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Is a Federal Sales Tax a Potential Replacement to the Federal Income Tax?

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You might be looking at this article’s title and wondering why it would be a good idea to introduce a federal sales tax when you’re likely already paying state and local sales taxes. Wouldn’t that take away the fun of shopping in the five states that don’t mandate a statewide sales tax—Alaska, Delaware, Montana, New Hampshire, and Oregon—or making online purchases in states that haven’t closed that tax-free loophole yet?

Not necessarily. Replacing the federal income tax with a federal sales tax has a lot of potential upsides. Here are the most significant benefits to warm you up to this new idea.

Less Intrusion From the IRS

Have you ever noticed how much information you hand over to the IRS each year? After you’re done filing taxes, you’ve told them your salary, the number of kids you have, whether you have a home office, and even if you’ve had a lot of medical expenses in the past year. And the IRS can get much more specific information if they decide to audit you.

With a federal sales tax, the IRS would lose a good deal of its control, while Americans would gain a good deal of privacy in their financial lives.

No More Dreading April 15

While getting a refund check from the IRS can feel like winning the lottery, going through the motions of filing a tax return ever year leads many Americans to dread that ominous deadline of April 15.

Moving to a federal sales tax instead of a federal income tax doesn’t mean you won’t have to file a tax return. But it could make filing easier and more streamlined—and save you from nasty surprises. After all, sales tax is a pay-as-you-go system.

Taxed Based on Consumption, Not Income

Let’s say you’re a police officer paid by the hour or a lawyer paid by the client. Currently, the amount you earn puts you in the 25 percent tax bracket. Since you have sway over earning extra money, you decide to put in some overtime or take on a new client. This works out well, and you want to do it again—except you realize that if you do, you’ll earn enough money to bump you into the next tax bracket (28 percent of any additional income earned). That extra 3 percent of taxation decreases the benefit of taking on more hours or more clients. Deciding that the extra work wouldn’t be worth it, you choose to spend the time with your family instead.

Replacing the federal income tax with a consumption-based federal sales tax would eliminate this built-in disincentive to work.

Incentive to Stay Away From the Store

Since the sales tax would be based on consumption, its implementation might motivate you to curb a shopping habit and lower your debt. Instead of shelling out money, you might start borrowing items from neighbors, using up the resources stored in your garage, or even bartering for what you need. This inspires resourcefulness and minimizes waste.

Instating a federal sales tax in lieu of the federal income tax won’t necessarily be all roses. There could be some downfalls, such as an increased sales tax rate to fill in the income tax gap and potentially depressed consumerism. However, the upsides of less IRS intrusion and more control over the amount of taxes you pay at any income level make the federal sales tax an idea worth pursuing.

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Amanda L. Grossman is the creator and owner of FrugalConfessions.com -- live a VIP life on an average paycheck -- where she shows hard-working people how to end anemic savings account syndrome and pay off debt years earlier than your creditors want you to without getting a second job or eating ramen noodle dinners. Amanda's area of expertise is in personal finance, and she has authored several personal finance articles for the Houston Chronicle, is a featured blogger at the Houston Chronicle, and has staff written for ReadyforZero.com Blog and RelayRides.com Blog (several of which have been syndicated to LifeHacker, Business Insider, and Yahoo Finance). She has a knack for taking seemingly complex, and irrelevant financial topics and making them accessible and meaningful to the average person. She, her husband, and their two cats (Lyla Bear and Danny Boy) live in a fixer-upper in Houston TX.