TAXATION: Federal Sales Tax?

Should the U.S. have a federal sales tax? Last week a committee of businessmen told the House Ways & Means Committee, which is trying to draft a tax bill, that it should.

Their proposal was important. It represented a growing body of U.S. opinion, which feels that only with the help of a national sales tax can the U.S. finance its rearmament program and remain economically sound. There is nothing new in the sales tax idea. National sales and purchase taxes date back to ancient Rome and Athens, are used in some form today by nearly 20 nations as an important source of revenue. Examples: in France 36% of the government’s revenues come from such taxes; in Italy, 18%; in the U.S.S.R., an estimated 90%. More than half of the states now have sales taxes; last month Georgia became the 29th to enact one. But Congress has repeatedly shied away from such a tax. What are the arguments for & against it?

What’s Good About It? One of the best arguments for the tax was presented last week by the National Committee for Fair Emergency Excise Taxation, a group of 50 leading businessmen who have long been asking for repeal of the wartime excise taxes on the products they make. Last week they launched an attack on all excise taxes except those on liquor, gasoline and tobacco, and substitution of a flat sales tax on everything except food, rent and medicines. Spokesman for the committee was old New Dealer Leon Henderson onetime head of OPA. A sales tax, he argued, would produce revenue quickly, discourage spending, spread the increased tax load to all income brackets, and be easier to collect than income tax.

In 1949, under the excise tax system, said Henderson, only $40 billion, or 22.7% of a total $179 billion in consumer spending, was taxed. His contention: some things were being taxed too heavily, others that should have been sharing the load were not being taxed at all. Henderson figured that at least $89 billion of untaxed expenditures (excluding such essentials as food and rent) should be taxed. Including the goods that are already subject to excise taxes—and projecting the figures to 1952 levels—that would broaden the tax base from $40 billion to $130 billion. A 5% tax on this broad base would yield $6.5 billion a year.

The Administration has asked for stiff (20%-25%) excise taxes on such things as autos, refrigerators and television sets (TIME, Feb. 12). But those sources, said Henderson, just won’t produce the revenue needed, since sales of such durable goods are bound to drop as the defense program nips off their production. Buying will shift to such “soft” goods as clothing, and unless there is a sales tax on such items the Government will not get the revenue it expects.

What’s Bad? To the anti-sales taxers, some of the arguments that Henderson advanced are just the reasons why the U.S. should have no national sales tax. The fact that it spreads the tax load is one of its weaknesses. Instead of taxing on the basis of ability to pay—the traditional test of a good tax—a sales tax hits those hardest who can least afford to pay. Example: a $3,000-a-year family spends the major part of its income (mostly on necessities), thus the tax hits most of its income. A high-income family, on the other hand, spends a much smaller proportion of its income on living expenses, thus would pay a sales tax on a far smaller proportion of its income.

In one sense, anti-sales taxers argue, a sales tax would be inflationary, not deflationary. Since it would raise prices all along the line, the wages of millions of workers whose pay is tied to the cost of living must rise also.

What About the Little Man? There is no doubt that the sales tax is “regressive,” i.e., hits harder at the lower incomes. But as Secretary of the Treasury John Snyder has emphasized, the bulk of the new taxes must come from the lower incomes. Not enough additional taxes can be squeezed from corporations and higher income brackets. Said the National City Bank of New York last week: “Even if the Government took the drastic and destructive course of taxing away all income over $25,000 a year the yield would be less than $1 billion a year above present taxes.” As for the inflationary effect of a sales tax, that would be negligible if food and rent, which make up almost half of the cost of living index, were exempted. A retail sales tax would do less to force prices up than heavy deficit financing or the manufacturers’ excise taxes which the Administration has proposed. A manufacturer’s tax snowballs, i.e., as each middleman between the manufacturer and consumer computes his profit, percentagewise, with the tax added in, the consumer is forced to pay far more than the Government actually collects.

What Are the Chances? Even its most ardent advocates do not contend that a sales tax could ever be a substitute for income or other taxes. But as a relatively painless revenue producer in inflationary times, it cannot be beaten.

Has it any chance of passage? Said Ways & Means Chairman Robert L. (“Muley”) Doughton last week: “Sentiment is … overwhelmingly against it.” In 1932, recalled ancient (87) Representative Doughton, Ways & Means had reported out a sales tax bill which was defeated.* In depression 1932, it should have been; then all efforts were to stimulate spending, not to cut it. But now times are different. Some Congressmen who now oppose a sales tax may quickly change their position if the budget hits $80 billion. Then, a sales tax will probably be the only way to balance the budget.

*Largely at the hands of fiery Fiorello La Guardia, who later put through a city sales tax when he became mayor of New York. Said he: “It’s all wrong in theory, but it does raise money.”