Public budgeting and finance

Public Budgeting

The idea of a sales tax has circulated as a means of addressing the budget deficit. A national sales tax exists in many developed nations around the world to support governmental revenues. The rates range from 5% in Canada and Japan to over 20% in most of Europe. The United States would come in the lower end of that. This paper will investigate how a sales tax would work in the United States.

There are basically two types of sales tax proposals, a sales tax and a value-added tax. The difference between the two of these is subtle but distinct. A sales tax is applied throughout the supply chain, but a value-added tax is only on the value-added through the supply chain. Under a sales tax system, some goods would see the tax added multiple times in full because the good passed through multiple middlemen in order to get to the consumer. Under a VAT system, the tax would only be applied once through the system

Some have also pushed the sales tax as a means of getting rid of the IRS. Mike Huckabee, among other prominent federal politicians, has proposed a national sales tax as a replacement to income tax (McKinnon, 2011). Other discussions have the sales tax or something similar proposed as a measure to get the deficit under control (Montgomery, 2009).

The advantages of a sales tax proposal are that it would raise revenue. Whether this revenue is used to help pay down the deficit or to eliminate the IRS, or some other pet project, is a function of one's political persuasion. Adding to the federal revenue base is the main benefit of the tax. That it has been implemented in most countries around the world adds to the argument that the U.S. should consider such a tax.

There are several disadvantages, however, to the idea of a sales tax. The first is that it would be politically challenging. There is a lot of resistance to new tax ideas, and this is one of the main reasons why the sales tax has never been implemented in the United States. In addition, the sales tax would create new burdens for business. Stores, restaurants and other retailers would have to make adjustments to the checkout systems and their accounting systems in order to collect the tax and remit it to government. This would create high costs and excessive burdens, especially on small businesses. There may even be a decline in the health of the economy as a result of this drag on business.

One of the most significant disadvantages of this type of tax is that it is regressive. A regressive tax is one that takes a higher percentage from low-income people than it does from high-income people (Investopedia, 2012). A sales tax is particularly regressive because low income people spend a greater percentage of their income. They might spend 100% of their income, which means they would pay a sales tax on all of that money. A wealthy person will spend more in terms of dollars on a sales tax, but will also not spend 100% of his or her income. Some of that income will be saved, meaning that not all of the wealthy person's income will be subject to this tax.

For poor people a higher portion of income will be taxed, and there is also less margin for tax increase in their budgets. A wealthy person can afford to pay a little more tax and still have a roof over his or her head, and food on the table. At lower income levels, even a moderate sales tax like 5% is going to put those things at risk. Thus, a sales tax is a particularly regressive plan.

The income tax system is also regressive to some extent, however. Employment income is taxed at a higher rate than investment income. For lower income people, all of their income is in the form of employment income, whereas for higher-income people a large portion of income come from investments, which are often taxed at a lower rate, if it comes in the form of capital gains.