A National Sales Tax?

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In an article today, the Washington Post contends that a national sales tax is a real possibility. Republicans have long fought for such a tax, which they deem as fairer than a progressive income tax. Now, however, several prominent Democrats are supporting -- or at least considering -- the idea to pay for the ludicrous amount of spending they've been doing. Could a national sales tax actually happen? I wouldn't bet on it.

Here's the Post's explanation of how a national sales tax, also called a "Value Added Tax" ("VAT") would work:

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American -- a tangible benefit that would be highly valuable to low-income families.

I find it impossible to believe that Democrats, who currently rule Washington, would ever go for this. The above explains that it's hugely regressive, but let me explain just how huge.

Imagine a VAT of 5% on all goods and services:

Oliver's relatively low gross income provides him with $10,000 in disposable income. That isn't a lot, so he doesn't save. Instead, he needs to spend all of this for his living expenses. That means he pays $500 due to the tax. That's 5% of Oliver's discretionary income.

Todd's relatively high gross income provides him with $100,000 in disposable income. That's enough that he's able to save $50,000 per year. He spends the rest. That means he pays $2,500 due to the tax. That's 2.5% of Todd's discretionary income.

The example is obviously a simplification, but hopefully the point is clear: Oliver, who makes a great deal less money than Todd actually pays a larger percentage of his disposable income based on the VAT. Progressives everywhere just had a heart attack.

The Post offers a rather ridiculous argument that liberals will be okay with this, because the VAT could be used to pay for free healthcare. But even then, you still have a situation where the poor pay a greater portion of their income for that healthcare than the rich. Does anyone really believe that Democrats will be comfortable with that outcome?

Of course, a VAT would have other negative repercussions. The most notable is that it would penalize spending. That's particularly problematic at a time when Americans are already ramping up their saving, during a deep recession when more spending might help. As a long-term proposition, encouraging saving in the U.S. might be a good idea. But is the government really prepared to create another market shock in our current recession to debilitate spending further?

Don't get me wrong: a VAT has benefits as well -- particularly if you aren't bothered by the poor paying a greater share of their income to taxes. I just find it highly unlikely a congress with strong Democrat majorities and a very progressive president would ever allow it. After all, they could instead rely on a plethora of other options, such as further increasing taxes on the rich or imposing high luxury good taxes, as more liberal-minded alternatives.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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