Society - National Sales Tax

Taxing Consumption Instead of Income

“Our founding fathers insisted on the use of indirect taxes on individuals and specifically forbade direct taxes like the income tax. They did this because they were students of history and they knew that every despotic country had one thing in common – direct taxation which helped enslave the people.”
      — U.S. Congressman Billy Tauzin

What would
life be like
without an
income tax?
By U.S. Congressman
Billy Tauzin

uch has been said about “consumption taxes” — taxes on spending as opposed to income or savings — in debates on tax issues. But I think the fundamental concept, which is both simple and brilliant, is widely either not understood at all or seen only in the abstract.

      By getting down to brass tacks, I hope to change that here; and, for those of you who already have some understanding, hope to leave you with some useful facts.

      Alexander Hamilton wrote in Federalist Paper XXI, “It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit, which cannot be exceeded without defeating the end proposed — that is, an extension of the revenue.”

      All taxes reduce our ability to consume and could thus be called “consumption taxes.” Everyone I know intends to consume all the money they make, now or in the future. Some of us want to defer the consumption until we retire or until our kids are ready to go to college. Others want to consume a part of their earnings by donating it to a church or other organization. Others just use their earnings to consume today. However, anything we decide to do with the money we earn is consumption. But how does this relate to taxation?

      Anytime government taxes away part of my money, it is reducing my ability to consume. Therefore, a 15 percent tax withheld from my income reduces — by 15 percent — the money I have to use for consuming goods and services. For example, to purchase a $10 item of clothing with an income tax of 15 percent, I would actually have to make $11.80, pay 15 percent of this amount or $1.80 of income tax, and then use the remaining $10.00 to purchase the clothing.


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