Wednesday, March 15, 2006

An advantage of multi tax sources

Proponents of a “fair” tax are almost all firmly opposed to the income tax. They insist that the USA should transfer our revenue sources in a single step. Even if they are correct, IMO the U.S. Congress would never imprudently attempt to accomplish it in one step. If advocates will not accept a multi-step transfer, they thus determine that their should never be a federal sales tax.

The USA could attempt a multi-step transfer, each year shifting a portion of our revenue source from income tax to sales tax. It’s possible that we could completely transfer our revenue source. IMO we will not complete the transfer. If advocate’s estimate of a 23% sales tax could replace our income taxes, IMO our nation would find that rate unacceptable. (Bear in mind many states and local governments now depend upon a general sales tax. In some places a 23% federal tax would be a total sales tax of over 30%). That does not mean there are not advantages to shifting a substantial portion of income tax to a sales tax.

Tax evasion is induced by benefit/cost determinations. Risk, the probability and penalty of detection are major factors of cost to the tax evaders. It’s been speculated that when income taxes were higher, our tax evasion rate was 20%. Greater tax rates grant greater benefits to tax evaders.

The administration and enforcement of income taxes are complex and expensive. The administration and enforcement of a general sales taxes is less so, but they are by no means free of costs. It’s particularly expensive when applied to taxing of services. IMO it’s not feasible for sales taxes to be limited to goods and exempt services. All billing of “mixed” invoices would then exaggerate the value of services and under-estimate that of goods. Fewer invoices would be for transactions of only goods. If sales taxes were applied to stock-in-trade (goods for resale), there would be almost no “pure” sales invoices.

IMO the “value added tax”, (VAT) is superior to other sales tax methods. When comparing all sales tax methods, VAT’s friendlier to commerce, no more expensive to consumers, and harvests more government revenue. Businesses deduct the taxes they've paid prior to delivering the taxes they've collected to the government. Those involved with transactions between businesses and other enterprises that are not the ultimate beneficiaries of goods and services have little inducement to seek or request the evasion of taxes. VAT’s government revenue/expense ratio is greater than that of conventional sales tax.

The total administration and policing expense of both income tax and Vat combined is not much more that of income tax alone. That’s because they share so much data, require similar tasks and they augment each other. We now are almost completely dependent upon income tax’s revenue. That dependency and Bush’s tax cuts made it difficult if not impossible for his tax panel to make any acceptable and revenue neutral recommendations. For all of these reasons, government’s revenue/expense ratio of the combined taxes at lower rates, is much greater than that of just one tax at a higher rate. The aggregate cost to taxpayers is certainly not greater.


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