Abolishing Sales Taxes

I’ve read in a couple of places over the past week (sorry I can’t remember any specific instances offhand, but would welcome citations) that a good policy proposal for Democrats might be to advocate the abolition of sales taxes, replacing the lost revenue with income taxes. Since there’s no national sales tax this would have to happen at the state level — which is okay, since that’s where the Democratic Party actually still has some power.

This would present a clear alternative to what has amounted to a gradual (and rather stealthy) move away from a national income tax and toward a national consumption tax by the Bush administration. In fact, some Republicans in both the House and Senate have recently begun explicitly talking about moving toward a pure consumption tax. In addition to presenting a clear alternative to these Republican proposals, getting rid of sales taxes would also allow blue states to keep more of their own money, as AB pointed out.

But most importantly, there may be some sound theoretical reasons to move away from sales taxes and toward income taxes. Off the top of my head, I can think of a few justifications for sales taxes, though there are probably more:

1. Ease of administration.

2. They may be less volatile during economic booms and busts.

3. They can internalize negative consumption externalities.

Given that most states already have the administrative structure needed to collect income taxes, I don’t think #1 is relevant. My impression is that evidence for #2 is mixed, though I could be wrong about that. And #3 can always be addressed through a separate tax on specific commodities that have large negative externalities, such as tobacco and gasoline, even if regular ad valorem sales taxes are abolished.

So I think that these good reasons to impose a sales tax are actually not that compelling. And they are counterbalanced by the negative side-effects of sales taxes, many of which AB has discussed in previous posts:

1. They are inherently regressive (unless you make them quite complicated, which causes more of problem #2 below).

2. They may impose greater economic distortions than an income tax (especially if you try to address problem #1 above).

3. Unless the sales tax is absolutely universal and flat, they may open up a Pandora’s Box of political lobbying and favoritism.

(Go to the “Consumption taxes” topic on the left for some more detailed discussion of some of these issues by AB.)

So here’s the question: what would be the major drawbacks of proposing the revenue-neutral abolition of sales taxes in the blue states?

Kash