With the ballooning federal budget deficit in the news, and with tax season fresh in most Americans' minds, ideas on how to "fix" America's system of taxation are getting plenty of play.
One idea tossed around with some frequency these days is that of a national sales tax. Believers in a national sales tax claim that 45 states already have a sales tax, so retailers will now just collect an additional 23% on top of any state and local sales taxes.
There are numerous problems with this idea:- Not every state taxes the same retail goods. For instance, Massachusetts has a list of items that are not taxed at the checkout that varies from that of Wisconsin and California. So, while Massachusetts may not tax breath mints, diapers, boat shoes, or prescription drugs, the federal government may. Deciphering that mess certainly sounds like fun at the cash register. The national sales tax would supposedly not affect so-called necessities, but who decides what is a necessity without creating a sales tax with all manner of odd exceptions and loopholes (just like the current system)? - Sales-taxers claim that a simplified tax code (i.e., the national sales tax) will reduce prices because the cost of the current taxation scheme will no longer be built into goods. True. The current scheme's costs will just be replaced by the new scheme's cost. Given how disparate taxation laws are across the nation, retailers will have to build in the costs of rationalizing state, local, and federal tax schemes at the register. This will not lead to the promised 20-30% drop in prices. - While forty-five states already collect sales tax, many states also collect income tax. Why not just flip the argument and say that since those states are collecting an income tax, let's just make them collect the federal income tax as well, and just have the states forward checks to the federal government? The argument is no weaker than that of the sales-taxers. - Sure, eliminating the income tax will eliminate the IRS, but the sales-taxers will create a completely different government agency to send checks out to Americans every month. So, the only big change will be the government workers' mission and sponsoring agency, not the total number of workers employed.
Perhaps an even more radical idea is required. One that even respects states' rights and the original ideas of federalism.
Since we know the population of the USA every ten years within some reasonable margin of error, and can estimate the population growth and migration of people even in non-census years, why not use that information to our advantage?
Let's take the federal budget, and come up with a per-head figure. So, if the federal budget is $3 trillion (I'm generally pulling that figure out of the air), and if the population of the United States is 290 million, then each person in the US would have to dig deep for just shy of $10,500 each year to meet our fiscal obligations.
Now, let's assume that Wisconsin has 5 million residents. That would mean Wisconsin residents need to pony up $52,500,000,000 ($52 billion) anually to keep the federal government in business.
Now that we Wisconsin residents know what figure we're shooting for as a state, let us figure out how to get there. If we want to have a large sales tax, then so be it. If we want to have a massive income tax, that's our business. As long as we make our payments to the federal government on time, who cares how we, the citizens of Wisconsin, choose to raise the funds. It's generally none of the federal government's business, as long as we dont' break any federal laws regarding interstate commerce and the like.
This setup would let people have a louder, clearer voice in how taxes are collected and who is burdened most heavily by them. State governments are much more responsive to citizens, and much more nimble than the federal government.
Citizens who didn't want to pay an income tax could either move to a state that doesn't have one, or lobby their state to eliminate the income tax. Those who were not comfortable with a high sales tax could move to a state that favored income or property taxes.
As populations ebbed and flowed around the nation, tax burdens for states would change to reflect these changes. So, if Utah created a tax scheme that many people loved, and if those people all moved to Utah, Utah's tax burden would be increased proportionate to the number of new residents it gained. Similarly, as residents left other states to move to Utah, the tax burderns of the other states would decline proportionate to the number of residents lost.
Such a system would remove the burden of federal tax collection from employers and businesses, and allow them a greater voice in what taxes they must collect.
A system like I've described above would also allow states to easily incentivize certain behaviors (like buying a hybrid car, for instance) or to penalize other behaviors (like operating a coal electricity generating facility) with tax breaks and penalties. Such carrots and sticks could then be used to lure desirable businesses and industries to states with favorable tax codes.
Those who favor states rights and a true sense of federalism would also have to favor such a system as it would give states great leeway to decide just how they are going to collect taxes from their citizens.