A consumption tax is bad for America and worse for America’s small businesses
If not already, you’ll soon hear about two consumption tax alternatives to accomplish tax reform: a value-added tax (VAT), and the “Fair Tax,” which is a national sales tax.
A VAT is added to products incrementally in the steps of the production/distribution process and passed to consumers in the ultimate price. The oxymoronic Fair Tax is collected from the end user at the point of sale, like state and local sales taxes. Both are bad ideas.
As major tax reform has been lately debated, in addition to tinkering with the current system or replacing it with a flat tax, politicians on both sides of the aisle have proposed consumption tax options. And they will be part of the 2016 presidential campaign debates.
Fiscally, the attraction of a consumption tax is that, in the largest consumer economy on the planet, it would raise a lot of tax revenue. Politically a consumption tax raises revenue on the rich more appropriately and, even though it’s regressive for the poor, they would receive some kind of a federal rebate or credit.
Consider these reasons why either consumption tax is a bad idea:
- We know that the big spending party is the one in the majority. So without imposing strict fiscal discipline – like a balanced budget amendment – a consumption tax will give politicians more money without solving budget deficits or national debt challenges.
- Most European countries have collected consumption taxes for years, and yet they continue to have significant economic/fiscal challenges.
- European consumption taxes are on top of all other taxes, including income tax.
- All European consumption tax percentages started small, but today the average is 19% – again, in addition to income tax.
A consumption tax would also hurt small businesses disproportionately. Big businesses have systems in place to deal with new government compliance, like tax collection, and they ALWAYS pass along expense increases to customers. Small businesses will be harmed because:
- We aren’t always able to pass along cost increases, even a mandated VAT.
- New tax compliance and remittance will be prohibitively expensive.
- The sticker price of a national sales tax will take time for consumers to adjust to, which will hurt small businesses more.
The only way we should consider any kind of a consumption tax is if it completely replaces the federal income tax, which would require repealing the 16th Amendment. Good luck with that because in the 227 years since the Constitution was ratified, only one amendment has ever been repealed – and that was to end prohibition.
Write this on a rock …
A consumption tax is a bad idea, especially for America’s small businesses.
Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”
