Saturday, May 2, 2009

Why Abolish Sales Taxes?

It is time we abolish sales taxes, replacing them with something much simpler. For what it is worth, I think we need simpler income taxes too, but that's a different topic. To those of you who live in Chicago, wouldn't it be great if a $5 footlong sandwich from Subway really cost $5 (rather than $5.51)?

To be clear, my reasoning for why we should abolish sales taxes is distinct from Robert Reich's motivation. Here are his words:

It would be fairer to abolish sales taxes altogether and have government rely more on progressive, graduated income taxes. Yet over the past ten years, sales taxes have gone up -- notwithstanding the occasional tax holiday -- while other taxes at the state and federal level have become less progressive.

Contrary to this quote, I make no claim that sales taxes are unfair. Fairness is tricky: is it fair to take more from people who worked harder? To the extent that hard workers make more money, that's what Reich's "progressive" tax scheme does. Clearly, a fairness argument can be made against progressive taxation as well as non-progressive taxation (see the National Retail Sales Tax Alliance). Therefore, I don't trust the fairness criterion. My beef with sales taxes is on efficiency/implementation grounds.

Most of my life, I lived in a simple world where there is no sales tax, a world called Montana. That changed when my wife and I moved to Chicago. Unlike Montana, Chicago has an extra special 10.25 percent sales tax. If you buy food at a grocery store, the rate is lower (around 2 or 3 percent), but adding 10.25 percent to nearly everything you buy gets really depressing really quickly -- especially when you've seen the much preferred alternative.

I dislike taxes as much as I dislike lighting money on fire. Nevertheless, as far as taxes go, sales taxes are my least favorite by far. That's because with a sales tax, not only does the government take your money, but in the process, the tax induces people to perform needless computations. As a result, people in a sales tax community waste time doing math that accomplishes nothing productive.

To illustrate my point, suppose you go to dinner with a group of 9 people in a restaurant that offers two dishes: a burger and a steak. The burger's pre-tax price is $5 and the steak's pre-tax price is $10. Everyone agrees to pay their own bill and everyone is honest about doing so. Suppose further that the socially accepted tip is 20 percent.

What happens when the bill arrives and this is a restaurant in Montana? The burger people pay $5, the steak people pay $10, both types of people ponder the 20 percent tip, but this is easy math. Burger people contribute one dollar for tip, steak people contribute two dollars. Easy.

What happens in Chicago? Everyone does the same calculations as before, but at some point in the process each person has to multiply by 0.1025 (or 1.1025) to get the tax payment right. During this step, there's a lot of staring at the ceiling and consulting the cell phone calculator. Who really want's to revisit decimal multiplication from grade school? Plus, there are four significant digits. Whose idea was it to make it 10.25 percent instead of 10 percent? Yet, the sales tax forced this silly computation on all of us.

To be sure, we perform computations to pay the right amount of other types of taxes, but these bouts with tax math are few and far between. It is no stretch of the imagination to say that people despise April 15th, even though many people receive money back! A big reason for our hatred of tax day is the senseless math. Yet, compared to sales taxes, income and property taxes waste little effort because our time spent on them usually only happens once a year. Sales taxes pose math problems for almost every transation we make. This is a complete waste of time. For this reason, I say we abolish sales taxes.

To be fair, it is not politically feasible to reduce our total tax burden so drastically (wouldn't it be nice?). On the other hand, it would not be difficult to substitute some other tax that requires less of our time in place of the sales tax. To our government, why tax time if you can't spend it?

Here's one suggestion. Levy the same percentage tax on the same goods and services, but require that the tax be built into the price: the price you see is the price you pay. In this scheme, we minimize the senseless math that comes with living in a sales tax community. The only people doing math on the remaining taxes are business owners who would have had to tally the sales taxes under the old scheme anyway.

From my perspective, this proposal looks like a pure gain. There is no additional math for the store owners because they're already doing it in the current scheme. The government gets the same amount of money -- after all, it is the same percentage tax. But most importantly, ordinary people can quit multiplying by 0.1025 and start enjoying life.

3 comments:

  1. Having grown up in Montana as well, I have always considered sales tax to be a very pesky business. Now I'm living in London, where taxes are outrageous. However, they don't always FEEL outrageous because the VAT (Value Added Tax) is figured into the advertised price (just as you are suggesting be done with sales tax in the US). Including the sales tax in the advertised price does not seem to be an issue here in England, and last fall when the VAT rate changed when the economy took a dive, there did not seem to be any large problems refiguring and re-advertising the new prices. Do you know of any specific reasons why sales tax in the US isn't integrated in a similar way? I would be interested to know the practical arguments, simply because the system here in England seems superb. If I have to pay a sales tax, I DON'T want to have to figure it out in my own head. It does indeed feel very much like time is being taxed when I'm paying for sales tax in the US!

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  2. One argument I heard for doing a sales tax instead of a VAT is that sales taxes actually require calculations. In performing these calculations, ordinary citizens get angry and demand lower taxes. Like our taxes, I think this argument is outrageous!

    First off, the overwhemling sensation from a sales tax isn't anger; it is sadness.

    Secondly, a VAT could be implemented by printing a separate line on the receipt that says how much tax was paid on that transaction. That would keep people outraged enough.

    Alternatively, stores could be required to post a sign that says "10.25 percent VAT." I know that I would be horrified every time I saw that sign.

    When it comes down to it, the time it takes to read "10.25 percent VAT" or read a line on the receipt is less than the time it takes to multiply by 1.1025. And, the result is the same: the government gets 10.25 percent of the base price.

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  3. What is VAT or VAlue Added Tax?
    Another way of hoodwinking the people,right?
    What value is added to the product or service?NONE
    It only goes towards the Mistress of the local governors or Something...

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