Published October 11, 2012
The first presidential debate covered a topic dear to my heart: tax relief to Middle America. Both sides agree that something must be done, but they differ on the best way to provide relief.
There is talk of streamlining the tax code and shifting things around to benefit the middle class. In the past there has also been talk of a flat tax and a fair tax but neither idea gained enough traction to get passed. Our tax situation is kind of like having your mother-in-law living in your house: you complain about it, but you’re never going to do anything about it.
The tax code has become so huge and complex that it’s intimidating for anyone to think about for an extended period of time, much less work to reform it.
Here’s my idea: Let’s completely eliminate the income tax and replace it with a true progressive tax – a consumption tax. It would mimic a national sales tax where goods and some services would be subject to taxation. The rates would be determined, but there are many benefits to having a consumption tax:
Every year rules change to make one group happy, disappointing yet another group that now has to restructure their holdings in order to stay ahead of the game. If a tax were based on what people purchase rather than what people earn, there would be no need for loopholes.
As with any system of taxation there is always the potential for abuse. Levying a consumption tax in lieu of the income tax would give the responsibility to business owners to collect and turn over the taxes. That’s a lot of money to be entrusted to our nation’s companies.
Business owners already must collect income taxes from wages, sales taxes and excise taxes. Rather than collecting the income taxes from wages, they will be collecting consumption taxes from buyers, so it’s pretty much the same thing. However, because there will no longer be an income tax, any entity and individual who normally makes estimated tax payments rather than having withholding at the source, will now be paying a consumption tax and thus increasing the amounts that sellers of products and services will be required to gather and turn over to the government.
There’s a very good answer to this quandary: We could implement a merchant credit card machine that will direct received funds to the business owner’s bank account for the net purchase and to the US Treasury for the consumption tax liability. That way the business owner never has access to the funds and cannot abuse the position.
Another disadvantage is the loss of behavior modification tools. I wonder what would happen to charitable giving if people no longer receive a tax break for their contributions? Perhaps purchases in thrift stores run by nonprofits could be excluded from taxation. This will encourage purchasing from these stores which will expand their abilities to fulfill their program goals. This will also provide another needed exemption for the nation’s poor.
Another problem to consider under a consumption tax system is whether or not we will be driving sales away from American businesses. If you must pay a 20% consumption tax on a new vehicle, will you instead attempt to import one from another country? I suppose raising import duty taxes could prevent folks from taking this route. The wild card is online sales: To save on the consumption tax, American shoppers can turn to Amazon UK to get the latest book, rather than go to the local bookstore. These are issues that must be addressed.
Finally, will the levying of a consumption tax provide us with sufficient revenues? The government needs to bring in at least, actually more than it is now.
No system is perfect, but with this one, I think we’re getting warmer.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.