How do we correct those “trade-related imbalances” of which Volcker spoke? We must export more and import less, save more and spend less, produce more and consume less. We need to emulate the ants and behave less like the grasshoppers of summer.He suggests an "industrial policy". A simple way to start is by instituting a national sales tax to replace the federal income tax.
But how do you tell that to two generations of Americans who have been raised in an era of entitlement?
Export more and import less: The FairTax, the legislative incarnation of a national sales tax, levies a 23%* sales tax on all new goods and services purchased in the US, whether they be produced domestically or imported into the country from abroad. Make imported items more expensive and imports will be reduced.
By scrapping the corporate income tax, exporters will keep the third of their profits currently going into federal coffers. Make it less expensive to export items and exports will be increased.
Save more and spend less: The income tax punishes wealth accumulation and rewards wealth liquidation. Americans must currently fork over money to the government when they earn it, but not when they spend it. When it's relatively cheaper to spend money than it is to make money, people save less and spend more.
A national sales tax does the opposite. It rewards wealth accumulation and punishes wealth liquidation. Americans will fork over money to the government when they spend it, but not when they earn it. When it's relatively more expensive to spend money than it is to make money, people will save more and spend less.
Produce more and consume less: As has been pointed out, eradicating the corporate income tax will lead to an uptick in exports by increasing the profitability of exporters. We'll produce more than we do now.
The national sales tax applies only to new goods. Sales taxes are not collected on the sale of used items. So the new car you're considering purchasing suddenly looks 30% more expensive relative to the three year-old automobile you're currently riding around in than it did under the income tax system. Consequently, you stretch the life of your car (and all the other things you own) in lieu of purchasing a replacement for it (and them). Thus we'll consume less.
* As a percentage of the total price. In terms of how state and local sales tax rates are typically discussed, it is actually a 30% rate. For example, with the federal sales tax in place (excluding state and local taxes for simplicity), a $1 candy bar will cost a consumer $1.30. Thirty cents is 23% of $1.30, hence the 23% figure.
If this seems misleading, keep in mind that income taxes are discussed in the same way. If a guy earns $50,000 and is subject to a 23% income tax rate, he has to cough up $11,500 (50000*.23). We do not describe this $11,500 owed as constituting a 30% income tax rate, even though the $11,500 paid is 30% of the $38,500 the guy gets to keep. Stating the national sales tax figure as 23% instead of 30% allows for an apples-to-apples comparison with the current federal income tax system to be made.