A FEDERAL SALES TAX: One Way to a Balanced Budget?

No proposed tax has been more bitterly opposed in the U.S. than a federal sales tax. Nevertheless, the Administration is studying such a tax as one of the few practical means left to get the Government out of the red. In spite of a $5 billion cut in the current budget, the U.S. is still running a $5.6 billion deficit. Worse still, the Government will soon lose $8 billion a year in present revenues, since it is committed to letting some emergency taxes die next year—the excess profits tax, the 10% emergency boost in personal income taxes, the temporary 5% boost in corporate rates. And with Russia’s super bomb raising some profound questions of U.S. defense strategy (see NATIONAL AFFAIRS), defense spending may have to be raised.

If the U.S. is ever going to balance the budget, new sources of revenue must be found, since present sources have just about reached the point of diminishing returns. Corporate taxes are already so high as to inhibit industrial growth; income taxes have reached such a high level that if the U.S. confiscated every penny of individual income over $10,000 a year it would only get $3.5 billion in additional revenue. But each 1% of a sales tax would yield $800 million if imposed at the manufacturer’s level and $1.2 billion if put on retail sales. Since a retail tax would mean the checking of 3,000,000 stores, thus be expensive and hard to collect, those who favor the tax want it at the manufacturer’s level.

The Administration is still divided on whether a sales tax should be proposed. Many politicos believe it would be political suicide, would raise the old cry of a plot to “soak the poor.” But a sales tax may not be so explosive an issue as politicians think. For one thing, 31 states and even a few cities, e.g., New York and Baton Rouge, already have them. Britain has had sales taxes for years, and Canada gets 16% of its revenue from such a tax.

Actually, the U.S. now has a partial system of sales taxes through the excise taxes (up to 40% on tobacco and liquor), the emergency “luxury”‘ taxes of 20% on cosmetics, jewelry, luggage, theater admissions and furs, the 15% levy on travel, telephone calls and sporting goods, and 10% on autos, refrigerators and TV sets. One advantage of a general sales tax is that it would replace this crazy-quilt discriminatory structure with a uniform tax (except on tobacco, gasoline and liquor, which probably would be left as is).

There are other arguments in favor of a national sales tax. Its yield is easy to predict, and at the manufacturer’s level would be relatively easy to collect (only 300,000 outlets need be policed). Such a 10% tax (equal to a 5% tax at retail) would just about make up the $8 billion the Government will lose by the expiration of present taxes. It would also broaden the tax base so that the 25 million wage earners who now pay no federal income tax would share some of the tax burden.

The chief arguments against the tax are that 1) those in the lowest brackets pay the highest tax proportionately because they are forced to spend most of their income on living essentials, and 2) it cuts the buying power of the groups that buy the biggest share of goods, thus is apt to hurt sales. Moreover, a manufacturer’s tax would pyramid if a retailer included it in the price on which he figured his markup. Thus a 5¢ tax on a manufactured item could get marked up to 10¢. Above all, such a tax would cut sales now when there are evidences of overproduction and possible deflation.

All of these objections have validity. Most of the revenue raised by a sales tax would have to come from those with middle-and lower-bracket incomes because they form the majority of the population. But it would hardly “soak the poor,” since food and housing and medical expenses, on which the lowest-income families spend as much as 65% of their earnings, would be exempt under all proposed plans. Instead, the biggest dent, dollarwise, would be made on those who have the most to spend on nonessentials. As for a pyramiding of the tax, Congress could easily prevent this by requiring retailers to leave out the tax when computing markups. The tax might restrict sales temporarily. But at the same time a deflationary period might be the best time—politically—to impose such a tax, since its impact would be less if imposed on falling prices.

Opponents of the sales tax often brand it a “businessman’s tax” in the belief that it would shift more of the tax burden from corporations to individuals. But businessmen themselves are divided on the tax. The National Association of Manufacturers advocates a manufacturer’s tax. The Committee for Economic Development and most retailers fight a sales tax for fear that it might depress sales. But on balance all the admitted evils of a sales tax seem less than those of the probable alternatives of again boosting income and corporate taxes. At least, a federal sales tax would make all citizens conscious of the cost of Government, and by so doing, increase by that much their zeal to keep it down.