The Simple Consumption Tax

Proposed, an amendment

 

Section 1. The sixteenth article of amendment to the Constitution of the United States is hereby repealed.

 

Section 2. A tax to be collected at the point of consumption(1) of all new(2) goods and services, except as exempt by this act, at a rate to be set by 2/3 vote of Congress as required, is hereby established. Items in the following classes shall be exempt; unprepared food(3), drugs(4), and medical treatment(5).

 

The following is provided for regulatory guidance and does not constitute a part of the amendment:

 

1) The tax is on the end user or consumer. This could be interpreted and implemented in two ways.

Examples for case one:

 

- A manufacturer would pay a tax on tools, office supplies, items he consumes in the manufacturing process, etc. but not the materials that go into his product and are delivered to the end user. For example a chemical manufacturer who used natural gas for both process heat generation and as a raw material for his end product would pay tax on the gas he consumed in the process but not for that portion that went into the end product. 
- The tax on the materials in a new house would be collected as a portion of the price of the house but if the builder built a shed for his tools, he would pay taxes on the materials he used in its construction.

Example for case two:
While case one is perhaps more literal it violates the principal of only taxing goods and services one time and will require considerable book keeping therefore the recommended approach is to consider materials etc. used by manufacturers and sellers to be a business cost that is passed to the end user as a portion of the product cost and taxed at that point. This leaves the issue of how items like vehicle fuel that is always sold tax included at the pump. A mechanism could be put in place to refund those taxes or we could simply issue special magnetic strip cards (debit or credit) that either reduce the price at the pump by the included sales tax or records the purchase in a central database that will be used to issue the credit.

 

2) The restriction to new goods and services and the following exceptions is to lower the impact on lower income citizens who would be expected to purchase used items and spend a disproportionate portion of their income on the necessities of life.

 

3) Ingredients as would normally be purchased at a grocery store. Food purchased at at restaurant or catered meal would be taxed. For example an apple purchased at a grocery store is not taxed but if it is provided as a healthy choice menu item at a location where the is intended to be consumed on location or “to go” it is taxable.

 

4) We would assume that the term “drug” is restricted to those items that fall under the responsibility of the Federal Food and Drug Administration.

 

5) Those procedures and/or treatments performed and/or prescribed by a licensed medical practitioner.

 

CLAIMED ADVANTAGES:

 

SIMPLE
It is not necessary to track income or determine its source. All taxes are collected when an item is purchased by the end user just like the typical state and city sales tax. The infrastructure is already in place. While this is very similar to the better known “FairTax” this approach has the advantage that the expense of administering the prebate is eliminated and the same end goal is reached by simply exempting certain classes of goods and services from the tax.

 

EFFICIENT
I am aware of no other revenue collection method that requires less overhead. While the proposed amendment eliminates the income tax it does not eliminate the need for the IRS to collect things like the Medicare and Social Security taxes which are a fixed percentage of wage income and receipt of the consumption taxes collected by the states. However, drastic cuts can be made to the current Internal Revenue Service resulting in a significantly lower cost of government. Additionally all of the brilliant accountants and attorneys whose sole function is dedicated to compliance with or minimizing or evading an entities tax liability can be released to productive efforts.

 

HARD TO EVADE

With the current tax on income it is easy to present with the “Tim Geithner syndrome” where “I didn't know that ________ was taxable income”. It is also widely known or at least suspected that some people invest in questionable tax shelters or put money in off shore accounts to hide it. It is difficult to hide spending/consumption unless you can subsist in a purely barter sub-economy.

 

FAIR
Money only has value when you spend it. People who have a lot will tend to spend a lot. People who have a little will spend less and therefore will pay less taxes. To ease the burden on persons in the lower income brackets certain necessities are exempt from the tax.

 

UNIVERSAL PARTICIPATION
As implied by the fairness attribute, everyone whether rich, poor, citizen or illegal pays taxes to one degree or another and therefore has “some skin in the game” and therefore should have an interest in keeping entitlements and other government spending under control or to put it another way everyone should have a better feeling of ownership of the government and ensuring our elected officials exercise good stewardship of our money. The idea that some people are carrying less than their fair share of the load is eliminated because everyone is playing by the same set of rules.

 

IMPROVED GLOBAL COMPETITIVENESS
Since consumption is taxed, not income, I believe this will encourage savings and investment which provide the capital to finance job creation and business expansion. While there may be a initial dip in consumption I believe that once consumers realize that the cost of goods and service is now lower and you still need stuff that will be short term. The key here, however, is that since the cost of US made goods will not include corporate and other hidden taxes the cost of exported goods and services will be much more competitive on the global market. While it is widely known that if you lay all the economists in the world end to end they would not reach a conclusion, the ones I have talked to say that if we adopted this tax system we might not have room for all the foreign companies who would want to move their production here in addition to the expansion of domestic production.

 

FLEXIBLE
As written, Congress can adjust the tax rate annually as part of the budget process. I would expect that initially a rate of 25% would be required to replace the revenue raised by the current income tax and all of the hidden taxes and users fees. After the system becomes stable after the initial perturbation caused by this change I would expect the rate to be lowered.

 

TRANSPARENT
Since there will be a single tax rate applied to items at the point of consumption everyone will know what their “free government cheese” is costing. I believe this will motivate citizens to be smarter about what they ask for from their government.

Comments

PaganTeaPartier Added Nov 12, 2017 - 11:34pm
The second part of your act would be unnecessary, since the Constitution already empowers the US Government to enact such taxes.
 
All that is really needed is a change in mindset, that you pay taxes when you buy, not when you sell.
 
Switch from a Capital Gains tax to a Capital Investment tax, and you pay your taxes when you buy the stock. At that point how much money you ultimately make or lose when you finally sell that stock, is none of the governments business.
 
Likewise if you want to sock it to CEOs, Corporate Presidents, and VPs, while sparing regular employees, tax the business on salaries paid over a certain amount. Then none of the shelters, deductions, and loopholes that they can sink their money into will matter.
 
Businesses can't pay for lavish vacations for their executives, and write it off as a conference, when you tax their raw materials.
 
That simple change in the fundamental thought process alone, would in and of itself solve almost all of the problems.
Jeffry Gilbert Added Nov 13, 2017 - 2:57am
Here in Thailand the income tax is quite low. There is tax on purchases, and anytime value is added. There are high taxes on imports and luxury items. 
 
For instance,  7 Series BMW costs $300000USD. A new 30 hp diesel engine for my boat costs $28000. The cheapest 2nd hand Ferrari is over $1000000.
 
Toyota Corolla costs less here than it does there, same with Chevy Colorado. Both are made in Thailand. Even the Benz that are made here not imported are less expensive.
 
I can get a Toyota diesel engine from a pickup marinized and installed in my boat for $3000.
 
If those that use the courts more pay for those additional burdens it makes sense. Why should the guy in receiving pay for that.
 
Same guy in receiving drives a 2000 pound car to work and the bosses in their 6000 pound cars the 6000 pound car does more damage so should pay 3x. The 18 wheelers that deliver his products do 40 times as much damage so should pay for it. 
 
So, if consumption is taxed intelligently your idea might work. 
 
The so-called "fairness attribute" right?
 
 
The Burghal Hidage Added Nov 13, 2017 - 6:48am
Good idea, but you'd need to wipe a lot more taxes off of the slate other than the federal income tax.
Leroy Added Nov 13, 2017 - 7:18am
Of course, the liberals will argue that the tax is regressive, forcing the poor to pay more.
Tamara Wilhite Added Nov 13, 2017 - 10:14am
I have several concerns.
* This type of tax is unacceptable if we have an income tax, too. Saying we'll lower income taxes and have a VAT/sales tax means they'll jack BOTH up over time.
* A sales tax at every stage is a VAT tax and looking at Europe and Canada, it increases the prices of everything. That hurts everyone.
* While a sales tax on everything is harder to avoid, it won't be simpler to administer. You already have states lowering sales taxes on certain "essentials" and jockeying to be classified as essential. Or rebates to the poor to offset sales taxes.
* Enforcement mechanisms become obtrusive. When you already have civil forfeiture because you were pulled over with cash, do you really want the state checking your bags for receipts as they do in Europe? No receipt for X? We're taking your newly bought goods or you go to jail. 
Dave Volek Added Nov 13, 2017 - 10:49am
I'm all for VAT taxes. Canada has had one for about 20 years. It has not slipped far behind the United States in economic terms.
Even A Broken Clock Added Nov 13, 2017 - 11:18am
Though not a huge portion of the economy (at present), what would be the tax on items sold through consignment or at a used goods store / antique store? The items are not new, therefore no tax could be extracted?
 
BTW, welcome to Writerbeat.
Mike Haluska Added Nov 13, 2017 - 12:07pm
Tamara - I would like to address your concerns:
 
"While a sales tax on everything is harder to avoid, it won't be simpler to administer."
 
Quiet the opposite - it is MUCH easier to collect and administer thanks to computer technology.  Over 2/3 of all retail purchases are made using a debit/credit card, which already has the programming in place to add state & local sales tax and send the funds directly to the proper entity.  Adding the federal sales tax is a simple matter. 
 
"You already have states lowering sales taxes on certain "essentials" and jockeying to be classified as essential. Or rebates to the poor to offset sales taxes.  Enforcement mechanisms become obtrusive."
 
With bar code technology it is a simple matter to apply a lower or zero tax rate to "essentials" thus providing an automatic tax break for low income households.  And with the federal government now using debit cards (SNAP) the "essentials" are programmed into the card account. 
 
By the way, can you imagine what would happen to employment if corporations around the world learned that "effective xx/xx/xxxx there will no longer be an Income Tax in the USA"???  Corporations from around the world would be falling over themselves to build factories, distribution centers, retail outlets, etc. in the US!!!
PaganTeaPartier Added Nov 13, 2017 - 2:50pm
A Value Added Tax and a consumption tax are very different things.
 
A consumption tax is paid by the purchaser, and is a portion of the total amount paid.
 
A Value Added Tax is paid by the seller, and is a portion of the difference between what they bought it for, and what they sold it for, minus whatever expenses are permitted to be deducted, the cost of which is then passed on to the purchaser.
 
And a Retail Sales Tax might be a popular consumption tax, but it is only one singular form that a consumption tax might take.
Dave Volek Added Nov 13, 2017 - 3:11pm
Mike
I was on the same lines as you for addressing Tamara's points. But I didn't have the time to put things together. Now I have the time, and you beat me to it.
 
But your last paragraph has some real interesting economic perspectives. I see basing most of tax revenue on VATs, production will be much more local to where the consumers are.
 
 
Tamara Wilhite Added Nov 13, 2017 - 5:57pm
Mike Haluska Europe has a VAT, and they've moved many factories to Asia. And customers buying things over the internet run into problems with customs checking packages and often holding it for ransom over disputes as to what VAT tax is owed over what was paid.
Katharine Otto Added Nov 13, 2017 - 9:59pm
Concerned,
In Wealth of Nations, Adam Smith claimed that not even the king would have the audacity to enact an income tax.  His rationale is that people would not accept such invasion into their personal affairs.  
 
The income tax was instituted the same year as the Federal Reserve Act was passed, in 1913, in order to assure perpetual interest income to the Fed for its fiat money.  The Federal Reserve Act put the federal government into the debt-creation business.  Why, the federal government even expects people to report everything they have of value, to do all that paperwork and spend all that time, without compensation.  Talk about a hoodwinked America. . .
 
This was the same tactic Alexander Hamilton used in 1790 to create an income stream for the nation's first central bank.  At that time it was the Whiskey Tax.  Both taxation measures violate the Constitution's proscription on "direct taxation," and both allowed the precedent for the federal government to invade every area of individuals' personal lives.  
 
We all work for the government, not the other way around.  Taxes feed the monster so that we can continue to be bled.
 
Katharine Otto Added Nov 13, 2017 - 10:03pm
Concerned,
By the way, you sound like a so-called "Fair Tax" advocate.  I've read The FairTax Book, by Neal Boortz and John Linder, with its basic assumption that the federal government deserves the money it gets.  I think not.  The suggested tax on services is one of the sleaziest moves proposed, but the book contains a lot of sleazy suggestions.
Flying Junior Added Nov 14, 2017 - 1:16am
Concerned and Leroy,
 
Of course a consumption tax is just a fancy version of a flat tax.  Most Americans already pay a sales tax to their state government.  It's over 8% in California.  People with lower incomes spend the majority of their income on consumables?  Would your consumption tax include housing?
 
So the rich could make as much money as they please to invest and give to their families without any taxation?  Everyone else has to pay more to make up the difference?
 
The republican tax plan is less brutal.
 
Caption from a cartoon seen in the New Indicator, a radical college rag from UC San Diego circa 1980.
 
The flat tax.  Take the amount you paid last year and add $3,000.  Of course it was from the POV of a young person eligible to fill out a 1040EZ.
 
O/T Another funny cartoon asked the question about nuclear annihilation.  Check this box if you say the hell with it, let's just have a nuclear WWIII.  Check this box if you would rather hold off and not have nuclear war yet.
Flying Junior Added Nov 14, 2017 - 1:17am
Dave,
 
Of course Canada has a VAT.  Nothing wrong with that.  So does the UK.  Both countries still have income tax.
Mike Haluska Added Nov 14, 2017 - 10:48am
Tamara - your statement:
 
"Mike Haluska Europe has a VAT, and they've moved many factories to Asia."
 
requires correction.  A National Sales Tax is NOT a VAT!  A VAT imposes a tax at EVERY STAGE of the making/distribution of a product.  A National Sales Tax is imposed ONLY at the final point of sale (individual consumer).
 
You have to keep in mind that the Income Tax would be ELIMINATED in favor of the Sales Tax - NOT in addition to it!  You would KEEP YOUR WHOLE PAYCHECK!  Every time I propose this great idea (sales tax replacing income tax) people immediately oppose it for totally erroneous reasons like:
1) I will lose my mortgage deduction (who cares? - there's no Income Tax to deduct it against!)
2) I will have to pay BOTH (NO - it is a TOTAL complete replacement of the income tax)
3) The "rich" won't pay any taxes (WRONG - they will pay every time they buy a yacht, Mercedes, Rolex, etc. - A LOT MORE THAN YOU!!)
4) The "poor" can't afford it (WRONG - they will pay NO SALES TAX on essential items and when using SNAP type government issued debit cards)
 
 
 
 
 
 
Mike Haluska Added Nov 14, 2017 - 10:53am
Flying Jr - your statement:
 
"Of course a consumption tax is just a fancy version of a flat tax."
 
Is again - factually incorrect!  With a Sales Tax, you keep your ENTIRE PAYCHECK and only pay sales tax when YOU decide to buy something.  If you make a good salary and live modestly, you can pack away A LOT OF SAVINGS TAX FREE - something Americans have failed to do in the past 60 years!!!
Dave Volek Added Nov 14, 2017 - 11:49am
Flying Junior
 
Like Mike, I'm a big fan of VATs. In my version of a perfect world, VATs should increase while income taxes are lowered. Canada should have a VAT of 35% and a two tiered income tax with 0% for the first $20,000 and 15% for anything over that.  Taxes shift from effort to consumption. 
 
Canada has not done that. Unfortunately the anti-tax lobby is so embedded here than any serious and effective reforms are politically unsustainable. We have a 5% VAT and 50% marginal tax rate.
 
Mike has done a good job of debunking quite a few myths on this thread. Unfortunately, common people don't buy into the common sense, still believing that rich people don't pay VATs. 
 
 
 
 
 
 
Mike Haluska Added Nov 14, 2017 - 3:43pm
Dave - I would favor a Sales Tax over a VAT.  First of all, the VAT just gets passed down the line to the end user anyway, so why make the process more complicated than it needs to be?  Second, the simplicity of no income tax or VAT for businesses would make investment by foreign nations just about irresistible.  What foreign company wouldn't want to build a tax-free plant in the largest consumer market in the world???
Mike Haluska Added Nov 14, 2017 - 3:53pm
Dave - one other item we could use to really help our "Rust Belt" states would be "targeted" zones where large plants (auto assembly, heavy fabrication, etc.) are encouraged to locate.  We could do some serious urban planning in troubled neighborhoods in Detroit, Chicago, Baltimore, Cleveland, etc.   By working with the public schools to renovate their facilities and curriculum to support the new manufacturing technology, a great public-private partnership can be made.
 
Wouldn't it be wonderful to those trapped in the Welfare State - especially the children - to have a prosperous future to look forward to?  We wouldn't need to have a political debate to abolish the Welfare State legislation - we could simply render it obsolete with lots of high-paying jobs!!!
Dave Volek Added Nov 14, 2017 - 4:41pm
Mike
 
Canada used to have a sales tax on all manufactured items. Of course the consumer would pay that tax (which was usually hidden in the price). But when one manufacturer sold a product to another manufacturer who used it to make another product, the tax would be incorporated into the price of the new product. Do this a few times in the manufacturing process, and the cascading taxes added to quite a bit of the final price. Canadian businesses were becoming less competitive on the international front, and things had to be changed.
 
We went for a VAT, which doesn't have the issue of cascading taxes. We could have set up a sales tax on an end use product, but this would have required a whole plethora of laws to decide which light bulbs are bought by consumers and which light bulbs are bought by factories making other products. Europe was having good success with their VATs, and our GST is just a version of that.
 
Other than a little extra bookkeeping, a VAT is not that difficult for a business to administer. A VAT really doesn't interfere with the profit/loss decisions whereas a corporate income tax is always on the accountant's radar. For this reason, I support an increase in VAT, coupled with a reduction in individual and corporate tax. 
 
And if corporate taxes are lower, then accountants have to weigh the low cost of Asian labor plus the diesel fuel to move ships across the Pacific against the higher labor costs of a western economy but with the factory right next to its market. More factories will move back home.
 
As for your welfare idea, I am getting that you Americans have really screwed this up. It's not easy being on welfare in Canada. If someone is able and the economy is reasonably good, he or she will take a minimum wage  job rather than go on welfare. Most of the people I know on long term welfare are unemployable. It's cheaper on the economy to give these people $1000 a month than to inflict them on employers who will have to fire them.  
 
Mike Haluska Added Nov 15, 2017 - 10:08am
Dave - other than "punishing" manufacturing businesses who end up passing the VAT along to the end customer anyway or keeping a bunch of government tax bureaucrats busy, what is the advantage of a VAT? 
 
You assessment of our Welfare State is spot on.  When you tally up all of the funds received through the various welfare programs in the US, you would have to find a job paying $24/hour to "break even"!  In addition, the perverted Welfare State laws promote behavior that keeps people in poverty and punishes behavior that lifts people out of poverty.  I believe you do much more harm to a young, healthy adult fully capable of working to give him/her welfare benefits without having some sort of work or education requirement.  There are plenty of public jobs that need to be done and require very little experience such as park maintenance, schoolyard monitors, public building janitors, etc. 
 
For example, when you go to work for a living your employer doesn't automatically give you a raise just because your family had another child.  With the self-perpetuating Welfare State, if you get pregnant out of wedlock and unemployed you're rewarded with more "benefits"!
 
This is why we (America) need to everything possible to promote high-paying manufacturing jobs and NOT punish or dissuade corporations from building plants in the US. 
Dave Volek Added Nov 15, 2017 - 2:35pm
Mike
 
I had my own oil-field service business when Canada went through its VAT tax change. My industry was not subject to any sales tax. I was doing my own books, and it was rather easy to administer the extra GST from my end. Maybe an extra five minutes a month. Write a check to the government for the difference between GST input and GST outputs. Quite simple. No impact on profits. While it would have been nice to keep the GST money I had collected, it was really not mine in the first place.
 
For those companies in manufacturing (subject to the sales tax), I think their bookkeeping became a lot easier.
 
The GST is fairly simple from a bureaucratic side. We don't have small army of tax auditors on the GST side--as compared to the income tax and corporate tax side. When an audit is done, it's real easy to spot whether some cheating has been happening--and it's difficult for an alleged offender to win on the appeal. It costs a lot less to get tax revenue from a GST.
 
Unfortunately, the government of Canada listened to the plight of the poor people, so some items were not subject to the tax when it was first implemented: food, rent, insurance. Grocery stores had a little difficulty in that they also sell a lot of non-food items. There were a few years of interpretation between business and government, but it seems the bookkeeping is settled. However when a grocery store is audited, it takes extra effort to sort out the food from the non-food sales.
 
Here is bringing back my light bulb example as to how a sales tax is applied. If the light bulb factory sells to the final consumer, the tax is applied. But if it sells to another business, the tax is not applied. To administer this tax, we would need to write laws to define a final consumer vs. a business consumer. Then the factory would need to separate its taxable and non-taxable sales. Then a tax auditor would need some mechanism to determine whether the factory is reporting the tax/non-tax sales correctly. But creating a taxable/non taxable columns in the books, we just raise the level of complexity and costs for both business and government to administer. 
 
And this is why a VAT should be charged on everything. It should not matter whether a product or service is being consumed by a business or final consumer. Keep it simple!
 ------
 
I estimate the breakeven wage for a welfare person in Canada is about $8 to $10 an hour. 
 
Where the welfare system fails is when long-term users have the ability to work to 20 hours a week (but not 40). If such a person ears $200 a week, the welfare payments are deducted by $200. So that person makes a rational decision not to take on that part-time job.
 
I think a guaranteed basic income program would solve that issue--and reduce social assistance bureaucracy. But that is a decade away.