Why a national sales tax can't be implemented

From the political news bag, someone asked the question, "There is a lot of press now about undocumented citizens.  Since one of the arguments is to get them to pay taxes, wouldn't a national sales tax solve that problem?"  

Ok James, first, let's set the record straight here - your question is based on two false assumptions.  One is that illegal immigrants aren't paying their fair share of taxes.  Actually, more than half of illegal immigrants do pay their taxes, according to the Congressional Budget Office.  The reason they're a burden from a tax perspective isn't because they consume more services than paying taxes, it's because they earn so little that they have very little to tax, due to poor education/skills.  As unskilled workers, they earn peanuts.  However, I might point out that your 1st generation immigrant ancestors probably looked identical as far as economic status.

The other false assumption is that a federal sales tax can be implemented, and I believe it cannot be done.  I'm in favor of instead implementing a zero-loophole flat tax, with only 3 exceptions permitted: 

• capital gains remain untaxed, to encourage savings and investments
• higher education tax credit for first-time college students or trade schools, to encourage uneducated/unskilled worker training
• charitable donations

Now as to why it is my opinion that a federal sales tax cannot be implemented.

At the risk of turning a short question into a very long answer, let me illustrate why, with a predictive tale that will have you thinking me quite the pessimist…

Suppose we heard tomorrow that, as of 1-Jan-2014, there would be no more federal income tax, and everyone would pay a 25% sales tax on non-food items.  This would create some very undesirable behaviors:

1. People would quickly realize that they will be making 25% more NEXT year, but goods will cost more as well.  If they can buy something in December, and pay for it in January, it's like getting a 25% off coupon…. but delaying until January means they'll have to pay "full price".  Excitedly, they realize they can get 25% ROI in just a few months from investing!  Except, consumption isn't investing.
2. People would plunge into personal debt as deep as they possibly can, purchasing durable goods, such as cars, electronics, boats, vacation homes, jewelry, gosh, whatever they want, because they're getting a 25% pay raise next year.  I believe this would be a staggering amount of debt.  This consumption would occur sooner rather than later, as the lure of "free" consumption will be too great, and the ski boat would look SO much better on the water this Summer rather than deferring enjoyment an entire year.
3. Massive consumption, essentially pulling 4 years of buying forward into 1 year would create a huge benefit in jobs, as the full economy would be cranking full-tilt.  Full employment provides even more discretionary income, and things seem pretty rosy.  However, laws of supply and demand would do this same thing that has happened to ammo since Thanksgiving, going from $.30 a round to $1 a round in a few short weeks.  The price of goods would shoot up in a few short weeks, as shelves quickly emptied.  
4. Escalating prices may give a few pause.  However, they will still need shoes, belt, dress, pants, shirts, socks and toiletries.  If $3 mouthwash is now $5, it will likely jump to $6.25 with tax next year, so they capitulate and buy anyway.  The 75% who are less prudent will decide the definitely "need" big TVs, nice cars, shiny new GXR, and will make that purchase 1-4 years earlier than they intended (and, looking at lottery winners, with reckless abandon).  From Apple computers to staples and glue, shelves are picked clean.  It would be like groceries when a disaster is declared, but it would be every mall in America, hitting all aspects of durable goods.  Transportation costs would escalate, gas prices would jump dramatically as consumption of fuel increased from the supply chain ripple effect.  Food delivery is effected, and food prices climb, but don't worry, next year, everyone is getting a raise. 
5. Companies get into the game with less abandon, but recognize the same cycle, so pull all computer, vehicle, office supplies, light bulbs, parking lot repairs and consulting forward into 2013.  The computer market had a big hit 4Q1998 - 2Q2000 because corporations had pulled 3 years of purchases into 1998 in preparation for Y2k.  That push helped cause the Internet "bubble" to collapse in Spring 1999.  This time, it's not the tiny software market, it's consumer goods spending, which is 30% of the GDP.
6. With massive consumption and short supply, inflation passes 20%, perhaps more… while some realize "pre-purchasing" next year brings a theoretical 25% benefit, others with poor math skills think 25% + 25% = 50%, so are willing to pay as much as 50% more for goods, so inflation could readily top 30%, but full employment keeps the bull roaring.  The poor couldn't raise financing or personal credit, and live in fear, as prices climb but fixed income does not. Many Americans are having a hard time finding needed durable goods, and now non-durable good such as gas and food.  Crime rises as people go hungry.  Spending is out of control.  Some banks might get caught in an unstable state, and go under.  Investments slow dramatically, as 401(k) and IRA contributions drop to zero, and savings accounts are sucked dry, and the only pump is consumer spending, but the end is looming.
7. In the final groaning days  of 2013 the spending hits frenetic levels, and December is the Christmas to save all Christmas splurges.  The recovered supply chain is smacked again.  Now however, non-durable goods and services take the hit as well.  Everyone wants to get a hairstyle, manicure, painting, redecorating, plumbing, all the home repairs they've been putting off. After all, it needs done anyway, but will cost 25% more next year, but they'll be rich when it comes time to pay. In total, the GDP impact of goods and services is typically 69% of GDP.  In the final months of 2013, it climbs North of 80%.  Runs on food hit, with flour, oil, sugar, vanilla, and other relatively shelf-stabilized products running dry.  Every gas tank is topped off, and gas climbs above $6 a gallon.  
8. Wheat, corn, rice, pork belly, and crude oil markets jump.  All the commodity brokers saw this push coming, and prices on food are now double the year prior.  Perhaps corn and wheat shipments to third-world countries would slow, and famine might be the result, as we choose to feed our populace with our own wheat rather than exporting.  Unemployment, at 0% for the prior 10 months, suddenly jumps to 10% in December as employers brace for the impact of the decline they know is coming.
9. January 1 hits, and the orgy of excess is over.  Now nobody is buying anything except food, because they already made their purchases. In fact, only fresh food is being purchased, but sparsely, because flour, sugar, salt and the like are still scarce.  Restaurants make a modest comeback but the food supply is still uneven and shortages remain.  The poor are now both hungry and cold, as heating oil prices and food prices provide the double punch with Winter in full swing.  Massive layoffs already started in December, and continue on through Spring.  Car, motorcycle and boat dealers close, as nobody comes to the lots for months. Malls are shuttered, and look like a zombie apocalypse movie, with nearly empty shelves and no shoppers.  The retail sector tanks, and supporting industries are hammered - transportation, warehouses, restaurants, jobbers, marketing, entertainment, all take a big hit as staggering debt load brings all discretionary spending to a halt.  Gas stations close, airline travel slows to a drizzle, and airlines collapse their routes, or fail entirely.
10. The only two sectors booming are package delivery and ports.  With the 25% sales tax creating a 25% tariff against United States businesses, Americans hit the Internet, and seek to purchase goods from Canada, Mexico, China or Europe.  Taxes grind to near-zero, and the US is near default.  Congress tries unsuccessfully to move the debt ceiling, then moves the income tax higher, and reinstates 10% income taxes, to keep the government afloat.  This tips the economy from Recession into a Depression.  The bleak outlook dries up the final sources of institutional investments, and more companies flounder without revenue, necessary cash flow or ability to borrow.  
11. Lack of investment and R&D causes a domino effect, and employment creeps higher.  The wealthy have gotten even more wealthy from investment analysts that positioned them well for the 2013 bubble. The poor and middle class can't remember ever being this poor before.  Defaults and foreclosures accelerate, and recently purchased cars, boats and LED TVs are recaptured, but with little market to move them.
12. Consumer spending has pushed inflation to 30% and beyond, but salaries fall, instead of climbing, since unemployment shoots past 30%.  

Sadly, this would probably "solve" the illegal immigration problem, as undocumented workers would leave to return to their home country, where job opportunities were better.

Dan