Commentary

Imagine There’s No Income Tax

By Stephen Slivinski
April 14, 2001
Imagine never having to file a tax form again. Imagine never again having to sit at your kitchen table slaving over your 1040 form. Imagine never having to pay an accountant to file for you or an attorney to sort out complex rules.

Here’s the current reality: Americans will spend a total of 6.1 billion hours this year filling out tax forms, filing records, learning tax rules, making calculations and engaging in other tedious exercises that accompany the income tax system in the United States. That amounts to about 48 hours for each taxpayer, all to make sure your tax forms are correct so you don’t run afoul of the 8,920 pages (and growing) of Internal Revenue Code and regulations.

But what if you paid taxes only on what you purchased, not what you took home in your paycheck? The way to do that would be to replace the income tax completely - tear it out by its roots - and replace it (along with the corporate income tax, the estate tax and most excise taxes) with a national sales tax of 15 percent.

Imagine you cash your paycheck, take what you need to buy groceries and pay the bills, and put the rest into savings. Under the current tax system, you still have to report that money to the IRS and you would have to pay tax on most of the dollars you earned, regardless of whether you spent it or saved it. What’s worse is that the dollars you saved will be taxed again: assuming you didn’t place your savings in a tax-deferred savings account like an IRA, the interest earned on that savings will be subject to tax, too.

Under a national sales tax, by contrast, the dollars you spend are taxed, but the dollars you save are not. You pay the tax at the cash register. No forms, no fuss and no intrusion into your personal finances by the IRS.

Some may worry that a national sales tax on top of a state sales tax would make shopping trips more expensive, but most economists note that the income tax, corporate income tax, and excise taxes already make goods more expensive. Since these taxes will be abolished, the price of consumer goods could actually fall as a result, as economist Dale Jorgensen of Harvard University suggests.

Also, getting rid of the taxes that penalize investing and saving will fuel an increase in economic growth, which means increased business competition. The marketplace will be more vibrant and that will make room for more competitors vying for your attention with ever-lower prices.

The poor pay a larger share of their income for essentials like food and clothing, so wouldn’t a national sales tax mean the poor also spend a greater share of their income on the tax than the rich do? Not if a universal rebate for all households was provided. This rebate would effectively exempt all consumption up to the 115 percent of the poverty level and exempt many poor working families from taxes altogether.

The national sales tax is a better deal for consumers and taxpayers. The sales tax would be clearly stated on the purchase receipt every time you buy something. It would be a clear reminder to voters of what the tax rate is. Because it’s so visible, it would be hard for politicians to raise that tax without people noticing. That scares most politicians.

For too long politicians have kept government growing at the expense of taxpayers. A convoluted income tax has aided them in this quest. There is an alternative. It’s time to stop merely imagining simpler and fairer and lower taxes. It’s time for a change.

Stephen Slivinski is a fiscal policy analyst at the Cato Institute. For more information on the national sales tax, see the Cato Policy Analysis “Emancipating America from the Income Tax: How a National Sales Tax Would Work,” by David R. Burton and Dan R. Mastromarco.