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 different scenarios demonstrate how irrational the US Income Tax system has become. Therefore, it's high time that we replace the personal income taxes with a set of middle-class friendly 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 than the rich people.
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 type 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%. In contrast, luxury and ultra-luxury could carry 5% and 10% rates, respectively.
The lower rates for the basic category will advantage the middle class. Simultaneously, the rich will be happier to pay higher national sales taxes in place of their disproportionately higher share of the federal income taxes (case in point: the top 1% pays 40% of all federal taxes).
While a host of progressive consumption taxes could be thought of and implemented, here are some basic ones:
1. National Sales Tax on Basic and Luxury Durable Goods – 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.
2. 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 one-size-fits-all blanket 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.
3. 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. These hotels might even use this sales tax as a promo ("We Will Pay Your National Sales Tax") 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. 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.
4. 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. International cruises coming to the US shores may be subjected to additional port charges. Luxury cars, charter flights, and private jet rentals must carry sizable luxury and ultra-luxury national sales taxes.
5. 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 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 pay a hefty price for their lifestyle (significantly higher taxes on their lifestyle products and higher premiums on life and health insurance, etc.). While we must not take smokers' choices away, the rest of us must not finance their lifestyles either.
While progressive consumption tax is poor and middle-class friendly, the rich would also welcome the idea of considering the trade-off. Of course, well-studied tax rates will be needed to make the switch revenue-neutral, even revenue positive.
It's about time we return control to taxpayers!
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