North America woke up Monday morning to discover that the nation of Japan has slipped back into a recession after a gross domestic product third-quarter contraction of 1.6 percent in addition to the seven percent dip in the previous quarter. The lack of consumption was blamed on the three percent sales tax hike on April.
Japanese Prime Minister Shinzo Abe is now mulling over whether or not he should institute another two-percent sales tax jump in order to reign in government debt and improve the state’s coffers. He will also weigh his options regarding calling a premature election for the Parliament’s lower house.
The prime minister’s inner circle has already confirmed that stimulus measures will be employed, though there has been some debate between his advisors as to how big or small it will be considering how bad the third-biggest economy’s internal finances are.
The narrative coming out of Japan has been to delay the sales tax hike by 18 months, but the real story should be that all types of sales taxes are bad, especially if they’re presumably used to pay down the government’s debt and deficits or social programs. All governments like the idea of a value-added tax (VAT): everyone consumes and the revenues are easy to attain.
Revenues from sales taxes or VAT are used to fund government programs, balance the books and potentially the waste the money on frivolous projects and scandalous endeavors. Although sales taxes and VAT are slightly different, they both have the same goal in mind: collect as much revenue as possible.
Since the economic collapse, governments at all levels have continually debated the concept of either instituting a sales tax or raising the current rate. Even 2012 Republican presidential candidate Herman Cain placidly introduced a nine percent national retail sales tax to his famous 9-9-9 plan, a terrible move because that 9-9-9- would quickly double to 18-18-18.
If a country, state/province or city is in financial trouble, even when it already has a sales tax, it shouldn’t consider raising it, but rather scaling back on the size and scope of the government and its operations. It’s as simple as that.
Proponents of the consumption tax say it’s superior to the income tax. Some of the arguments in favor do have some merit, but so do arguments against it, such as it hurting the poor and the most vulnerable. On the whole the sales tax idea should be dropped as well as the income tax, purely on the basis of economics.
Here is what Murray N. Rothbard wrote on the consumption tax:
“One reason, therefore, that an economist cannot claim that the income tax, or any other tax, is better from the point of view of the taxed person, is that total revenue collected is often a function of the type of tax imposed. And it would seem that, from the point of view of the taxed person, the less extracted from him the better. Even indifference-curve analysis would have to confirm that conclusion. If someone wishes to claim that a taxed person is disappointed at how little tax he is asked to pay, that person is always free to make up the alleged deficiency by making a voluntary gift to the bewildered but happy taxing authorities.”
Rothbard continues in his piece:
“Consider: all prices are determined by the interaction of supply, the stock of goods available to be sold, and by the demand schedule for that good. If the government levies a general 20 percent tax on all retail sales, it is true that retailers will now incur an additional 20 percent cost on all sales. But how can they raise prices to cover these costs? Prices, at all times, tend to be set at the maximum net revenue point for each seller. If the sellers can simply pass the 20 percent increase in costs onto the consumers, why did they have to wait until a sales tax to raise prices? Prices are already at highest net income levels for each firm. Any increase in cost, therefore, will have to be absorbed by the firm; it cannot be passed forward to the consumers. Put another way, the levy of a sales tax has not changed the stock already available to the consumers; that stock has already been produced. Demand curves have not changed, and there is no reason for them to do so. Since supply and demand have not changed, neither will price. Or, looking at the situation from the point of the demand and supply of money, which help determine general price levels, the supply of money has remained as given, and there is also no reason to assume a change in the demand for cash balances either. Hence, prices will remain the same.”
Indeed, a sales tax as the primary form of taxation in this current state of perpetual government is a better alternative than the antiquated income tax, but an effective tax rate of zero is the superior choice. Also, be sure to remember that a proposed sales of, let’s say, 20 percent won’t remain at that number. Within just 10 years, that figure would have been raised three times.
Eugene Patrick Devany says
A VAT is the fairest way to tax businesses and is used by every country in the developed world. In the U.S. a 4% VAT combined with an 8% C corporation rate (and no tax expenditures or payroll taxes) would be fair, competitive and efficient.
For individuals consider a flat 26% rate with an option to pay a 2% wealth tax (excluding $15,000 cash and $500,000 retirement savings) in exchange for a lower 8% income tax rate. About 98% of taxpayers would elect to pay the wealth tax and hope to pay a greater wealth tax year after year.
Unfortunately only the top 10% of the U.S. population has increased their share of wealth over the last 25 years. The middle class is down 8% and the poorer half of the population is down 70%. The 62 million families at the bottom cannot afford sales taxes.