This essay was originally published in the USBIG NewsFlash in February 2008.
The unexpected success of Mike Huckabee in the Republican primaries has given a substantial boost to the small movement to replace all federal taxes with a national sales tax with an accompanying tax rebate in the form of a partial basic income (see story above). The basic income movement has been almost an entirely left-of-center movement since the 1980s, made up of mostly of people who want an equal society with much better, freer lives for the poor. I believe that most basic income supporters would like to have an ally on the other side of the political divide. Is the sales tax movement such an ally? Although I have no doubt that a basic income as small as the one proposed by the sales tax movement would be better than no basic income at all, there are two main reasons why the sales tax movement promotes something that is very difficult for most basic income supporters to endorse.
First, the stress of the sales tax movement is almost entirely on the benefits of income tax relief to try and discover if there is anything that could be done to help them. The tax rebate is included almost as an afterthought to cushion the blow on the poor, who currently pay little or no income taxes and would stand to lose significantly by a shift to sales taxes. Any motivation to help provide basic economic security is left out of the movement’s literature. The poor are expected to work, and adequate work is assumed to be available in the job market. As the sales tax movement sees it, the poor only have one problem—the government makes them pay taxes. If the government rebates their taxes, private employment provides everything they need. Even if we disagree with the motives of sales tax advocates, and even if their basic income is far too small, it is better to get some of what we want than nothing. That is, as long as the cost is not too high, which brings me to the next reason.
Second, sales tax advocates would only support a small basic income as part of a shift to the national sales tax, which supporters call “the fair tax.” But the sales tax has significant problems. The three most obvious measures of an individual’s economic standing are income, wealth, and consumption. Any one of these measures could provide a base for taxation: an income tax is obviously a tax on income; capital gains, wealth, and inheritance taxes fall on wealth; and a sales tax falls on consumption. What difference would it make to base federal taxation on sales? Savings (i.e. the accumulation of wealth) is the difference between income and consumption. If you make $30,000 and save $3,000, you spend $27,000. An income tax would tax you based on how much money you make; a sales tax would tax you based on the portion of that money you spend that year. Sales tax advocates call this fair because it encourages savings and because it supposedly taxes people how what they actually consume rather than on what they are able to consume.
For most of us, there is no a big difference between income and savings. The poorest people tend to spend all of their income, and members of the middle class are lucky if they can put away 10 percent. But at higher levels of economic well-being, there is an enormous difference. The richer one is; the less one spends as a percentage of income. Therefore, the “fair” tax is regressive, making after tax incomes between the middle class and the wealthy less equal than before tax incomes. Supporters argue (fairly) that it will be no more regressive than the current system with all of its exemptions, but the sale tax is simply not a mechanism capable of making the system progressive. A government financed by a national sales tax will allow families to accumulate more and more wealth and the power that goes with it. They will be able to pass that wealth down for generations and generations with no interference from income or wealth taxation.
Sales tax advocates say that it is fair to tax people on what they actually consume rather than their potential to consume. Yet, the holding of wealth takes up resources that other people might as much as consumption does. If my family holds land as wealth, we block anyone else from using that land, but we would pay no sales tax on it. Under a sales tax, if a middle class man spends $50 to buy his son a baseball glove, he pays tax. But if a wealthy man spends $50 million to buy his son a professional baseball team—that’s investment spending, not consumption—he pays no tax. This is the “fair tax” in name only.
Even so, a national sales tax could be part of an overall progressive system if it was accompanied by a substantial basic income and some kind of tax that hits large dynastic family accumulations of wealth. Inheritance taxes and capital gains taxes don’t actually do that job very well, but there are two taxes that could, a tax on land value or a tax directly on wealth holdings (see Top Heavy by Ed Wolff). However, I fear that sales tax advocates would resist any changes in their preferred system that would make it progressive.
-Karl Widerquist, Oxford UK, February 2008
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