Finally, public support for abolishing the income taxes is at an all-time high. When columnist Jack Anderson asked readers of Parade magazine to write in and tell him if they would like to replace income taxes with a federal retail sales tax, some 40,000 did. And 97 percent of them favored the retail sales tax.
Daniel J. Pilla Responds
The chief opposition to the sales tax is the claim that due to evasion, it will quickly degenerate into a European-style value-added tax (VAT). All agree VATs are inefficient, hidden, and to be avoided.
The argument that a sales tax will mutate is simply not supported by the American experience. Forty-five states now have a sales tax. In no case has it transmogrified into a VAT. Moreover, the present system creates an incentive for a merchant to engage in sales tax evasion with a customer. When a product is purchased "off the books," the customer evades the sales tax, and the merchant evades the income tax. If there is no income tax, the merchant loses his primary incentive to aid in sales tax evasion. He is not as likely to abet evasion when the risks are his but the rewards are not.
Please note: Evasion is greatly reduced when the public perceives the tax rate is reasonable, and the system itself is fair and simple. Hence, as the overall tax burden falls, evasion falls. This is precisely why it is critical to eliminate existing federal taxes in favor of a single national sales tax.
The average American family today pays 15-percent income taxes. Social Security tax, not including the employer's matching share, is 7.65 percent. Thus, to purchase a $10,000 automobile, the average family must earn $12,265 (not counting state taxes). Now, consider that business taxes and compliance costs amount to 15 percent of a car's purchase price. Get rid of those costs and the car costs $8,500. By eliminating other federal taxes and going to a 25-percent retail sales tax, the average family would have to earn $10,625 to purchase the same auto--a $1,640 savings.
The Armey plan also seeks to eliminate wage withholding. It would require us to send a check to Washington each month. Grover Norquist suggests payments will "be painful reminders of the true cost of government." True, but they will also remind us of the continuing presence of the IRS. And, in fact, IRS records show about 3.5 million citizens annually cannot pay what they owe, regardless of how simple it is to file a return. To collect, IRS executes 3 million to 4 million wage and bank levies, and files about the same number of tax liens.
A flat tax coupled with no withholding creates a compliance problem unheard of in any sales tax environment. It turns loose tens of thousands of IRS collectors on the public. A system designed to remind us that taxation is painful will become a collection nightmare for millions.
Norquist suggests that a flat tax puts "all taxpayers in the same miserable relationship with the state." I fear this is true, as the IRS is preparing for draconian enforcement measures even now. Overreaching IRS procedures will flourish under a flat tax. Our challenge, however, is not to put all citizens on equally miserable footing. Our challenge is to free all citizens from the misery inflicted in the name of taxation.
The biggest single advantage of the sales tax, apart from eliminating the IRS, is simplicity. This is lost with the flat tax. Advocates claim both businesses and individuals will be able to file flat tax returns on a postcard. However, Bruce Bartlett's remarks betray this claim.
He acknowledges that businesses retain substantial deductions, including, "wages, salaries, and pensions paid (but not benefits); purchases of goods, services, and materials used in business; and all capital equipment, structures, and land." It is no easy matter to account for these expenses. It is even more difficult to persuade error-prone IRS examiners that one's own calculations are accurate.
Also consider that withholding of income tax ceases under the flat tax, but withholding of Social Security taxes does not. Consequently, every business with employees must continue to withhold, make regular deposits of the tax, and file five employment tax returns annually.
According to the IRS's 1993 Annual Report, nearly 29 million such returns were filed, at tremendous cost. The IRS assessed nearly 11.5 million penalties in connection with those returns, at a direct cost of over $3.5 billion. Nothing in the flat tax proposal eliminates this albatross.
In sum, the claimed benefits of a flat tax are non-existent. Only a national sales tax provides the kind of relief needed. We all recognize a reduction in government is a key element in the tax reform debate. A sales tax provides a unique advantage in this regard. If funded through a sales tax, government has a vested interest in keeping its hands off the economy and out of people's pockets. As the economy grows, government's share of the pie grows.
Conversely, the flat tax is still an income tax and carries with it the unarguable reality that it penalizes growth. That is precisely why our founders used consumption taxes as the primary means of funding government. Alexander Hamilton rejected taxing "the articles of our own growth and manufacture" as they are "more prejudicial" to the economy than consumption taxes.
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