An Alternative to Income Taxation
By: Omar Delawar
Tags: Income Tax, Taxes, Progressive, Taxation, Progressive Taxation

So what would be an alternative to an income tax? How about a “Progressive” Sales Tax?

Here is how it works:

Instead of charging income tax which can disincentivize labor, the government could alternatively charge a sales tax (on the consumption of goods and services) based on the income categories below:

“Low” for low-income earners ($0 — $15,000 per year) — 5% tax

“Mid” for middle-income earners ($15,000–100,000 per year) — 15% tax

“High” for high-income earners ($100,000+) — 30% tax

$ amounts and % numbers above are examples only.

Why The Need for “Progressivity”?

An often-heard criticism of goods and services tax systems is that they are inherently regressive — meaning low- to middle-income households spend a greater percentage of their income than high-income households do, and so a sales or consumption tax hits them harder. Having different income categories that are taxed differently counteract this phenomenon.

Implementation

For this tax system to work, the IRS has to identify the income category (low, middle or high) of the individual using income data from tax returns. When the individual applies for a new credit card or bank card, the financial institutions and credit card companies will request this information from the IRS (via data feed) and embed the income category into the credit/bank card before mailing it to the individual. That information is then read at the retailer’s Point-of-Sale (POS) system during each retail transaction so the correct amount of tax can be charged at the time of purchase. All retailers have to make small adjustments to their POS system to account for the additional income categories above. POS systems today already come with the ability to charge and add sales tax.

Cash Loophole

Most people will figure “ok but if my electronic payments get taxed, I’ll just pay with cash!” Not so fast! The cash loophole can be closed by having the income categories above listed on the ID or issue a separate ID for Income identification purposes. People who pay cash would then have to show their ID to the clerk similar to how alcohol, tobacco, and guns are purchased today. The clerk has to manually enter the income category into the POS so the correct tax amount is charged. The ID would only list the income category name, not the actual amount of income someone earns. For example “low” for low income, “mid” for middle income, “high” for high income.

Additional Notes

Under this progressive sales tax system, luxury taxes would be eliminated as there would be no need, simplifying taxes. Exemption from tax for household items (such as toiletries, food, etc) could still apply. Under current law, families and individuals are taxed on labor earnings (effectively punishing work). Under the progressive sales tax, most households would be exempt from any income tax (from a job) and thus would be able to save tax-free. There would also not be a need to file your tax if your income came from a job. The Progressive Sales Tax will raise the reasonable revenues that we need to fund the programs that will grow the economy, make the U.S. a better place to do business and invest, and provide benefits and opportunities to those who need them the most.

Stay Frosty =)