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 The sixteenth article of amendment to the Constitution of the United States is hereby repealed.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