No more Mr. Tax Man?

What if we were taxed on what we consume instead of on our income?

Holly Lahd

Last Saturday, at the state Capitol, two rallies occurred simultaneously that, at least on the surface, seemed to have nothing in common with each other: an anti-tax protest and a global warming rally. The messages they sent were clear: 1) no more new taxes and 2) do something about global warming. But these two groups, ironically both protesting on the Saturday before tax day, do have a common solution that might fit them both: a reform of the present federal tax code into a consumption tax.

As students, most of us don’t pay enough taxes to break the bank. However, with any luck, one day we will be making enough money to really value the numerous possible deductions. But with the deductions come a lot of headaches trying to figure out which ones you can claim and which ones will get you in trouble with the Internal Revenue Service if you do claim them. To give you some perspective on the deduction fun to come, the current federal tax code is 67,204 pages long.

A column of 800-odd words doesn’t have the space to really address the complexities of taxes; that level of dissection I’ll leave to you. But let me explain how a consumption tax could be designed.

Instead of filing out a yearly 1040 tax form, a consumption tax could work as a national sales tax. Many economists conclude that a national sales tax of 23 percent could replace income taxes. In order to prevent a burdensome amount of taxes on society’s poor, all individuals would receive a sizable rebate or allowance to cover the additional tax on essential living items like food and shelter.

Another way to design a consumption tax is to continue the tradition of filing yearly tax forms, but exempt the first 15,000 or so dollars spent on consuming goods from taxes.

Economists generally like the idea of a consumption tax, because it has the potential to increase the national rate of personal savings. The United States has one of the lowest personal savings rates in the industrialized world. In fact, in 2005 the, U.S.’s personal savings rate was negative. As it stands with the current income tax, all income is taxed before it is put into savings. If you invest that savings and earn a return on it, the gain is again taxed as earned income. This can discourage people to save for the future. A consumption tax wouldn’t tax income or gains and would thus eliminate the savings hurdle. A higher savings rate will strengthen the economy, and that’s why former Federal Reserve Chairman Alan Greenspan endorses some form of a consumption tax.

In other words, a consumption tax taxes people on what they take from society and not on what they put in. That’s the reason that many environmentalists support a tax on consumption. By paying that immediate sales tax, individuals are more aware of the things they are buying. A consumption tax more accurately ties taxation and spending with their environmental impact.

Another benefit of a consumption tax is that it would be a whole lot easier to understand than our current tax code. I expect that no one, except tax preparers, would be disappointed at a tax code that the average American could figure out on his/her own. And to those who want to pay fewer taxes, the answer with a consumption tax is simple: Just consume less.

The idea of a consumption tax is more than theoretical; the idea has advocacy organizations and an existing bill in Congress. The nonprofit organization Americans for Fair Taxation advocates for the replacement of the income tax with a national sales tax by repealing the 16th amendment that mandated a national income tax. They estimate that an average single taxpayer should receive an annual consumption allowance of $10,210 to cover extra sales tax on basic needs consumption.

A version of the consumption tax has been introduced in the House of Representatives this year and has more than 50 cosponsors (H.R. 25). There is a Senate version, too (S. 1025). A version of this bill has been introduced many times by Rep. John Linder (R-Georgia). The co-sponsors are overwhelmingly Republicans. Democrats often cite that a consumption tax would unfairly impact the poor. That’s not a small concern, either. Educating people how the new system works would be another undertaking. It’s also important that people understand that the consumption allowance isn’t a free gift from the federal government that they should spend immediately, but rather it has a purpose. However, with careful design and implementation of the consumption allowance, the consumption tax can work. The biggest looming challenge is to pass the bill with the bureaucratic IRS giant standing by.

This year’s tax season might be over, but since “nothing is ever certain except death and taxes,” it’s not too late to begin the consumption tax conversation for next year.

Next April, instead of two separate rallies with small altercations, maybe the global warming and the no-more-taxes crowds can protest together at the Capitol for a consumption tax. Who knows? There certainly have been stranger bedfellows.

Holly Lahd welcomes comments at [email protected]