CAN A NATIONAL SALES TAX ELIMINATE THE CURRENT INCOME TAX SYSTEM?

• Author: Stunda, Ronald A.

INTRODUCTION

Tax-avoiding corporations are some of the most profitable, recognizable companies in the world, and they represent a variety of industries, including technology, energy and gas, financial services, aviation, pharmaceutical, and manufacturing. These companies avoided taxes by employing a variety of legal tax breaks. Accelerated depreciation allows companies to write off the cost of their investments faster than the investments wear out. This break accounted for hundreds of millions in tax write-offs alone.

Stock options provide another break that allows corporations to write off expenses far in excess of the cost that they report to their investors. Amazon, Netflix and others use this tax break to write off millions. These tax loopholes, and others, allow many profitable companies to avoid paying a single dime in taxes, but it should also be noted that many other profitable companies are also using these special breaks to pay far less than the 21% statutory federal income tax rate.

Today America faces a financial crisis unlike ever before seen, and with debt levels at all-time highs, spending must surely be reined in perhaps even changing the structural manner in which we have spent over the past half century. We are sure to hear of revamping the tax code as well. But how do you even begin to revamp something that is so inherently complex and perceived unfair?

Well, maybe instead of revamping the current system, what if we eliminate it all together and replace it with a national sales tax? This concept has been discussed off and on for the past 20 plus years as a potential addendum to the current tax structure, but maybe what should be proposed is a complete transformation from one to the other. Many have argued that there would not exist enough tax revenues under this method. Well, let's just see. This study analyzes the effect of eliminating the current income tax system and replacing it with a national sales tax.

REVIEW OF LITERATURE

During the year 2019, Netflix and Amazon paid no federal taxes. Other companies reporting no federal taxes paid include; Chevron, Delta Airlines, Eli Lilly, General Motors, Gannett, Goodyear, IBM, Jetblue, US Steel and Whirlpool. In fact, 60 Fortune 500 companies avoided all federal taxes in 2019 (ITEP News Release 4/11/20). If these companies paid the statutory 21% federal tax rate, the U.S. government would have collected an additional $16.4 billion in income taxes during 2019. For years, corporations have manipulated the system to avoid paying taxes, and it is clear that the 2017 Tax Cuts and Jobs Act (TCJA) did nothing to change this.

The IRS tracks the tax returns of the highest 400 adjusted gross incomes each year. Their average federal tax rate was 13%. The top rate for individuals currently stands at 37%. In fact, the average tax rate for all other taxpayers was just 7.5%. Throw into this the fact that approximately 50% of all U.S. households pay no federal taxes at all, and you begin to see one of the reasons why we have a federal debt approaching $23 trillion.

What causes this apparent disjointed revenue stream? In a nutshell, the federal tax code is filled with over $1 trillion in credits, deductions, and exemptions, an average of about $12,000 per taxpayer (USAGov, May, 2020). Add on the fact that the tax law is packed with tax breaks that are designed to help special interests, including American families. Therein lies the problem in trying to control such credits, deductions and exemptions. Whose taxes do you affect and by...