Tuesday, March 9, 2010
The "Secret" U.S. National Sales Tax
A lot of people who don't like the income tax believe the U.S. should adopt a national sales tax or value added tax. But those on the left of the political spectrum denounce a sales tax as being regressive -- meaning that it hurts the poor more than the well-to-do.
What seems to be lost in this argument is that we already have a tax that works just like a national sales tax.
For 2008, income taxes, employment taxes and excise taxes paid by corporations equaled about 30% of total tax revenues. And this did not count the same kind of taxes paid by the owners of pass-through businesses like S corporations, partnerships and limited liability companies. These pass-through entities tend to be smaller but there are a lot more of them. Conservatively, I estimate that at least 40% of the government's total revenue comes from taxes imposed on businesses.
But here's the catch. A business doesn't really pay any taxes. They merely collect the taxes.
When all businesses are faced with the same cost, that cost will be included in the price of their products and the consumers will bear the real burden of the tax. One could argue that the taxes on employers for social security, Medicare and unemployment benefits have the effect of reducing the wages that could be paid to the employees. But the result is the same as imposing the tax on the consumers.
The far left will argue that it is the evil owners (capitalists) of businesses who bear the burden of the taxes imposed on businesses. That argument falls apart when you consider that owners will shut down a business (or sell their stock) if they are unable to earn a competitive return on their investment. Without an adequate return in relation to risk, investors will put their savings under the mattress or in a low yield but safer savings deposit.
However, when the government imposes more taxes on businesses than other countries do, a lot of the U.S. business owners will move to more hospitable countries. Or they may begin to hire more self-employed independent contractors instead of hiring more employees. Or they may even outsource work to cheaper labor in other countries.
Posted by Vern at 8:48 AM