Enter the consumption tax
AMERICA is in desperate need of tax reform. It needs more revenue to close budget gaps, fund social programmes, and make needed investments, but the current tax system is so complex and riddled with loopholes that efforts to boost revenues are economically costly and lead to lots of tax dodging. Economists often recommend scrapping the income tax system entirely, or shrinking its role, and replacing it with a progressive consumption tax, which is more efficient. It's a good idea, and one that's worked in other rich countries. The problem (aside from the political challenges associated with any big reform) is that state and local governments are already dependent on sales taxes. Piling a big federal consumption tax on top of local levies will depress consumption and limit state and local revenues. But technological shifts could clear the way for a change:The rapid growth in internet sales is great for online retailers. But it’s not such good news for state and local governments. The Commerce Department reported Thursday that e-commerce retail sales totaled $44 billion in the fourth quarter last year, up from $38 billion a year earlier. E-commerce sales now account for 4.3% of total retail sales.....Many of those online purchases didn’t have any sales tax attached to them. Long before the Internet was on anybody’s radar, the Supreme Court ruled that states couldn’t require that retailers without a physical presence in a state, like mail-order companies, charge sales tax on their behalf.This is creating a big budget headache. Now, one solution is to change the rules so that state and local governments can have retailers headquartered elsewhere charge a sales tax. Another possibility, however, would be to use declining sales tax revenues as an opportunity to reshape how state and local governments raise money, thereby freeing the federal government to adopt a consumption tax.The challenge then is to figure out where states should get their money. Heavier reliance on income taxes would be a bad outcome, since it would offset federal efforts to get away from income taxes and increase tax competition between states. But taxes on land or charges on congestion could raise money while improving the economic climate within the area being taxed. If even a few states experimented with these reforms and enjoyed success, that could spur broader change.And that's today's pie in the sky policy proposal.