Dave Says
Advice from Nashville's leading Financial Aid Advisor Dave Ramsey
Author of Financial Peace and The Total Money Makeover
Should we do away with income tax?
What's your opinion of doing away with the income tax and having a flat rate national sales tax instead? That way, the government would have to get money from everyone - including people who get paid "under the table" and illegal workers.
Nathan in Huntsville, Al.
Dear Nathan,
There are some huge advantages to a national sales tax over a national income tax. Part of the problem with the idea is that there are some enormous industries that are built on the income tax system. Think about this, who would be affected if there were no income tax? A lot of CPA firms would go out of business - or at least scale way back. The ones that do taxes and not bookkeeping would be completely gone. All 401(k), IRA, ESA and those types of plans would not be necessary. Those plans are just to keep us from having to pay income taxes on those investments. So, retirement planning companies that focus on those types of plans would be gone - or at least dramatically changed.
Another down side for a national sales tax is that it is regressive. That means that people in the bottom half of income earners would pay a higher percentage of their income in taxes than someone making $300,000 a year. I think you would have to exclude taxes on necessities like utilities and food. A lot of states don't have sales tax on food for that reason.
Despite those disadvantages, I would be a huge fan of doing away with the income tax because it is a disincentive to earn. Over the years, I've gotten e-mails from people who say, "Dave, I'm working extra and it seems like I'm making less money." Now, they're not really making less because there is no 100 percent tax bracket, but they feel like they're making less because they move up in the tax brackets. Once you make some money, you kind of lose your incentive to go make some more money because you're penalized for having won - the way it is now.
The other thing that is attractive about a sales tax is it's an automatic incentive to save instead of spend because money that is saved has no tax on it. The only way you are taxed is if you spend. And the cool thing about that is that I get to choose if I'm taxed. If I don't want to pay sales tax on a car today at the state level, I just don't buy a car. If I don't want to pay sales tax on a computer, I don't buy a computer. What a neat idea. And that would be true on a national level. So you could choose how much you're taxed. Right now, that's not the case.
The choice is made for you by people who think they're smarter than the average citizen out here. Washington dictates to us how much we will pay.
So, even though there are some fairly dramatic problems with a national sales tax - and I don't honestly think we'll see one in our lifetime - it's a wonderful discussion to think about what it would be like to not be penalized to save money and build wealth.
- Dave
9/6/2004
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