Tuesday, November 10, 2009


While searching the “archives” of THE WANDERING TAX PRO for something else I came across my first post on the subject of the “Fair Tax” – a national sales tax.

While I am certainly not at all sold on the idea, since this is a time when alternatives to the current federal income tax system are being discussed and considered, and there has been talk of a VAT (value added tax), which I do not at all support, the idea of a national sales tax should also be seriously looked at.

I have decided to “reprint” this post from the true “infancy” of TWTP. It was originally posted on Tuesday, September 4, 2001 (I started TWTP in July of 2001). Here is the post in its entirety –

“I labored all through Labor Day, working on various amended returns and assorted “stuff”. I did, however, manage to take time out for dinner with family at the Lincoln Inn in the Heights section of Jersey City (best Chicken Cordon Bleu around).

The older I get, the more I agree with the old adage – ‘Children should be neither seen or nor heard’. Especially in restaurants!


This summer, Representative John Linder, along with 7 co-sponsors, introduced THE FAIR TAX ACT OF 2001, which has been sent to the House Ways and Means Committee to review.

The bill attempts to ‘promote freedom, fairness, and economic opportunity’ by abolishing the Internal Revenue Service and repealing the federal income, payroll (Social Security and Medicare), estate and gift taxes. The funds generated by these taxes would be replaced by a National Sales Tax of 23%.

While this particular bill, as written, is not the answer (it calls for a complicated registration of all households and a monthly sales tax rebate program), and certainly will not be passed by Congress, it does bring up a viable alternative to the current tax system – a national sales tax.

1) A national sales tax would be relatively easy to administer. Almost all of the 50 states already have a state sales tax, with all the appropriate collection and auditing functions in place. The national sales tax could be incorporated into the collection and compliance process of the various state sales taxes, with the states receiving a ‘commission’ from the federal government.

2) A national sales tax (with perhaps exemptions for food and clothing purchases) would eliminate the problem of the ‘underground economy’, which escapes taxation under the present system. Everyone, regardless of the source of their income, would pay sales tax at the point of purchase.

3) A national sales tax would encourage saving and investing. As the tax is assessed on retail purchases only, income from investing activities would not be subject to tax.

4) If under the national sales tax system corporate and business income taxes are abolished, along with the need for expense compliance costs, the savings would {I was naive – should have said ‘could’ - rdf} be passed along to consumers in the form of reduced prices and to stockholders in the form of increased dividends.

5) States like New Jersey have had much more success raising revenue from sales tax audits than from audits of income tax returns.”

I still agree with the 5 points made above.
I also still believe that children should be neither seen nor heard - especially in restaurants!
So what do you think?



Tony said...

I completely agree with this idea. I heard of it a long time ago and always agreed on it. Not only does it encourage people to save and invest, it also recuperates tax revenue from people who work under the table or get their money illegally. Those two facts alone make this a very good backbone idea. Quite honestly, this country needs something that will give them a good reason to save money, because right now the majority spend their paychecks before they even get them.

Bruce said...

I have thought about this and read about this. The concept is sound enough but lacks discipline. The “underground economy” as you put it would only thrive in a situation like this. To keep that going it would seem to this tax preparer that crime would escalate, thus causing insurance rates to sore, in turn causing the cost of goods to sore out of control.

People spend their paychecks before they get them is a proportional way of survival. Doesn’t make it a good thing or a bad thing, it is just a way of life for some. So using this as a means to “teach” our neighbors to save and invest is a lot like a story I read written by George Orwell titled 1984. Frankly if that happens, I’d find myself in the situation of Winston Smith.

Over all the idea is a sound one but, in this world I find it to be unrealistic. Namely, look at all the people who would become unemployed, No IRS. . . Then there is the problem of what would our politicians do, if there was a tax so simple as this?

Kirk said...

This particular bill is horrible not only because of the registration and "pre-bates" but the tax rate of greater than 30% (the 23% rate includes the sales tax) that applies to *everything*. Could you imagine the uproar if someone tried to slap a 30% sales tax on a house?

I'm not a huge fan of the sales tax in general because of the enormous rate that would need to be applied. On top of that, the sales tax would not be applied to everything for long. The powerful lobbies would riddle holes in the sales tax just like the income tax and the rate would have to shoot upwards every time.

I'd much prefer scrapping the individual tax code and implementing an income tax with a high standard deduction and few itemizers. Something akin to the current AMT for individuals and that could certainly be used as a model.

For businesses, changing the tax to be a tax on book profits earned in the US would be a great way to simplify the code. Take book profits and multiply by a tax rate. You're done.

Of course, if that happens I'm out of a job. I'm not heading back to school yet.

Dutchman3 said...

Good concept, lousy plan! All 50 governors, through the National Governors Association, are opposed to any kind of national sales tax.

In addition, here are a few other flaws in the plan:

(1) Federal taxation of State and Local spending is inappropriate if not unconstitutional under our republican form of government!

(2) Seniors get treated unfairly by double taxing their savings when spent and forcing them to resume paying for their SS pensions
with their sales tax dollars.

(3) The Family Consumption
Allowance is actually a huge cash grant entitlement at a time when entitlements are squeezing out discretionary spending in the federal budget.

(4) The inventory tax credit would add $600 billion to the budget deficit in the first year of implementation.

(5) The "cold turkey" implementation would place the entire economy at risk. No other nation has successfully funded their central government with na sales tax.

(6) Retail prices will rise by 15%-20%.