National Sales Tax Term Paper

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sales tax reform in America. Specifically it will discuss the idea of an alternate tax system, the National Sales Tax and compare it to the current tax code. A new way of collecting taxes seems much more fair and equitable than the current income tax method, which seems antiquated and unfair. Some large corporations and America's wealthiest people pay very little or no taxes through tax loopholes, which makes the system, rely on the people who can afford it the least. One expert notes, "Certain business entities such as partnerships, small business corporations and limited liability companies are treated for tax purposes as conduits and pay no federal tax at the entity level" (Boyd, 2005). There has been talk about developing a more equitable system that would be fair to everyone, not just a few. Developing a national sales tax system could help decrease the budget deficit, make the system fairer, and help pay for other government programs, and it would make income tax season much easier for most Americans.

Some kind of tax reform has been on many people's minds for year. President George W. Bush talked about it during his administration, prior presidents addressed the issue, and people have advocated for tax reform for decades. However, simply changing the system to a national sales tax type of system is not as easy as it might seem. Expert Boyd continues, "Tax reform is much more complex than lowering or raising taxes. It implies shifting the burden among taxpayers, or changing the financial activity being taxed" (Boyd, 2005). That of course, is controversial, which makes any attempt to change the tax structure controversial, as well. The alternative tax system under consideration that most people take seriously is a "Value-Added-Tax" or VAT, which is in use in 130 countries around the world. Rates range from a 5% tax to 25% and it has been so successful in some countries, like Ireland, that they have been able to attract more outside businesses because of reduced corporate tax rates because of the tax (Montgomery, 2009). The VAT tax is much simpler to administer and collect, because it is paid by consumers and reported and collected by businesses for the government, just as any other sales tax is, and it is fair, because every consumer pays the same rate, regardless of their income or taxable income.

The elimination of the current Adjusted Gross Income and Income Tax credits would impact everyone in the U.S., but most people think the impact would be positive. Reporter Montgomery continues, "Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14% would raise enough money to exempt families earning less than $100,000 -- about 90% of households -- from the income tax and would lower rates for everyone else" (Montgomery, 2009). Thus, the working poor and middle class would actually pay less than they pay now in taxes, and it would be spread out over the year through their consumer purchases. The wealthy would probably see their tax rates go down, as well, while some wealthy would pay more, because they are using tax loopholes now that would be closed. Experts also believe that the VAT tax would raise enough money to pay for government health care (Montgomery, 2009), which would reduce the healthcare burden on the working poor and on state and local governments who pay to subsidize healthcare as part of their social services.

The tax system should be used to address social and economic polices and change, because it is a way to stabilize the budget, bring tax relief to the nation, and it could fund a national healthcare system, as well, which is a social change that is important to everyone in the country. An alternate tax system should not change the common desire to save money for retirement, donate to charities, or own a home, because these items are not consumables, they are investments.

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A VAT would not tax investments such as these, or if it did, it would tax them at a very low rate, to encourage, rather than discourage these activities. Now, there are incentives, such as income or interest that encourage people to save or invest, and that would not change under a VAT system. In fact, another expert notes that the VAT tax would remove income distortions such as these, and encourage more people to make these investment and charitable decisions. He notes, "These include distortions of labor supply, saving, corporate financing decisions, corporate retention decisions, investment decisions, foreign retention decisions, bequest and gift decisions, and charitable contribution decisions" (Kotlikoff, 2008). This includes estate taxes and trust taxation, which would encourage more people to set up trusts and bequeath items, without the worry of a financial burden on their loved ones and charities.

Another major incentive to the VAT tax system is that it would reduce paperwork and the size of government. There would no longer be a need for the Internal Revenue Service, or its size could dramatically reduce, because there would no longer be a Federal Income Tax, so it would be unnecessary. That would reduce the size and cost of government, because collecting a flat rate tax would be far simpler. Americans would no longer have to file their income taxes every April 15, and life would be much simpler. Administrative costs would be minimal, and more money could go into other areas of government, but there would be other incentives to at least some VAT proposals, because they would eliminate all payroll taxes along with income tax. That means people would keep more of their paychecks to help pay for the VAT tax, and employers would only have to pay VAT taxes they collected, rather than all the payroll and Social Security taxes they have to withhold now, so it would be a savings for employers, as well (Kotlikoff, 2008).

There has been talk in Congress of a "sin" tax on items like tobacco, alcohol, and even super sugary drinks (Montgomery, 2009) as an alternative to the VAT tax. However, that targets only certain individuals, and does not address the inadequacy and intricacies of the current tax code. Most members of Congress do not support this type of sin tax, and it probably would not be part of a national sales tax plan, because so few people support it. President Obama also proposes a greenhouse gas emissions tax, but that would be difficult to monitor and administer, so it might not generate as much revenue as other tax reforms. Consumer purchases make sense to make the tax equal for everyone, and the government should explore this option because of all the positive benefits and the fairness of the tax structure.

One hundred and thirty other countries use a VAT form of taxation, and for most of them, such as Ireland as noted, have found it is a positive experience. Author Kotlikoff continues, "Virtually every developed country with the exception of the U.S. has a VAT" (Kotlikoff, 2008). Certainly, it is still a tax, but it simplifies the tax structure in these countries, and it brings in revenue from all people equally, rather than favoring the few and the privileged.

Of course, there are always opponents of every innovation, including the national sales tax. Another expert notes, "While some taxes are worse than others, there is no good tax. All taxes distort production, depress economic growth, and punish producers and consumers. They all violate privacy and rob us of property" (Rockwell, 2008). These opponents say the national sales tax will collect just as much as people pay now and more, and that it will be difficult to administer.

In conclusion, this research shows that a VAT tax is a national sales tax alternative that might bring excellent results.....

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