and others in the states and lesser entities. The power to tax is considered a concurrent one. That means both federal and state governments can exercise it. But, in practice, states have been the units of government imposing and relying on sales taxes. Indeed, many of them rely on such taxes as a major source of revenue. If the federal government were to preempt them by imposing its own sales tax, they would be at a loss for necessary funds. The Articles of Confederation, which preceded the Constitution, forbade the federal government from collecting taxes. In regard to a national sales tax, that tradition has continued.

Governors are already concerned about creeping preemption depriving them of needed funds. Former Michigan Gov. James Engler expressed those concerns in testimony before Congress in 2001.

Preemption of state regulatory authority and restrictions on state revenue sources is becoming a very serious intrusion into state sovereignty. Some prime examples include:

~ The Estate Tax

~ International Trade

~ Financial Services

~ Food Inspections

~ Telecommunications

In addition, the patients' bill of rights and energy legislation include significant preemption concerns. Moreover, the education bill now in conference -- which features many provisions that governors support -- cuts governors out of the process of writing state education plans. This is classic one-size-fits-all Washington micromanagement at its worst.

[This material has been edited for brevity. See the source document for details.]

Any effort to preempt the states in regard to a national sales tax would be vehemently opposed. I also believe the Supreme Court would side with the states if the matter ever reached it.

The reasons why a national sales tax is a bad idea are unlikely to be discussed in the blogosphere. The Right Wing bias is so entrenched here that the idea will be treated as if it is mainstream instead of the prattle of fringe groups on the far Right. That lack of balance is one reason I urge people to read sources of information other than blogs.

8:20 PM