The Problem with the Universal Sales Tax (UST)
What is the UST?
The concept of the UST is simple. The federal government will collect taxes only through a universal sales tax. It is being pushed as an alternative to the progressive tax system currently in place.
How is it different then what exists now?
Currently taxes are collected through a progressive payroll tax system (there are other taxes, but let’s ignore them for now). The more a person makes, the higher their taxes will be. A person making $25,000 may only pay 8% taxes, whereas a person making $1,000,000 may pay 30% in taxes. An important note is that income is broken into brackets and that when any individual is paying a tax rate for income up to a brackets amount. In other words, if you make $1,000,000, the first $25,000 is taxed at 8%, the next $100,000 is taxed at 10%, the next $250,000 is taxed at 15%, and so on until you get to the top bracket (say $750,000), at which point any income above that is taxed at, say, 37%. In other words, if an individual is taxed for income in a tax bracket at the same rate as everyone else in that bracket for income in that bracket. If you make $750,001, that one dollar would be charged at 37% and everything up to $750,000 would be charged at different rates.
It’s complicated, but it’s the system that is in place. It’s also a system that many people don’t seem to like, so they propose alternatives, like the UST.
What are the problems with a UST?
The concept of a UST is appealing for it’s simplicity. The consumer decides whether to pay taxes based on what they purchase. During good times, people spend more money and as a result, more taxes are generated. During bad time, less taxes are generated. The Government’s funds are reflected by the state of the economy. So what are some of the problems with a UST system?
Perhaps the biggest issue with the UST system is that it is a regressive tax system. Whereas in a progressive system, the more you make, the higher your tax rate is, a regressive system increases the percentage of income taxed the less you make. Take someone who makes one million dollars a year, but only spends 15% of their income ($150,000) and is taxed 10% ($15,000) of that, meaning they are taxed less then 2% of their total income. On the other hand, someone who makes $40,000 a year and has to spend all that to make ends meet winds up being taxed on 100% of their income. Their purchasing power goes from $40,000 to $36,000, whereas the millionaires purchasing power is relatively unaffected. As a result, those that make less are burdened with a higher tax rate then those who make more. The system rewards you the richer you are.
Identifying taxable items
One of the proposal put forth to combat the regressive nature of the UST is the concept of exceptions on necessities. Food, clothing, and other “necessities” would be given an exemption to the tax. On the surface this seems like a good balancing measure, but looking closer problems start to crop up.
First, what defines a necessity? Traditionally needs have been listed as food, water, shelter, and clothing. Give a person food to eat, water to drink, a place to sleep, and clothing to keep them warm and their basic needs are met. But againde what fines a necessity. Food is a broad topic. Is a Subway sandwich considered food? What about McDonald’s McRib? Looking at the Colorado QuestCard (food stamps) program, they define the following allowances for foods:
>You CAN buy foods such as: breads, cereals, fruits, vegetables, meat, fish, poultry, dairy products, seeds and plants which produce food for the household to eat.
>You CANNOT buy any nonfood items such as: beer, wine, liquor, cigarettes, tobacco, pet foods, soaps, paper products, household supplies, toothpaste, cosmetics, vitamins, medicines, foods that can be eaten in the store and hot foods.
From Colorado’s perspective, basic foods are allowable, whereas processed foods (bread and ceral excepted) are not. If you cook with it, it’s allowed, but if you buy it in a prepared form, it’s not. What about hot dogs or frozen meals? And this is just food. What about clothing and shelter? Does the government give a person an exception for certain types of clothing? Are generic brand clothes exempt, but not name brand? Will the government start providing government issued blue jeans to cover the basic clothing need? And then there is shelter? Is the $500/month rental unit exempt along with the $10,000,000 mansion? Maybe the government will set limits, say a $750/month excemption limit. Then there’s the problem of housing costs based on where you live. Housing costs in San Francisco and New York are higher then Des Moines or Denver, along with food and other items.
Then we back to “necessities”. Heat is a necessity in many places. Are utilies such as water, natural gas, and others automatically excempt even if they are used to charge consumer devices like TVs or iPods? Or does the government monitor what the electricity is being used for. Based on electrical signatures, it would be easy enough to know how much electricity is being used for the TV vs. how much is being used for heating. The UK regularly monitors it’s citizens to determine if they are using TV without paying the BBC tax, so what’s to prevent the US government to drive around and monitor usage.
Then there’s the process of identifying which items are taxable. From a technical point of view, this is easy to do, a simple switch in a database, but the process of identifying the items still needs to be done. Someone has to determine what is exempt and what isn’t. Most people would say that tulips are floral decorations, but in fact they can be eaten from the flower to the bulb. Does that fall under exempt or not?
Of course there’s the burden now put on the stores to track this accurately. Computer databases make this easier, but databases need to be continually updated and standardized. If every store has a different database or uses an outdated database, items might be taxed when they shouldn’t or vice versa. Maybe the solution is to move the database to a central location that is updated regularly and then require stores to interface with that database, tracking what is being sold. But what about mistakes? Do we go back and issue tax recalls? If so how? Maybe that central database includes the names of people who bought the items as well. Maybe the government could issue tax cards that track all our purchases. Perhaps tax exempt items can only be determined if payed for with the government card. Cash would always be taxed to be on the safe side.
And it goes on and on. A simple idea becomes a massive bureaucracy with government defined allowances, invasive tracking of spending, discouragement of cash transactions, government sponsored clothing, and a multitude of other big government initiatives. Not exactly a system of lesser government.
Barter System/Black Market
If you go to some parts of major cities, you can find entire districts dedicated to the black and grey market. These are areas where you can pick up the latest movie release for a couple bucks. Recently a major electronics company found its latest, and unreleased, wireless card available on eBay, made availabe via a black market. These examples are part of an underground effort to subvert the system in place to provide people with cheaper alternatives to traditional routes. Some, like locally produced wines, can be bartered in a grey market for other goods and servies. Others are flat out stolen from the screen or the factory and form an underbelly of crime that part of the black market. During prohibition, alcohol was available to anyone looking, providing criminals money needed to expand into other illegal activities. The War on Drugs has resulted in massive violence as cartels fight amongst themselves for control of the unregulated market. Imagine that same scenario being played out as people work to avoid paying taxes.
In a UST system, there will most likely be a rise in “tax-free” items of questionable quality. Right now I can go to my local Rite-Aid and purchase medication (not allowed under Colorado’s ClearQuest system) with the assurance that it’s most likely safe. Can the same be said for a black market seller? When I lived in Colorado, there was a van that would park on the side of one road that had a sign that said “Fresh Shrimp For Sale”. It was Colorado. It was about as far away from the ocean as you can get. I couldn’t trust the quality or safety of the food because it was a van. I had no assurance that what I was buying had passed at least some level of quality and safety assurance. With the black and grey market the same thing happens.
This isn’t a criticism of one friend giving a twelve pack of home brewed beer to another in exchange for some plumbing work, this is a criticism of the mass production of tax-free items with no government oversight. That tax free $15 bottle of wine from the back of a van might seem like a good idea at the time until you find out the wine was stolen from a truck. By doing so, you engage in the funding of criminal activities. Much like counterfeit Prada can be tracked back to funding terrorist activities, you have no assurance the $15 bottle of wine doesn’t do the same.
Doesn’t Solve the Deficit Problem
And a UST doesn’t solve the deficit. The deficit is a result of spending, not income. Until a system can be put into place to control spending, you are still stuck with an inherently unbalanced system in which tax cuts are promised while maintaing the status quo for spending. It can’t work that way. It’s like living off off of your children’s credit cards. Someone eventually has to foot the bill. This is tax system independent.
Are there any benefits to the UST system?
Any system has it’s benefits. UST advocates suggest using a monthly prebate system for necessities, giving a each family a monthly check to cover necessities. The elimination of standard payroll taxes means more money in peoples pockets up front. There would be a wider tax base, including previously untaxable individuals like illegal immigrants. Everyone is charged the same tax rate “at the register”, lending towards a sense of fairness.
Is a progressive tax system punishing the “producers”?
One of the arguments for a UST tax and against a progressive tax is that it punishes the “producers”. By taxing those who make more, you are disincentivizing people to produce more. Why make $1,000,000 when you’re going to be taxed 37% on any amount over $750,000? Financially speaking, you’re still making $157,000, more then most people make in the U.S. and that doesn’t count the money you made up to $750,000. So while you tax the rich more, the impact to their lives is minimal, whereas there are benefits to society such as reduced deficits and better safety nets.
I hope that this post has shed some light on the problems with the universal sales tax system. It’s not a bad idea, but there are a multitude of problems that proponents gloss over. The current progressive system isn’t perfect, but to paraphrase Winston Churchill, a progressive tax system is the worst form of taxation, except for all the others.