The Pros and Cons of the National Sales Tax

 

The Pros and Cons of the National Sales Tax

More and more often you can hear an idea that IRS became too expensive and invasive, and that current tax system is too complex. This paper evaluates the pros and cons associated with national sales tax compared to the current tax system.

National Sales Tax as an Alternative Tax Method

National sales refers to taxation based on consumption rather than a taxation based on earnings. This tax means to be imposed on the final retailer’s sales of product and services to the consumers. Some analysts claim that the sales tax would range between 31% and 65% to trade the revenues from the current federal tax system (Gale, 2005), and others are less pessimistic and predict that the rate would fall between 23 percent and 30 percent (Marotta, 2013). Nevertheless, national sales tax is called "Fair Tax" as ideally, it should charge each consumption one time and maintain quality to prevent going against customers’ choices and ensure low rates. Also, it is worth mentioning, that national sales tax is a typical regressive taxation technique. Basic items that are necessary such as food, clothing and shelter should not be taxed, to ensure that national sales tax avoids typical shortcomings of the regressive tax and that low-income individuals receive the necessities without paying the substantive part of their income in taxes.

There are both advantages and disadvantages of the national sales tax system. In my opinion, the biggest advantage is that it would national sales tax vent tax evasion. There are many illegal citizens, and people who purchase goods to turn them into the black market (McDonald, 2015). However, sales occur in one form or shape. This is an indicator that there is a possibility to avoid taxation, due to the lack of filling annual taxation forms. Each person pays their share depending on the quantity of purchasing conducted every month.

Additionally, the sales tax is not complicated and highly visible to the taxpayers, as it is a fixed percentage on the top of the price of goods or services and paid immediately with the purchase. The national sales tax would mean less paperwork for individuals as the tax will be collected and paid by the retailers, not consumers (Gale, 2005). This also means that the IRS was founded by federal tax agency.

 Another significant advantage, in my view, is that sales tax would incentivize people to spend less on unnecessary things and save more. More savings could free up more funds for capital investments and help the economy to grow (Meehan, 2017). More cash flowing into the budget which would require households to spend less money on paying taxes each year. This kind of potential retrieves hopes to people who struggle with their incomes.

Also, the sales tax is essential in reducing business taxes. In theory, the tax would lower companies' tax rates thus giving the enterprises more money to spend. More money means the creation of more jobs, reduced prices of products in the market and investing in development projects (Marotta, 2013). Therefore, national sales taxes can bring an economic benefit that has never been experienced in the world.

Lastly, national sales taxes would promote equal taxation technique. This type of taxation would charge an equal amount nationally, instead of the usual progressive taxation depending on the amount of cash being earned (McDonald, 2015). This indicates that there would be equality in the taxation system regardless of an individual's economic status. Every citizen receives equal treatment when paying taxes.

In contrast, the sales tax has various disadvantages. First, hiked prices of goods and services. Many houses would prefer purchasing second hand products to evade paying of taxes, because sale tax only applies to new products. (Gale, 2005). Raised demand for used goods would create scarcity in the market, thus leading to raised prices for the goods in demand. Therefore, this would introduce the secondary tax in families because one is either pays extra for used goods because sellers are out to get profit or pays taxes for new products.

Furthermore, the sales tax would introduce cases of dual taxation. Roth IRA is a good example of tax accounted that depends on post-tax dollars for funding (McDonald, 2015). Upon retirement, when on purchases items with the funds, the money is fully taxed the second time, when using national sales tax. Thus, the second taxation reduces the value of retirement funds, and households opt for other alternatives.

Additionally, sales taxation would lead to an increased mortgage crisis. The sales tax would bring to an end all the benefits of owning a home under the current system. There is a high possibility that the mortgage crisis would dramatically decrease the home market (Marotta, 2013). Existing mortgages lead to the emergence of many underwater homes and increased debts similar to the crisis that happened in 2007-2009.

Also, the history of national sale over the years has taught people that increases are bound to happen. Initially, the levels of sales taxation started small but have risen over the years. Several communities' states sales have hit 10%, if not more (Meehan, 2017). Adding the anticipated 30% needed for sales task, and all goods have a tax upcharge of 40%. That means a product worth $10 would cost $50.

Another disadvantage is that the sales task requires a lot of money to implement. Sales tax requires a nation to have a new reporting system and methods of money collection, which are not available in most cases (McDonald, 2015). Although this mode of taxation would be beneficial in the long run, there are a lot of expenses involved, which would result from the construction of the necessary infrastructures.

Lastly, it worth mentioning again that lack of refunds, subsidies or rebates makes sales tax a regressive tax by its nature. According to Marotta (2013), unlike progressive taxation which puts more burden to the rich in the society, regressive tax burden decrease with the increase of income and lower income individuals, the poor, have a greater tax burden compared to wealthier people.

Conclusion

National sales tax has various advantages and disadvantages. For many, the national sale tax system would mean simplicity and fairness, while other people would see it as a threat to small businesses and the economy as a whole. Though many countries (Germany, Austria, Italy, New Zealand, Russia, Canada, US, and others) levy taxes on goods and services, not one country currently uses national sales tax as their main source of revenues, so it is hard to say how successful the national sales system can be with no precedents.

References

Meehan, C. L. (2017, Month Day). Flat Tax vs. National Sales Tax. Chron.

Marotta, D. J. (2013, February 11). Is a National Sales Tax Really Fair? Forbes.

McDonald, E. (2015, April 9). Replacing the Income Tax with a National Sales Tax. Fox Business.

Gale, W. G. (2005, May 16). The National Retail Sales Tax: What Would the Rate Have To Be? Tax Policy Center - Urban Institute & Brookings Institute.