Under the existing
income tax system, the top 1% pays 40% of all federal taxes. According to the
Tax Policy Center, 44% of Americans will not pay any income taxes this year. On
the other hand, Warren Buffett claims he has a lower tax rate than his
secretary does. While much buzz was created about the carried interest, nothing
has been done yet and as a result hedge fund billionaires continue to enjoy one
of the lowest tax rates. According to Fortune, “Amazon will
pay a whopping $0 in federal taxes on $11.2 billion profits.” These conflicting
scenarios demonstrate how irrational the US Income Tax system has become.
Therefore, it’s high time that we (phase out and) replace the personal income
taxes with a set of progressive consumption taxes.
Of
course, the one-size-fits-all consumption tax – which was proposed before and
was justly unsuccessful – is inherently regressive, as poor and middle class
folks tend to spend a much higher percentage of their incomes compared to the
rich folks. Yet, the consumption tax could be an ideal replacement for the
current income tax, as long as it is progressive. How? Quite simple – all
non-food goods and services must be broken down into three progressive tax categories:
Basic, Luxury and Ultra-luxury. While the basic category will have the lowest
tax rates, luxury and ultra-luxury will carry progressively higher rates; for
example, the national sales tax rate (atop the state and local sales taxes as
it replaces the federal income tax) for basic durable goods (e.g., appliance)
could be 2 to 3%, whereas the luxury and ultra-luxury could carry 5% and 10%
rates, respectively. Needless to say, the lower rates for the basic category
will advantage the middle class while the rich will be
Happier
to pay higher national sales taxes in lieu of their disproportionately higher
share of the federal income taxes (case in point: the top 1% pays 40% of all
federal taxes).
So,
how will the progressive consumption tax system work?
1. National Sales Tax on Basic and Luxury Durable
Goods – In order to save, say $5K to $5M on annual income taxes,
taxpayers would be amenable to an additional national sales tax – obviously
atop the current state and municipal sales taxes – on durable goods. Unlike
income taxes, consumption taxes are more humane meaning families can budget or
plan for these expenditures. Since the basic durable goods impact the poor and
middle class, the rate must be lower, say 2% to 3%, followed by progressively
higher rates on luxury durable and ultra luxury durable goods generally demanded
by the rich; for instance, all appliances under $10K could be the basic, $10K
to $20K being the luxury while over $20K being the ultra luxury category, with
progressively higher rates. Likewise, automobiles could have three categories
as well. Since this a national sales tax, it must cover all online purchases.
While states and municipalities will continue to charge different sales tax
rates, the national sales tax rates will be uniform across all states and
territories as they will replace the federal income taxes.
2. National Sales Tax on Unhealthy (processed) Foods and
Beverages – It’s about time that the health-conscious folks are not
forced to subsidize those who basically live off junk foods and high-calorie
beverages. This is a (preventive) health issue and, hopefully, this national
sales tax will save citizens billions in health insurance premiums down the
road. The parallel case is equally compelling: Today smokers are paying a hefty
price for their lifestyle (significantly higher taxes on their lifestyle
products and higher premiums on life and health insurances, etc.). While we
must not take smokers’ choice away, the rest of us must not finance their
lifestyles either. The phase-out of the income tax system will take 5 to 7
years, during which as the income tax revenue starts to come down, the junk
food/beverage sales tax should start high at, say 10%, graduating down and
perhaps bottoming out at 5%.
3. National Sales Tax on all Name Brand Prescription
Medications – When a particular medication (all forms: oral,
injection, iv, etc.) has a generic counterpart, it must be subjected to the
national sales tax. Since the name brands are significantly costlier, they are
generally meant for the rich folks, without directly impacting the poor or
middle class. Of course, if or when a generic is not available (or is not
easily or readily available), the brand name must be exempt from the proposed sales
tax. Even the prescription generics produced in foreign facilities could be taxed
(excise or sales).
4. National Sales Taxes on Million dollar-plus Home Sales –
Since the rich and ultra-rich owning the upscale and expensive homes will be
big beneficiaries of the phase-out (followed by no income taxes), the million
dollar-plus home sales must be subjected to the additional progressive national
sales taxes. It must not be a blanket one-size-fits-all rate; instead, it must
be progressive, for example, sale price $1M to $2M @5.00%, $2M to $3M @5.25%,
$3M to $5M @5.75%, $5M to $10M @6.00% and $10M+ @6.25%, etc. At the individual
level, unlike the income taxes, these sales will impact them once in a while,
thus a far preferable option than the high annual income taxes they have been
paying. On the contrary, in order to keep the upscale housing market liquid and
economic, the property tax component of the SALT cap must be separated and
de-capped. Should sales clusters start to balloon just under $1M, the threshold
could be lowered to the jumbo mortgage (non-conforming) level.
5. National Sales Tax on Luxury Hotels (4 and 5-Star) –
These hotels are primarily for the corporate executives and rich folks so an
additional 5-6% national sales tax will not harm the hotel industry. In fact,
these hotels might even use this sales tax as a promo (“We Will Pay Your
National Sales Tax”) in order to compete for the traffic during off-peak
seasons. A vast majority of these hotels have medium-to-large convention
centers – seasonal to round-the-year – so convention center sales surtax could
be an ancillary surtax as well. The hotels that are run as resorts must be
subjected to an additional resort sales surtax. Similarly, all private golf
courses must have additional surtaxes. Again, none of these will adversely
impact the middle class; even if they impact the middle class to some extent,
it will be insignificant when compared to the tax savings they will be enjoying
from the elimination of income taxes.
6. National Sales Tax on all Luxury Air Travels, Amtrak,
Vacation Cruises and Car Rentals – Business and first class air
travel, both domestic and international, is primarily for the corporate
executives and rich folks so an additional 5-6% national sales tax will not
harm the airline industry. Similarly, those who spend thousands more on luxury
and ultra-luxury vacation cruise suites can afford an additional 5-6% national
sales tax and it won’t harm the cruise industry either. Foreign cruises coming
to the US shores may be subjected to additional port charges. Luxury car,
charter flights and private jet rentals must carry sizable luxury and
ultra-luxury national sales taxes. Likewise, upscale suites and berths on
Amtrak must be subjected to the national sales tax as well. Again, none of
these will adversely impact our middle class.
7. Selling Non-specific National Sales Tax Data to Private
Companies – Undoubtedly, the national sales tax data will pave the way
for the largest warehouse of the most uniform consumer spending and market
performance Big Data, so the Commerce Department might consider selling the generic
data to private companies, reducing the importance of the back-door data from
the social media. Private companies in the consumer sphere, including the
market research and econometric consulting firms, will pay large sums on an
on-going basis to have access to such central and uniform data. Since the data
will constantly change in line with the economic cycles, companies will be
dependent on it, perennially. Additionally, the sale of data to the end-user
private companies will be directly taxed while the value-added resellers will
collect sales taxes from their clients. In no time, the national sales tax data
could be a big money maker for the federal government. Citizenry would be
relieved as the dominance of the social media data taking a nosedive.
8. Selling Naming Rights to Lesser-known or Un-named
Federal Infrastructures – Let the rich people and private institutions
pay to put their names up on lesser-known federal government buildings, town
squares adjacent to federal buildings, highways, bridges, parks and
recreational centers, education/job training centers, shelters, libraries, etc.
that the federal government owns and operates. Federal government must also own
the naming rights while funding (or primarily funding) non-profit institutions
with federal dollars. If the wall is built on the southern border, naming
rights to each stretch or segment must be auctioned off as well (in fact,
this could provide partial funding for the wall, as well as the cost of general
maintenance). The selling process must be totally open and transparent (via
open tenders), thus awarding the naming rights to the highest bidders (some
restrictions could apply). Also, in order to attract the right market price, it
must also be term-limited, say 3 to 5 years. US DOT should also consider
private-public joint ventures to build new toll roads and bridges (unable to
get federal funding) wherein the private party incurs all costs to build the
infrastructure in return for the toll incomes for 10-15 years.
9. Last but not least, Massive Savings will be generated
by Downsizing IRS – IRS has over 80,000 employees with an operating
cost of $11.5B. Obviously, the vast majority of them are expected to work on
the personal income side. With the phase-out and eventual elimination of
personal income taxes, the overall manpower could be significantly downsized,
reducing the operating cost to $2B to $3B. Of course, a much smaller national
sales tax group (Collection, IT and Data Science) will be needed under the
umbrella of the Commerce Dept. Along with the reduced headcount, many IRS
Centers around the country could be closed, data centers merged and
cloud/storage facilities scaled back. The corporate income tax rate has already
been lowered to 21% and any further reduction would necessitate some
compensating European Union-style VAT.
Instead of forcing the
top 1% to pay 40% of all federal income taxes, we should seriously consider
switching to a more humane progressive consumption tax system wherein people at
large get to plan and decide the amount of taxes they would pay. While progressive
consumption tax is poor and middle-class friendly, the rich would also welcome
the idea considering the trade-off. Of course, studies will be needed to make
the switch at least revenue neutral.
- Sid Som, MBA, MIM
President, Homequant, Inc.
homequant@gmail.com
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