Brusca: Time For A National Sales Tax?

Robert Brusca, Ph.D.|Chief Economist, FAO-Economics
Thursday, 11 Aug 2011 | 4:12 PM ET

When it comes to the budget we know the name is apropos. Neither side wants to ‘budge its’ position. Over the years Republicans and Democrats have become increasingly polarized. Gone are the days when a Republican could have a group of supporters called ‘the Reagan Democrats.’ We now could simply refer to this ongoing conflict as the Donkey and Elephant Circus but it also has elements of a boxing match.

In this corner… with donkey emblem on their brown shorts – Democrats! They do not want to cut the entitlement programs.

And in this corner… in the grey pachyderm colored trunks –Republicans! They do not want to raise any tax of any sort for any reason.

Irresistible force meets immovable object — Okay, let’s start there. Take those two items off the table and there is not enough left to fight over. Any budget discussion must start with EVERYTHING on the table. We know the Democrat position is untenable because Social Security and Medicare simply explode their proportion of government spending on current policy.As for the Republican view, Federal taxes (paid) as share of GDP are currently low by historic standards. In sum: We have two inflexible positions, neither of them supported by any facts and if we honor these demands we have nothing to talk about. That’s a good starting point, isn’t it?

Something New — With that said why not make the starting point something that neither party wants! Hey, that sounds like equilibrium to an economist! This is a tax program. Of course, it will have to accompany cuts in entitlements, but in reality, if not in Democrat-land, we know that already.

I suggest a national sales tax on consumption.

Opponents to the tax — All states, regardless of partisanship, hate the idea because states (and some cities) already use the sales tax. They do not want the Feds elbowing their way in on these revenues. Democrats don’t like it because the tax is regressive. Poor people who spend all their income ‘just to get by’ would pay tax on each dollar of after tax income. The rich would escape some taxation, since they save. Republicans do not like this tax because it is just too powerful. When you tax spending there are no deductions- you can’t avoid it. There is that and the fact that, once in place, it’s too easy for a spendthrift Congress to just raise the rate… Endless revenue.

Why a national sales tax is a good idea — By taxing spending we do not discourage earning income. We actually encourage saving and growth. It allows us to (fairly) tax imports. Stopping the rise in marginal tax rates is important since people work for ‘what they get to keep’ not what ’they make.’ Also national living costs vary. You can’t really identify ‘high income’ except for the super-rich and you can’t tax them enough to matter. The cost of living on the coasts is just so much higher than in the middle of the country that taking aim at income is more random than a game of whack-a-mole.

How much revenue? If consumption growth in nominal terms averages 4% per year over 10 years, a 2% consumption tax would raise nearly $2.7trillion. It could be a great program to couple with tax simplification and spending cuts. Millionaires with fancy tastes would pay tax on their high-priced life styles. People saving for their future retirement or education would not be affected. It’s an idea with so many economic benefits and so much opposition that it deserves consideration. It could be triggered on and off by the lagged deficit-to-GDP ratio, so that budgeting could not rely on it and recession alone would not trigger it. We can’t get anywhere doing what politicians want to do (refuse to do) so let’s try doing what they abhor. There is a certain perverse, yet satisfying, logic in that.

Robert Brusca Ph.D. has been an economist on Wall Street since 1977. He is now Chief Economist for FAO-Economics in New York City.