I have mixed feelings about Fareed Zakaria’s proposal in his latest Washington Post column for a national sales tax. Here’s his explanation:
The top 10 percent of earners in the United States contribute a staggering 74 percent of federal income tax revenue — even though they generate just about 50 percent of all income, according to the Tax Foundation. In Denmark and Sweden, the top 10 percent pay about 25 percent of income taxes; the average for rich countries is 32 percent. In the United States, the top 1 percent — 1.3 million households in a country of over 330 million people — generate 22 percent of the income but pay almost twice that, 42 percent of federal taxes. And the code has become substantially more progressive over the past decades. The net contribution of the top 20 percent of income earners in the United States has risen by more than 200 percent since the 1980s.
When you add state and local taxes, America’s top earners’ tax rate often tops out at more than 50 percent of their marginal income. If one of them moved from New York or California or Illinois to London, Berlin or Singapore, they would get a big tax cut — particularly in Singapore, where the top tax rate is 24 percent. (And in all those cases, by the way, they would get universal health care and high-quality public education from kindergarten to universities.) In New York City, as Mayor Eric Adams has pointed out, the top 2 percent of residents pay half the city’s income taxes.
It has become a bipartisan article of faith in the United States that most of the federal budget cannot be cut and that the taxes of 98 percent of income earners cannot be raised. This is why we are on an unsustainable path. We need to both cut some spending and raise some taxes, and future tax increases cannot come from the one source from which most new revenue has come in the past few decades — high-income earners.
I’ve advocated something similar myself. The reasons for my mixed feeling are:
- Sales taxes are regressive. I advocate a sales tax that is progressive, made so by an income-adjusted prebate.
- State and local governments are highly dependent on sales taxes for revenue—typically around 25% of revenues. The math says that a federal sales tax would reduce state and local revenue even as the demands on state and local purses are increasing.
- I think that the federal government’s problem is too much spending and there are lots of areas in which spending can be reduced.
- I already pay very nearly the highest sales tax in the country.
Watch out! It’s an idea that’s likely to catch on.
One of the problems with depending on rich people to provide a majority of tax revenue is that their revenue can be highly variable.
I don’t remember all the details, but California tends to go boom and bust when it comes to tax revenue depending on the fortunes of the wealthy, whose income tends to be more closely tied to the stock and other markets.
But a national sales tax seems like a bad idea to me. Sales taxes tend to be regressive, even in states with a refund system. And a national sales tax has the significant problem in that it is politically unpopular with both Democrats and Republicans. The only thing our political class is willing to have a serious debate on is marginal rates and a few rare loopholes and policies. I’m not sure how to change that.