Opinion » Ted Rall

Death by Consumption

The push for a national sales tax


NEW YORK-They've trashed protection for bankrupt consumers and sunk their fangs into the soft fleshy throat of Social Security. Now Republicans are laying the groundwork for the ultimate goal in their ongoing war against the idea that government has a duty to mitigate economic injustice: replacing the income tax with a national sales tax.

If current GOP trial balloons lead to full flight, their long-hoped-for dismantling of the progressive tax structure in place since World War I could involve going beyond the flat income tax long championed by Steve Forbes to a system that's fully regressive. The smaller your salary, the higher the percentage of taxes you would pay. Our social devolution to McKinley-era America would be complete.

In the latest reminder that Alan Greenspan has become ideologically indistinguishable from right-wing econoquack Milton Friedman, the once-acclaimed Fed chairman told Congress on March 3: "Many economists believe that a consumption tax would be best from the perspective of promoting economic growth-particularly if one were designing a system from scratch-because a consumption tax is likely to favor savings and capital formation."

Republicans count on our ignorance of history as they quietly re-spin the national consensus on taxation. Could that be why they relentlessly slash the education budget? There is, after all, a precedent for an America without a progressive income tax: the late 19th century.

Back then, the government relied on three sources of revenues: tariffs, property taxes and sales taxes. High tariffs, critics on the left and right agreed, stifled trade and drove down wages. And, since everyone buys the same necessities (like food) at the same prices, sales taxes fell disproportionately heavily on the poor. The average worker earning the equivalent of $30,000 a year spent all or almost all of that $30,000. The average person taking home $300,000 spent less and saved more-savings that, under the consumption tax scheme, were gloriously tax-free and, for the most part, sat in savings accounts gathering interest. The disparity between rich and poor became staggering; robber barons built magnificent mansions while millions starved. There was no middle class to speak of. Because the Carnegies and Vanderbilts who had all the money paid few taxes, the government of the 120-year-old United States was too weak to maintain a strong standing army, much less compete internationally against France, Britain and the other colonial powers.

The modern income tax, enacted in 1913 with rates ranging between 1 and 7 percent, replaced most tariffs and consumption taxes. By 1945, federal taxes started at 23 percent; the wealthiest individuals paid 94 percent. Though the top rate has since fallen, individual income taxes have since hovered at 8 to 10 percent of GDP. Increased revenues allowed the federal government to fund massive mobilizations in two world wars, launch expensive anti-poverty and public works programs to fight the Depression, outlast old Europe and outspend its principal international rival, the Soviet Union, into bankruptcy. Government also acted as an agent of wealth redistribution, using taxes dunned from the wealthy to help Americans in need. Income taxes transformed us into a superpower and helped create the large middle class that capitalist economies require for continuously expanding consumption.

Ah, yes, consumer spending. Bush's economists argue that, "Removing the tax ... on savings and investment ... would increase savings and investment." That's true. But if you've ever had to factor in the 20 percent national sales tax on goods purchased in Europe (they call it the "value added tax"), you know that taxes on purchases are as much of a disincentive as taxes on savings. Corpo-conservatives want you to think that investing creates most jobs. It doesn't. Consumer spending generates 70 percent of GDP. A high national sales tax-it would have to be big to replace taxes on savings and income-could plunge us into a depression.

There are, if you open your mind, other options. For example, a 6 percent tax on purchases of stocks, bonds and other securities would allow the complete elimination of individual income taxes: no more 1040s, no more H&R Block. Even the rich wouldn't have to pay. (Here's the math: in 2004 the feds collected $809 billion in individual income taxes. Transactions on the New York Stock Exchange alone totaled $12.6 trillion.) Investors wouldn't come out ahead until the value of their securities increased by at least 6 percent, but that's also true about real estate. The standard 6 percent broker's fee doesn't seem to hurt the housing market.

Or, given the rising disparity of wealth since 1975, we could restore the maximum 90 percent income tax on the wealthiest Americans. We had that during the 1950s, when the American century hit its zenith. We could hike taxes on corporations and ban the creation of phony offshore headquarters whose sole purpose is the avoidance of taxes.

Rich or poor, corporate or individual, government will collect its revenues from whomever screams the least. The howls of the rich and powerful for a consumption tax have disproportionate influence upon our supposed elected representatives. But the rest of us can scream too-and there are a lot more of us.