“Taxation without representation”… seen on K Street.

Politicians love hidden taxes. When they raise the taxes on corporations and those corporations raise their prices as a result, the politicians get to preen about the “greedy corporations” instead of looking in the mirror to see who is truly greedy. — Larry J (Economics for Dummies or Presidents (But I Repeat Myself))

I prefer the income tax over the sales tax on the federal level because, conceptually, it’s simple.¹ If we are going to have a tax, it must be simple. The things that you are given by your employer are taxable; the only issue comes in determining their worth. And it has to be done once.

A sales tax, however, not so much. Do trade-ins count? Bartering? How do sales prices figure? Yard sales? If yard sales are exempt, what is a yard sale? These are decisions that have to be made several times a week, if not several times over the course of every day. And the more complex or vague, the more you discourage new people from selling: from creating new businesses with new jobs producing new products and keeping prices low.

Because sales taxes are heavily regressive without some additional complication—they will affect people who spend most of their income more than people who spend smaller parts of their income—they almost always come with an additional complication. The national sales tax usually comes with some complex scheme to rebate money to the poor to cover their expected taxes. Why not set a simple, low threshold, below which the tax does not apply? If the tax is so onerous that it would break a person’s wallet, they can choose to break their purchases over multiple days. Families could break up their groceries into multiple carts. But the rich didn’t get rich by wasting their time like that—unless of course the sales tax were so onerous that it became worthwhile to hire people to make smaller purchases for them.

Now, I can see that the national sales tax as it’s described is a huge improvement over the national income tax as it’s currently implemented, but that’s because the national sales tax hasn’t met the real world yet. As long as we are overhauling the tax system, making a straight percentage all the way across, no deductions, will mean that everyone pays X% and income taxes will be simple, too.

For example, the total income in the United States in 2012 was thirteen trillion². The total federal revenue in 2012 was 2.449 trillion. A simple 18% tax, no adjustments, no exemptions, no deductions, no nothing, would match that number and be a whole lot simpler than the current system of different kinds of income and complicated deductions, exemptions, and adjustments.³

I can think of one real benefit to a sales tax over income tax: as a business owner you don’t have to deal with it until your service is ready. You don’t have to become an expert in tax law before hiring anyone, but only after you start providing a direct service to the public, such as an online store. Of course, this benefit is only because we shanghai employers into garnishing their employees’ wages on behalf of the government, something that we shouldn’t do. This benefit could be provided to the income tax as well simply by removing that requirement and letting employees keep all of their wages until the end of the year.

In fact, most of the problems with income tax that sales taxes are supposed to fix are not inherent to income taxes, and will be applied to sales taxes once the federal government implements them: hidden taxes that the seller is not to show on the receipt, multiple taxes with different names to make some of them look like they’re not really taxes. I fully expect that the complexity of having different taxes for different people will also end up being offloaded onto retailers just as it is currently offloaded to employers.

There is no such thing as a fair tax. Every tax punishes some activity; income taxes punish employing and working⁴; sales taxes punish buying and selling. Corporate taxes punish employing, making, working, saving, buying, and selling and also hide the taxes on working, saving, and buying.

The benefit of a national sales tax is that most states already have one, so the national one can be piggy-backed onto the state one. But of course this penalizes states that don’t have sales taxes—just like having a federal income tax penalizes states that don’t have income taxes. This is why I still stand by my suggestion that the federal government shouldn’t tax individuals or businesses at all: the federal government should tax the states, and let the states figure out how to acquire the money. States that prefer income taxes can use income taxes; states that prefer sales taxes can use sales taxes. States that prefer a mix can use a mix. And people can vote with their feet on where to live and where to buy.