Advice from Nashville's Financial Guru Dave Ramsey
Dave Says
By Dave Ramsey
Author of Financial Peace and The Total Money Makeover
9/6/2004
Should we do away with income tax?
Dear Dave,
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
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
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