National Sales Tax: You Read It Here First

By Jeff Harding        

Do you think a national sales tax is so far-fetched? We originally wrote about the possibility of a national sales tax in March, 2009. 

President Obama appointed Paul Volker to head up a new task group to study tax reform. The problem they are studying is not to figure out how to make life easier for taxpayers, but how to get more money from us. The ostensible purpose of the task group will be to simplify the tax system, to close tax loopholes and reduce tax evasion, and reduce corporate welfare (i. e., increase corporate taxes).

Budget Director Peter Orszag said at a March 25, 2009 press conference:

The Task Force on Tax Reform that will be formed by the Volcker board will be examining ways of being even more aggressive on reducing the tax gap, which could provide funding for tax provisions …

The tax gap announced is something like $300 billion a year. We had, in the budget, some proposals to start to reduce that, but there — I think there’s widespread concern, frankly, that perhaps even this $300 billion estimate is too low because of the complexity of some of the transactions that are involved, especially involving international transactions and transfer pricing and a whole variety of other topics. So I don’t want to give you a precise quantitative estimate. I do want to say $300 billion a year or more is a lot of money, and we are interested in being as aggressive as possible in trying to reduce that number. And that’s something that I know Chairman Baucus and Chairman Rangel are also very keen on reducing.

Orszag said “the only constraint” on the task force review is that there be no tax increases during 2009 and 2010, and that the proposals shouldn’t raise taxes on families earning less than $250,000 a year.

You and I know they won’t simplify taxes at all. But they will try to squeeze more juice out of taxpayers. When they use the words “corporate welfare” what that means is that they will reduce or eliminate some of the tax breaks Congress has given business over the years. Nothing simplified; it’s just another tax increase. Volker and his Blue Ribbon task group (aren’t they all “Blue Ribbon”?) have until December to figure things out, but like all commissions, their report and recommendations will be delayed while the Administration studies the report. According to Josh Gerstein at Politico, the panel will meet secretly. That’s because they will no doubt study a national sales tax.

In a piece from the Wall Street Journal’s Real Time Economics blog, Roger Kubarych of the New York office of Unicredit said:

It is hard to visualize a meaningful reduction in the size of the federal government’s budget deficit without a substantial increase in revenues. Otherwise, upward pressures on US interest rates will become harder and harder to resist.

Kubarych says that the Obama Administration has few choices to finance the deficit:

1. [A]ccess to foreign funding is not unlimited, and domestic savings are insufficient to take their place.

2. It is highly likely President Obama will face the unenviable task of proposing new taxes, perhaps even including European-style value-added taxation.

The Daily Capitalist has been frequently discussing this gap and the question of where the money will come from to finance the deficit. We believe that foreign sources such as the Chinese will not fund a sinking dollar for the long term, and that the deficit will be much higher than the Administration projects. We believe that President Obama’s budget assumptions are Keynesian fairy tales and that stimulus spending will eventually suppress economic recovery.

We see Obama fashioning himself after European social democrats who like value-added taxes (national sales tax) a lot: the implementation of such a tax would definitely be on his table. I think such a tax would exempt the very bottom taxpayers and have a cap on the lower 50% or 60% of taxpayers who pay very low taxes. 

Not far-fetched at all. Stay tuned.


9 comments to National Sales Tax: You Read It Here First

  • MMH

    And like I said before, what we can look forward to if a national sales tax does go through – is that it will not go away. Government does not know how to decrease itself effectively.

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  • Dick Jensen

    I would be disappointed in any analysis of taxes which does not consider all options. Sales, value added, flat, and simplified income tax. How do you analyze and debate these options if only one or two are studied?

    I’m old enough to have seen the expression of surprise “can you imagine, they’re talking about a ______ tax”? Why is this so surprising or strange? Perhaps because true believers think they know what is the best one and reject all the others before understanding.

    Taxes are not “truth” and there’s only one. It depends on the outcomes you are looking for — including financing government. Unfortunately, we’re wasting a lot of economic value with the current tax system without adding a set of values worth preserving. The IRS code is worthy of replacement.

  • Art A Layman


    Have to agree with Mr. Jensen. If you’re truly reviewing tax reform you should consider all possibilities. Personally I don’t see or think Obama would accept a national sales tax or a value added tax as a viable alternative. Granted you can allay the regressive effects with rebates but that can be cumbersome and fraught with inequities unless you do it similar to the Fair Tax folks method but that method predicates the rebate on the poverty level only.

    If you propose a sales related tax, is it additional or replacement? If additional then you’re still stuck with the tax code for cleanup and simply reducing some of the provisions or rates is not tax reform and resolves little.

    Best bet is to clean up the code, getting rid of a lot of loopholes while trying to avoid adding new ones (nigh onto impossible) and then adjusting the rate structure to necessary levels. And that should mean making them higher for the much higher earnings of today. Perhaps one of the biggest inequities in the current structure is that someone earning $400,000 pays at the same rate as one earning(?)$25 million, ignoring capital gains.

    Grin and bear it guys. Higher taxes are coming and rightfully so.

  • Jeff Harding

    Dick and Art:

    What you are both saying sounds nice if they were being rational technocrats. The tax system needs a serious overhaul but we aren’t going to get that. In the time frames the Volker panel has (December) all they are going to do is figure out how they can increase revenues.

    The VAT is a tried and true method of taxation. It is in addition to all other taxes where used (the E.U.). I agree with Art that higher taxes are coming, but it may be more difficult to do than Art thinks. I doubt they can achieve the desired revenues with just increasing taxes on the “rich.”

    The negative income tax was proposed years ago by Milton Friedman in which he suggested we stop trying to tax the lower reaches, give them a stipend instead, and overhaul the entire system to maximize outcomes as Dick suggests. By implementing a VAT, it wouldn’t be very difficult to rebate sales taxes to the “poor” since the government hands out rebates all the time.

    “Rightfully so,” Art? Why do you think the government can spend rich people’s money better than they do?

    BTW I wrote a long response to your response on Reich, but I must have screwed it up because it didn’t get published.

  • Art A Layman

    Doc: (I only do that to needle you ;))

    Rebating to the poor is not difficult, notwithstanding that the Fair Tax actually rebates the “poor” portion to everyone who asks for it. They, graciously, assume that those who don’t need it won’t ask. If, as you mentioned, they attempt to extend rebates to more middle income folks, the task becomes much more complex as well as more costly.

    Though often considered trite, there is validity to the old adage that if you want less of something put a tax on it. One of the reasons I’m in favor of high taxes on executive salaries. In an economy that depends heavily of consumption as the driver, seems a little silly to tax consumption more. Plus, it could inhibit the states abilities since that is one of their favorite taxing methods, right after smokers and drinkers.

    First of all “Doc”, and sometimes the monicker appears less appropriate,”rich” people don’t spend that much of their money. In addition, who was the last “rich” person you know who paid to have a bridge repaired or a highway repaved or who funded a retirement program out of pocket? How much money does a “rich” person need? All they can get? To what avail? It is the basic problem in our culture. We have no other measurement for success and status than wealth accumulation so the game must go on.

    We thrived for many years with tax rates which you would consider horrendous. I know, many factors were different, but so are they today. Where do most “rich” people invest their money today? In companies in the US that provide plentiful jobs with decent pay for the masses? Methinks not. The Investment segment of GDP has declined since 1980 as GDP has grown significantly.

    This may not be your grandfather’s economy but neither is it your father’s.

    BTW I wrote a long response to your response on Reich, but I must have screwed it up because it didn’t get published.

    Now the person of a more spiritual nature might think that fate or the Gods screwed up your response because it was recognized as balderdash. ;)

  • Jeff Harding

    Art, I think you are incorrect on your assumption about rich people spending money. But … what you are venturing into is the moral aspects of income distribution. What’s wrong with earning a lot of money? That isn’t the problem with our culture. The problem is not understanding how the economy works. I think you, with all due respect, represent a line of thinking that believes that rich people somehow got their money through illegal or immoral means, somehow cheating the “poor” out of what was rightfully theirs. I would say that wealth is created not stolen. Your comment about decent pay for the masses is illustrative of the problem. Employers don’t set wages and prices–you do as a consumer by paying what you thinks is fair for a product. Art, there is too little time and space to debate all these issues. You have ideas that are common in our society and generally are socialistic in philosophy. I would say socialism doesn’t work, has never worked, and will cause a less equal distribution of wealth in society. Only capitalism has been able to achieve the remarkable standard of living we have today. … Signing off.

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