National Sales Tax: 3 Reasons Why It’s Stupid


Megan McArdle over at the Daily Beast has her objections to a national sales tax:


To be sure, there are reasons to like broader sales tax collections. Economists favor consumption taxes—which is basically what a sales tax is—because they are relatively efficient, and they may encourage people to save and invest more. If states can collect more revenue from internet companies, they may rely less on income taxes.


There's also a question of fairness: local businesses are essentially competing with internet firms that offer a 6-12% discount because they don't collect sales taxes. But there are also reasons to be wary of forcing out-of-state companies to collect your sales tax. For one thing, it erodes the healthy tax competition between states and localities. Right now, the fact that it’s hard to collect sales tax from other states keeps those taxes to reasonable levels; they currently top out around 12%. If states and localities didn’t have that competitive restraint, they might well start to rise….


Sales taxes are also regressive. My colleague points out that internet consumers skew affluent, because you have to have a credit card. Sort of. The rise of pre-paid credit cards is actually rapidly changing that, bringing even unbanked consumers online. Of course, the very poorest—the welfare mothers and people on disability—are not buying much. But those people don’t buy much anyway, since they generally have a cash income of less than $1000 a month. Besides, internet consumers also skew young But the biggest concern may be the burden this puts on small business. That burden is smaller than it was in 1992, because there is now software that can help you keep track of all the different regulations. But it remains a burden. 50 states, umpteen localities, all of them with different rules not only about the rate of tax, but which items are exempt. This is a trivial problem for Amazon. But it is not trivial for small businesses who have to know, say, whether to categorize their cookies as a (usually tax free) grocery item or a (usually taxed) prepared food.


She has some great points, and now I will add my reasons:


1. The IRS can't handle the work load it has, much less deal with a National Sales Tax

The IRS is powerless stop stop $12 billion in fraudulent refunds. It can't process correct refunds. And it now has to implement ObamaCare as well? 


2. The IRS won't receive the money Congress thinks it will with a National Sales Tax

Nope, not even talking about the Laffer Curve (which states that after an optimal effective tax rate is exceeded, as taxes go up, revenues actually go down). A funny thing happens when vendors are charged with collecting sales tax. Sometimes it never quite makes it to the taxing authority. Sometimes because of fraud, sometimes because vendors are short of cash, sometimes vendors dip into money they are supposed to send to the government. It happens all the time with payroll taxes. It happens all the time with state sales taxes payments. So who at the IRS is going to be policing every US based retailer on the internet to make sure that everyone is being charged the National Sales Tax? Not only that, who can can piece through the many layers of anonymity that exist on the internet and personally find people to assess with trust fund penalties for failing to pay over and collect national sales tax?


3. Taxpayers will be ripped off under a National Sales Tax plan.

So National Sales Tax will mean higher prices, yet the money the National Sales Tax is supposed to collect will actually never quite get there. Any expansion revenue will be eaten up by scam artists and compliance and enforcement costs. All while depressing the economy by making everything more expensive.