Friday, January 24, 2014

The Sales Tax is Simpler and More Efficient

We currently have two main tax systems. We can save a lot of money by having just one.

With any tax system, we should strive to maximize efficiency. Efficiency should measure how much it costs the government and the taxpayer to raise a dollar of revenue. The sales tax system is very efficient for the tax payer. There are no forms to file, no cost basis to keep track of, no receipts to keep or depreciation schedules to maintain and no accountant to pay at the end of the year. It takes no time for the citizen to comply with the law.

For the retailer, the sales tax is only slightly more complicated. They file a simple form, usually monthly that says, "I sold this much stuff so I owe this much tax" and they remit the money. For businesses that don't sell to the end user, there is nothing to report.

Contrast this system to our current income tax system that poses huge costs on businesses that must report all types of information from W-2 income and dividends to interest and sales of capital assets. Mortgage companies need to report interest paid and brokers must report capital transactions.

Mutual fund companies track dividends reinvested. And if you don't have the basis, our friends at the IRS just assume the basis is zero and tax you on the whole damn thing.

IRA custodians must track distributions, and God help you if you have an IRA with after-tax dollars in it because you will suffer the most Byzantine system for reclaiming your own money without being taxed twice.

Billions of dollars are spent by businesses to just provide the information to us along with countless hours preparing documents to take to their CPA. Then we as citizens pay billions of dollars to file a form.

When you compare all the costs of the two systems, it's clear that the sales tax system is a much more efficient system.

But why have two systems? With two systems you must support two bureaucracies. By using just one system to collect revenues, we eliminate a whole level of overhead.

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