GLEN TENNEY At the Margin Advertisement

A national sales tax is in the wind at the highest levels of policy-making in Washington.

As we consider the merits or demerits of such a tax, we perhaps need to make sure we understand the important key arguments rather than stumbling over petty matters that make almost no difference in the long run.

Some supporters of a national sales tax, also known in some circles as a "value-added-tax" because it taxes goods at each and every level of production, are framing their discussions in terms of the perceived benefits of replacing the existing tax systems with a sales tax.

The perceived benefits of such a replacement plan are based on the idea that a national sales tax is based on consumption, which would presumably encourage sorely needed investment and capital formation as opposed to consumption.

While the intent of such talk about encouraging investment is praiseworthy, we need to understand that in its economic effects a sales tax is ironically not a tax on consumption at all. As the great Murray Rothbard taught in his famous treatise on taxation, "It should be carefully noted that the general sales tax is a conspicuous example of failure to tax consumption." If a sales tax is not a tax on consumption, then it must be a tax on incomes in some way.

In an attempt to see why a sales tax is really an income tax in disguise, let us examine a typical transaction. We start with a consumer who is willing to pay $107 for a product of some kind. Whether this $107 is composed of $100 "selling price" and $7 tax (as is customarily understood), or $50 "selling price" and $57 tax, is not a concern to the customer.

The relevant price for the consumer is only the $107 total price rather than any specific components of the $107. This focus on only the total price from the perspective of the consumer is consistent with the treatment of individual costs of production of all kinds from his perspective as well. For example, in a case without any tax, the total of $107 could be composed of $100 materials cost and $7 labor cost, or the $107 could be composed of $17 material cost and $90 labor cost, or the total could be composed of any other combination of materials and labor. The consumer is only concerned about the total cost of obtaining the product, which is $107 in our example.

Notice the illusion going on here. It is customary to think in terms of sellers multiplying the "selling price" by some tax rate in order to obtain the actual amount he obtains from the customer.

Tax laws typically specify the sales tax is "added to" the price of the product. But the customer is arguably not concerned with what the law says about the breakdown of the money he hands over to the retailer. He is only concerned about the total rather than the breakdown between material, labor, tax, etc.

Economically speaking, this means the sales tax is a cost to the seller of a good just like any other production cost.

The key point here -- which is admittedly somewhat obtuse -- is the economic effect of all taxes are best understood as being related to actions of human beings rather than being burdens placed on things.

Economic goods, such as televisions, computers, and automobiles, cannot bear economic burdens associated with taxation. Only real human beings are capable of bearing economic burdens.

And these economic burdens are recognized and analyzed in terms of the actions of people changing as a result of a tax of some sort.

Thus the sales tax is best understood as a cost of production just like any other cost of production.

How then is the sales tax really an income tax?

By viewing things in the way we have, it is easy to see the incomes of the owners of the factors of production (labor and capital) at all the various stages of production are reduced by a sales tax.

Because the value going to the consumer is fixed at the total amount he is willing to pay for the finished product, the tax that is extracted by the taxing authorities must come out of the incomes of workers and the owners of capital.

The fact that a sales tax is really an income tax rather than a tax on consumption provides us with a hint about the question of whether a sales tax is better than an income tax.

Since a sales tax punishes productive efforts in the same way an ordinary income tax does, any minor differences between these two types of taxation are very minor indeed. This suggests that, instead of being concerned about the type of taxation, our concern should be focused on the total amount of taxation.

Only if the national sales tax were to completely replace all the other tax schemes currently existing would it come even close to being a candidate for acceptance.

It seems the risk of taking national sales tax proposals seriously is such a tax will end up being an addition to what we already have rather than a replacement of existing tax schemes.

That risk seems like a very real political possibility, and it is therefore a very good reason to reject the sales tax. It is more likely to become an additional tax rather than a replacement tax.

Glen Tenney teaches economics and finance at Great Basin College in Pahrump. He can be reached at glent@gwmail.gbcnv.edu