10/5/10

Tax consumption, not production.

The US method of taxation is to tax production. Better to tax consumption.
Income tax, Cap gains tax, business tax, all add to the cost of manufacturing production. These and other forms of tax and costs make manufacturing in the US more expensive. It's well known that most manufacturing jobs have gone overseas due to the higher cost of business in the US.
However, a flat sales tax that is large enough to compensate ("pay for") the elimination of such production taxes would promote the return of manufacturing and the jobs associated with it. A flat sales tax would also happily apply to imported goods, raising the price of imported goods and backhandedly apply the costs to the overseas manufacturers. A flat sales tax would benefit the balance of payments deficit to foreign countries.
A flat sales tax would be effectively neutral to the average consumer, costing the taxpayer the same in consumption tax as currently is paid in income taxes.

An example.
Bob can buy the TV that he wants at Walmart for $1000. In order to have the $1000 available, Bob had to earn $1400, and pay $400 in taxes.
The Chinese factory that manufactured the TV pays no income tax and the workers are paid bubkis.
For the American factory to manufacture the TV, they would have to pay a combination of business taxes, Social Security taxes, and extra pay to the workers to cover the worker's income taxes. The American factory could not manufacture the TV for less than $1800.
Bob can buy the TV that he wants at Walmart for $1000. In order to have the $1000 available, Bob had to earn $1400, and pay $400 in taxes.
The Chinese factory that manufactured the TV pays no income tax and the workers are paid bubkis.
For the American factory to manufacture the TV, they would have to pay a combination of business taxes, Social Security taxes, and extra pay to the workers to cover the worker's income taxes. The American factory could not manufacture the TV for less than $1800.

Now, let's change the tax situation. Imagine this. There are no American income or business taxes. There is a 40% sales tax.

Now, the Chinese factory TV costs $1400 with the sales tax.
But Bob has earned the same $1400 and paid no income tax or Social Security tax. So, the Chinese TV is the same price to Bob.
But the American factory can now also manage to manufacture the same TV for $1000, which will sell for $1400. So the American and the Chinese TVs are now the same price.
Which means that American factory can now compete with the Chinese factory.
Which means that as more American factories compete, more American jobs are created. More Americans have more money to spend. More American goods are manufactured and bought in America.
Fewer Chinese and other foreign goods are imported. The balance of payments is improved and perhaps balanced.
America is returned to financial balance.
All this with a decision to change the way taxes are collected to finance the US Government.
Oh, and the hated income taxes are eliminated. Along with the loopholes and other unfair practices, and the social engineering by tax decree.
Oh, and the Chinese are now paying 40% of their imports into Federal taxes.

1 Comments:

Anonymous Anonymous said...

I just sent this blog entry to the President, my congressman, and the one senator from my state who is still sane. Ya think anyone would notice?

12:46 PM, January 12, 2011  

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