I wonder if there are lessons which could be learned from how other countries with a national sales tax implement it which might help the US? Personally I have long thought that a national sales tax of some form is a good counterpoint to other trends in federal taxes such as the seeming repeal of the estate tax, lowered income taxes, more other tax loopholes/credits etc.
However, I agree and understand that if just passed on all transactions, people who spend most of their earnings (or indeed more than they earn) will be most heavily penalized.
So a few suggestions:
1. Exempt education, healthcare, food, beverages (perhaps non-alcoholic ones only), public transportation. This covers a significent percentage of basic household purchases, but leaves out some critical areas - housing, school supplies and clothing being two obvious ones.
Say that a federal sales tax were 1% (another option is a graduated sales tax, something like 0.5% - or lower, on the first $100, then go up to 1% above 100. (sure, some very rich people might "break up" transactions above $100 into many smaller transactions but existing laws might cover this and in any case it would perhaps put the retailer at risk as well)
If everyone nationwide got a sales tax credit of $100 (and a true credit, refundable if you do not owe any federal taxes), this would more than cover the tax burden of most low income families.
I would further suggest giving "rich" people an option such as "donate your tax credit to ..." (presidential election campaign funds, paying down the debt etc.)
I do not have the exact sums, but it seems to me that if imposed on end use sales (retail sales, sales to businesses not for resale purposes) and if bound by existing sales tax exemption (but perhaps with greater audit/enforcement powers to limit abuse) such a sales tax could generate very significent funds while minimizing the impact on lower incomes, and only minimally impacting "the rest of us".
A few items would be controversial:
- gasoline (I personally think higher taxes/costs of gas are likely a net positive in the change in behavior they might impose on the economy but this is an arguable point as they may also raise costs across the board
- clothing - we all "need" it, however it seems ripe for abuse if exempted, instead I think the across the board credit approach is better
- tourists / non-filers - I think tourists should probably pay taxes, however could be handled in a similar manner to VAT refunds in Europe, especially on things such as hotels, airfare, rental cars etc.
- meals out vs. food at grocery stores - easiest I think would be to exempt it all, though perhaps impose the tax on alcohal which is perhaps viewable as a luxuary good.
- how to define "public transportation" "eduction" "healthcare" - especially optional items such as plastic surgery or over the counter medicines/supplements etc. On the otherhand I think this might be easiest if handled very simply.
- phone - i.e. when is a phone a phone vs. a computer? Again a case I think were simplicity should reign.
What would remain?
- games and entertainment
- Housing (purchased only perhaps - exempt rent though may make some complicated tax loophold available)
- Investments - tricky, could be defended as having a value and separate tax cehicle (capital gains), often are also tax deferred/avoided entirely in any case.
Anyway, I think it is something worth consideration. The Democrat's points are valid, but not impossible to address in a way that still is a net positive (in a very significent manner) to the federal government, and which might also have some very serious other positives to the economy as a whole.
Why do I say that?
Well, for one, a simple, federal sales tax which is levied on corporations as well as individuals alike, and which is paid at the time of the transactions (and filed monly as current state sales taxes are filed) means federal revenues spread across the 12 months of the year vs. concentrated in April and quarterly.
More critically it is a way to collect revenues from corporations that otherwise pay very little in taxes at present (via tax shelters, creative accounting, and other means - though many do pay some state sales taxes and property taxes).
The process of setting up to collect this tax will impose some burden on many businesses (though no to little burden on individuals - though the issue of individuals selling such as via Ebay is a complicated one worth consideration). At the same time this burden might impose new investments in technologies to connect with the government and to collect and track sales tax, this in turn might create efficiences and cost savings.
Further, a common, uniform sales tax is one that could be imposed on online as well as offline transactions. Sure, we might all grumble, but it might point towards a way to greater parity on and offline, plus something like 1% is not a big difference in most transactions.