Robert T. Patton, Ph.D.
Financial and Economic Consultant
1100 Chuckanut Crest Lane
Bellingham, WA 98229
(360) 647-7777 office, (360) 676-9055 home
Draft 3, edited 6/22/16
The Case for a National Sales Tax
A feasible program that would cut the
Federal budget deficit by 714 billion dollars a year
Introduction: Taxes imposed on the net income of individuals and corporations fund the U.S.
federal government. When first enacted in 1913, the Federal Tax Code was 400 pages long. A
hundred years later, in 2013, the Tax Code was an incredible 2,600 pages. Tax lawyers and
accountants also reference the super-sized CCH Standard Federal Tax Reporter, a huge (73,000+
page) compilation of legislative history, Treasury Regulations, editorial commentary, and court
cases. This massive and incomprehensible tax system means that Americans spend an
estimated 11 million hours a year struggling to understand and submit their annual tax return
to the IRS. These human resources are therefore not available to help produce goods and
services that improve quality of life in the U.S.
Some estimate that the tax-compliance industry is six times larger than the entire U.S.
automobile industry and that 82 percent of taxpayers must pay for help in filing their annual tax
return. About 60 percent hire an accountant or tax preparer, while another 22 percent use
purchased tax software. The IRS employs about 100,000 people, requiring a budget of $14
billion dollars every year, just to process the nearly 200 million tax returns that are sent to
them.
A better alternative would be a sales tax system that could eliminate much of this unproductive
effort and expense. At the same time, it would stimulate the private sector to create hundreds
of thousands of new jobs within the U.S. and reduce the Federal deficit by an estimated 714
billion dollars a year.
The problem
On April 1, 2012, the United States became the country with the highest corporate income tax
rate in the world. Many will say, "Great; sock it to those big corporations!" Ultimately however,
businesses don’t pay taxes; they just build the taxes charged to them into the price of the
products or services they sell, or reduce their wages or dividends. As a result, the consumer is
ultimately the one who pays all tax revenue to the government but most consumers do not
realize that the price they pay for goods and services contain these hidden taxes. And
politicians like to keep it this way so that voters do not understand the full price tag of
government.
One of the unintended consequences of our current tax system is offshoring: the incentive for
businesses to take as much of their activity as possible overseas. In so doing, they avoid the U.S.
Corporate income tax, as well as pay lower wages. The unfortunate result we’ve seen is that
family-wage jobs once held by Americans have been moved overseas. Until our tax system is
dramatically changed, the U.S. will suffer from this uneven playing field created by our tax
system.
The fix
Individual and corporate income taxes, as well as payroll taxes, account for over 90 percent of
the Federal tax revenue. Replacing the Federal income tax system with a well-designed
progressive sales tax would level the playing field and offer other benefits.

Products imported from foreign companies would be assessed the same sales tax as
products produced in the U.S.

The IRS could be virtually eliminated by having the sales tax collected through the same
sales tax system currently administered by the States.

Most tax accountants, attorneys, and accountants in private enterprise could be
employed in more socially valuable positions.

Tax cheating would be mostly eliminated while the taxpayer would be permanently
freed from the incomprehensible tax code and the burden of filing a tax return every
year.
For Americans, this proposed change to the way we fund Federal government is much simpler
than the "Fair Tax proposal,” which would still require reporting income to the government and
require complex monthly “prebate” payments.
Why is our income tax system so terrible?
The U.S. Income Tax Code has grown over a hundred years into an incomprehensible
document. Politicians and lobbyists have interacted over the years with the IRS to create a
monster that even well-educated people cannot understand. This complexity has spawned a
sizable industry to help taxpayers report their tax liability. Some buy TurboTax or a similar
computer program each year to assist in the preparation of the complex income tax return.
Others march into their local professional tax preparer’s office and pay out hundreds or even
thousands of dollars to have their tax return prepared for them. All through the year leading up
to tax season, individuals and businesses spend countless hours trying to keep track of the
information that will be needed to file their income tax return. Then the professionals get
involved and spend countless hours assisting in the reporting procedure. All of these hours and
dollars that are absorbed by the record-keeping and reporting process add absolutely nothing
to the quality of life--and actually detracts from the quality of life. Instead, these resources
could be invested in the production of goods and services that add value.
The income tax system is also used by criminals to steal tax refunds that are owed to taxpayers.
“The IRS estimates that it sent out nearly three million fraudulent refunds to con artists [in
2013]. And according to a new report from the Government Accountability Office, it cost
tax-payers $5.2 billion. The Treasury Department believes the numbers are much higher
than that. Proving once again, what every con man already knows: there is no
underestimating the general dysfunction and incompetence of government bureaucracy.”
A sales tax system would eliminate this problem and would in fact eliminate the need for any
tax refunds to taxpayers.
Why is income tax on business particularly bad?
The corporate income tax is particularly bad for three reasons:

The consumer ultimately pays. As mentioned earlier, businesses don’t really pay taxes
because taxes levied against business are passed on to the consumer, either directly or
indirectly. The tax on business simply becomes another item calculated into the cost of
delivering a product or service. Because the only source of dollars to pay for any item’s
full cost is the customer, who ultimately pays business taxes? It’s the consumer.

Taxes raise the cost of U.S. products. Corporate taxes effectively raise the price of U.S.produced goods and could be described as a domestically imposed tariff. Comparable
products that are produced abroad typically include only a Value-Added Tax (VAT),
which is exempted when exporting to the US and other world markets. Without the
additional tax burden, the price of foreign goods is often lower.

Encourages companies to move offshore. When our tax policy prevents domestic
businesses from competing effectively with foreign competitors, our businesses either
close down or move their business activities offshore. Jobs disappear in the U.S. and
reappear overseas. Our workforce becomes unemployed, has less to spend, relies more
on government services, and pays less tax to fund government.
An example: Sam needs a new car. He can buy a Ford for somewhere around $25,000,
depending on options, or a Toyota for about the same price. The Ford has several thousand
dollars of hidden business taxes calculated into the sticker price, while the Toyota was exported
from Japan with no VAT. Without the tax burden, Toyota can lower the sale price and/or add
quality to make the Toyota a better value. Sam decides to go with the Toyota.
Why do our politicians keep bad tax policy in place?
There are at least two reasons why politicians like our current tax system.
1. Consumers never see most of the tax they pay because these taxes are hidden in the
price of things they buy. This ensures that most consumers are unaware of the actual
cost of government. When consumers don’t see the taxes they are paying, they are less
likely to complain or hold politicians accountable for the enormous sums they spend in
what is often wasteful or low-priority projects that fail to move this country forward.
When politicians are held accountable for their folly, it is much harder for them to get
re-elected, and election is often the number-one objective of the politician.
2. The current tax system requires hundreds of thousands of workers to administer. Many
of these workers belong to public employee unions, who contribute to the politician’s
reelection. The unions also encourage their members to vote for the politicians who
help the union bosses most. Other workers are tax professionals whose jobs depend on
the continuation of the current tax system. These professionals are likely to support
politicians who promise to secure their jobs.
Can a federal sales tax fix the problems with the current tax system?
A Federal income tax system could be replaced with a well-designed progressive retail sales tax
to fund the U.S. budget. The Federal sales tax could be designed to collect the same amount of
tax revenue as the current federal income tax in a manner that was both fairer and more
efficient than the current system.

More fair. The first response of many will be that "a sales tax would be regressive."
However, a retail sales tax system could be designed to be at least as progressive as the
current income tax system. For example, Congress could pass legislation to exempt
certain foods, medical services, energy needs, or the first $x amount of a vehicle
purchase. In addition, the sales tax would apply to products regardless of where they
were built, which would give American manufacturers a level playing-field for the first
time in decades.

More efficient. The individual taxpayer would no longer be required to waste time and
money reporting their income tax liability each year. Instead, tax would be collected at
the point-of-sale when items subject to sales tax were purchased. Under a sales tax
system, nearly two hundred million tax returns would no longer be sent to the IRS each
year. This means that the vast majority of the approximately 100,000 IRS staff and tax
professionals would be free to pursue more meaningful and productive work. Some of
the IRS employees could be reassigned to replace retiring Federal workers in other
needed government positions. In fact, we could eliminate nearly all of the IRS function.
The national sales tax could be collected using the existing state systems, with a small
payment back to the states for providing this service (all but five states currently collect
sales tax at the state level). Under this arrangement, nearly all of the billions of dollars
per year spent by the IRS and private entities could be saved.

Less fraud and abuse. Under a sales tax system, tax cheating would be greatly reduced.
The estimated $2 trillion lost through underreporting of income, plus $500 billion more
for “under the table” payments and illegal transactions would all become taxable when
that income was used to purchase taxable products or services. Money currently lost
through tax evasion would no longer be lost to government.

Less waste. A sales tax system would have the added benefit of encouraging saving and
good health. It would dial back consumption, waste, and cheating. We would likely have
fewer people going through bankruptcy and needing public assistance.
How much of the federal deficit would be eliminated?
If we collect a Federal sales tax through existing state systems, estimated savings are as follows:
$14 billion currently wasted on IRS expenses.
$300 billion currently wasted on compliance.
$500 billion (2008) wasted through tax cheating.
$200 billion currently lost to foreign producers because of the domestically imposed duty
(Federal Income Tax).
_________
$714, billion, which could reduce the Federal budget deficit or pay down the Federal debt.
Conclusion
The U.S. is losing businesses and good family wage jobs at a rapid rate. The U.S. income tax
system is one of the key reasons for this loss. The income tax system is also expensive to
administer, invites tax cheating and is increasingly beset with fraudulent requests for tax
refunds.
It is past time to overhaul the U.S. tax system used to finance our Federal government. A
national sales tax would reduce fraud, waste, and abuse, and would be feasible and relatively
straight-forward to implement and manage. It makes a great deal of sense.