The popularity of Congress has continued to decline to the point where it is difficult to find anyone who holds a favorable view of our lawmakers in Washington, D.C.
In that context, maybe we can be forgiven for misinterpreting a slogan. Automobile license plates in the District of Columbia bear the words, “Taxation without representation.” When first seeing one of the plates, our initial thought was that it meant drivers there are OK with being taxed; they just don’t want the added burden of being represented by senators and representatives. Given the popularity of Congress, it made perfect sense, in its own way.
We were mistaken, of course. The license plates are part of an effort to change the legal and voting status of the District of Columbia so that it more closely resembles a state … or something.
As is noted in Ecclesiastes, there is a time for everything. This is the perfect time for Congress to consider two issues that resurface with whalelike regularity: tax reform and statehood for the District of Columbia. These are not issues that have any real possibility of passage, so they are especially attractive to a Congress running on backup batteries.
The D.C. statehood issue lacks a real constituency outside the beltway and is probably going nowhere, again. But for both policy wonks and the media, tax reform has a particular attraction at this time because of the presidential campaign. With so many candidates crowding around, each searching for a signature issue, one or two might latch on to tax reform and give it visibility.
This season’s tax reform scheme is called Fair Tax and its core idea involves getting rid of the Internal Revenue Service, Congress’s only true rival for the most-despised title. And, sure enough, several candidates have expressed enthusiasm for the idea.
Essentially, the Fair Tax would get rid of income taxes and substitute a national sales tax. It is supposed to be revenue neutral in the sense that it would neither raise nor lower the amount of money flowing to the federal government. All that would change would be the method of collecting it.
Sadly, neither life nor economics is that simple. Even the origins of the Fair Tax idea turn out to be complex. It appears to be the outgrowth of a bitter dispute between the Church of Scientology and the IRS. When Scientology lost the argument, it came up with a way to make its enemy disappear — the Fair Tax.
In its current form, House Bill 25, the concept of making the IRS disappear is still the active ingredient in the Fair Tax idea. The proposal, which has over 60 co-sponsors in the House, begins with a litany of taxes, income taxes, payroll taxes, gift and inheritance taxes, etc., which would be eliminated.
Irrespective of its most recent origin, the idea of a national sales tax in one form or another has been around for some time. Most of the proposals in the U.S. have been modeled on the value-added tax that is popular with British and European governments.
The differences between a value-added tax and a sales tax are important, of course, but the fundamental economic question about the Fair Tax comes from a different source: the difference between income and expenditure. An income tax is applied to money that flows in; a sales tax is applied to money that flows out.
For many of us, of course, the amounts are identical. One way or another, every dollar that comes in seems to find a way to go out. Whether things would stay this way, though, if we were taxed only on what we spent, not what we earned, is a significant economic question.
A national sales tax would seem to encourage savings — discouraging spending by taxing it. How much it would reduce spending is unknown, though, and that is just one reason why the promise of its being revenue neutral is an empty one. Estimates of what the revenue-neutral national sales tax rate would be range from about sixteen percent to more than fifty percent — not a level of precision to inspire confidence.
Employers would welcome being relieved as tax-collectors-in-chief, certainly, and states are actually in a good position to collect a national sales tax. That said, there is no reason to assume that a sales-tax structure drafted and controlled by Congress would be any less complicated than our current income tax.
The Fair Tax needs a lot of work before anyone could take it seriously, and even more work before it could safely be turned loose on the economy. Of course, we could say that about Congress, too.
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101” monthly for the Snohomish County Business Journal.
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