For my Libertarian friends

 

This makes every seller a tax collector who pays all the tax he's collected to the tax office and claims back all the tax he's paid in the course of doing business. Of course consumption tax in the form of sales tax and VAT already exist, but not at the percentages that a single national sales tax would require to replace all other taxation.

 

I understand your requirement for this system is to have a smaller government and hence lower overall tax bill, but if the aim is to replace a multitude of different taxes with one single inclusive tax then we need to know where in the whole economy this tax is going to be applied. What I was attempting to get across is that consumption is just as complex as income and will become more complex when it is the only taxation method. 

 

You have already listed food as being tax exempt, if we add to that all the intermediate exemptions I've already discussed, then what of all the other necessities for life: pharmaceuticals (prescription and/or over-the-counter)? female sanitary products? do we tax children's clothing? some book or all books, text books, worship books? are haulage companies and travelling salesmen exempt from consumption tax on fuel? what of prepared food from a restaurant? do we tax pet food but not livestock foodstuffs?

 

Once you transfer the role of tax collector over to the retailer then all the complexity of the system becomes his responsibility, and he will make you pay for that by charging the extra cost of his administration and/or extra accountants needed onto the goods he sells so the price increase is more than simply the value of the tax itself. Of course the same thing can happen with any taxation - it depends on who collects the money and pays it to the revenue service - the ideal would be to have the tax collectors at the far end of the line where they cannot pass on the cost of collection to anyone else - but as income tax collection has demonstrated, once that cash sum is in their hands there is a pain-barrier to overcome in persuading them to give "their" money to the revenue service.

 

At the end of the day it doesn't matter where the tax is collected or how big the government is - if it exists at all and requires z million dollars funding then that money will be collected in total - what you are discussing is how that is apportioned through the population. If someone pays less tax for whatever reason or circumstance then someone else will pay more as a direct consequence because the net yield has to remain at z millions.

 

If the rich pay more income tax by earning more or they pay more consumption tax by consuming more in principle it shouldn't make any difference, but the reality is that it will - TheLlama has already illustrated the deadweight loss associated with income-tax (when tax is removed wages will drop) - the same applies to consumption tax - once the price of goods increases through sales-tax then the demand will decrease and it will decrease more on expensive (luxury) items (where the fixed percentage tax just means paying more dollars per item - the buying public does not think in percentages it thinks in dollars and cents). Even if there is more disposable income as a result of income tax reducing to zero, there is a psychological effect of prices increasing as a result of sales tax to overcome regardless of how much money you have in the bank. If people don't like paying income tax, then they don't like paying any tax and will not be fooled by the ruse that consumption tax is fairer, because no tax is fair (in their estimation).

 

What you are doing is shuffling the effects of taxation around the population looking for the largest sector that will either complain the least or have the least influence on the overall economy.

 

Where consumption tax wins is that it is difficult for the ordinary citizen to avoid it and practically impossible to evade it. Where it loses is that it puts the burden of tax collection on the small businesses (ie retailers) who can least afford it and who are least skilled at managing it. To make tax collection simpler it should be moved up the supply chain, not down it - it is easier and more efficient to collect larges sums of cash from a small number of suppliers than it is to collect small sums from a large number. This could overcome the psychological tax pain-barrier effect - the price of final goods may increase by exactly the same percentage, but if it not regarded as a direct taxation then people will be less reluctant to pay it.