An alternative to the sales tax.

In the vein of offering new and innovative solutions to today's problems, Halstead and Lind come up with an alternative to the sales tax:

Here's a concrete alternative. Why not replace our fifty separate state sales tax systems with a single and simple national consumption tax, whose proceeds are rebated to the states on a per capita basis? Unlike regressive sales taxes, a personal consumption tax can be made highly progressive by exempting a certain amount —say, the first $15,000 of consumption— so that the average cost of basic necessities like housing, food, and transportation would be free from taxation. At the same time, such a system would remove all tax collection burdens from businesses and ensure a level playing field for both "brick" and "click" industries.

A person's annual consumption could be calculated based on a simple formula: income minus savings and investment equals consumption. For example, if, after income taxes, you made $45,000 in a given year, saved $10,000, and spent the remaining $35,000, then with the $15,000 deduction, your taxable consumption would be $20,000. Naturally, the exemption level should be increased somewhat for each dependent. Because the sales tax does not differentiate between individuals with dependents and those without, our system would become more family-friendly in the process of becoming more progressive. A consumption tax designed for the new economy should also be education-friendly, given today's need for constant skills upgrading. Accordingly, education expenses might be viewed as investments rather than as consumption, and thus exempted from taxation.

(Halstead & Lind: pp. 131-132).

This proposal would be a significant change not only in the US but also in the EU, where the value added tax (VAT) is still the main source of revenue. It certainly sounds more fair, although we would obviously have to study its effects more in detail. Would it allow our governments to raise a similar amount of money, for instance?