Bush’s National Sales Tax Could Balance the Budget on the Backs of the Rich

The dust hasn’t quite settled from the November 2 vote, but Mr. Bush has already outlined a rather ambitious agenda: a ban on gay marriage, reform of Social Security by privatizing it, and a simpler tax code. Indeed, the tax code has been Mr. Bush’s favorite tinkering toy in the last four years. Having made exceptions for every Tom, Dick and Ken Lay, Mr. Bush has made the code more confusing than ever, and so, he says it needs to be simplified. He’s even been considering a National Sales Tax. That would be a great idea, but he shouldn’t tell his friends on Wall Street. They wouldn’t like it at all.

The national sales tax is familiar to European readers as the VAT, and to policy wonks as the ad valorem tax. In the EU, this tax sticks an extra 15-25% on the price of goods and services, with some reductions and exemptions. This is in addition to income taxes. In the US, Mr. Bush would probably prefer to get rid of income taxes altogether on the premise that earning shouldn’t be discouraged, but consumption should be. That may be an over-simplification, but it does fit with the current fashion of Calvinism in Washington.

In this, Mr. Bush should be encourage to spend every possible penny of his political capital. So long as the tax applies to stock, bonds and the like as well as sneakers, toothpaste and books. In fact, the problem will be keeping the federal budget from running chronic surpluses.

According to the New York Stock Exchange, the average trading day in October was $45.6 billion worth of stock. The NASDAQ and American Stock Exchange combined just about equaled that. Presuming 200 trading days per year, and a VAT on stocks of just 10%, the total generated for the US Treasury would be on the order of $1.8 trillion – which would more than cover the current budget. And toothpaste hasn’t been taxed yet.

Naturally, if stock trades were taxed, there would be far fewer of them, and there might even be a drop in the value of stocks. These dollar volumes almost certainly wouldn’t be realized. At the same time, there would be far more stability in stock prices as investors cease looking at short-term investments. Knowing that 10% is coming off the top, the smart investor will look for a return of more than 10%, which either occurs with a very hot stock or over a rather longer time period that most consider.

Whether the Bush administration is serious about tax fairness can readily be judged by whether stocks, bonds options and other financial instruments are subject to any proposed national sales tax. If they are, America’s short-term investment thinking may have to end, which would go a long way toward fiscal responsibility.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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