A $5,OOO Cat? - The NRST and Real Estate

Once Johnny came home with a puppy that he had found at the park. His father told Johnny that he couldn't keep the dog. Johnny protested but his father was unrelenting.

Tearfully, Johnny agreed. He took the puppy and left and was gone about an hour. When Johnny returned his father asked what became of the puppy. Johnny said that he sold it for $10,000.

The father demanded an explanation. Johnny said that he had gone to the neighbor's home and sold the puppy for two $5,000 cats.

Many in Washington explain everything that they do for us in glowing terms. They refer to the great benefits reserved for us in the tax code.

However, often when we examine the manna from Washington we find that the supposed benefit isn’t as good as we were promised. The benefit from Washington all too often really resembles one of the boy's $5,000 cats.

An example of this is the mortgage interest deduction. The fact that this benefit will be repealed by the national retail sales tax ("NRST") is one of the major objections used by opponents of the NRST.

Is the mortgage interest deduction really a "great" benefit or a $5,000 cat? The mortgage interest deduction is a provision in the federal income tax code which permits the deduction of the amount of mortgage interest paid on your home mortgage from taxable income, the amount of income on which federal income taxes are calculated.

Washington bureaucrats and realtors trumpet the tax advantages that accompany home purchases. "Buy a home and get a 'tax shelter' like the 'big guys' ". Alas, the "mortgage interest tax shelter" is, for many Americans, a $5,000 cat.

Here is an illustration of the home mortgage deduction. Fred and Joan Jones have two children and an annual income of $60,000. On January 1st, they buy a home a home for $140,000, pay $14,000 down and obtain a $126,000 30-year mortgage at 7 percent interest. The monthly mortgage payments are $838. Fred and Joan will pay mortgage payments of $10,059 in year one. Of the $10,059, $8,780 is interest and $1,279 is principal, which under the present federal income tax is not deductible. {1}

At the end of the year, eager to take advantage of this great "tax shelter, the Jones family deducts the mortgage interest paid of $8,780 from its taxable income of $60,000 and $10,600 of personal exemptions {2} leaving a new taxable income of $40,620. By deducting the $8,780 of mortgage interest the Jones family will pay $6,094 in federal income tax. {3}

At first glance, this would seem to be a real benefit. Fred and Joan were able to reduce their taxable income by the amount of the mortgage interest they paid. They know that their top marginal federal income tax rate is 15% so they appear to have received 15% of $8,780, or $1317, of the money that they would have paid in federal income taxes back from the government. However, in order to utilize the "mortgage interest tax shelter", they must file a 1040 return and itemize deductions. Interestingly, most real estate agents don't explain this fact but, without itemizing, the Jones family would have been able to take what is called the standard deduction that is available to everyone whether they pay mortgage interest or not.

"65,400,000 Americans are home owners but only 29,396,016 Americans take the mortgage interest deduction. For many of these 29,396,016 Americans the benefits of the mortgage interest deduction are marginal and more illusory than real."

If they had not deducted the $8,780 in mortgage interest payments but simply taken the standard deduction, Fred and Joan would have paid $6,551 in federal income taxes. This means that the mortgage deduction actually only saved them $457 in federal income taxes over what they would have paid if there was no mortgage deduction. On top of this, filing a return and taking the standard deduction generally means that you are less attractive to the IRS for an audit. So, the Jones family filed a more complicated return and increased their odds of an IRS audit to save $457. {4}

Another point that needs to be understood is the idea of "after tax expenditures." These are expenditures which, unlike the mortgage interest deduction, are not subtracted from our taxable income when computing taxes. These are items for which we have to earn enough to enable us to pay the income tax and still retain the net amount to be spent. Since the Jones family is in the 15% marginal tax bracket, in order to have a dollar to spend they will have to earn $1.18 and pay 18¢ in federal income tax (15% of $1.18) to net $1.00. As stated earlier, $1,279 of the total mortgage payments in year one is principal which is not deductible. The $1,279 of principal payments in year one is paid from the money that Fred and Joan have after payment of their taxes. To Fred and Joan, this means that they had to earn $1,505, pay $226 in federal income taxes (their marginal income tax rate is 15%) in order to net $1,279, the amount they paid in principal on their mortgage.

To recap, Fred and Joan have earned $60,000 and the examples shown in figure 1 illustrate the actual benefits they received from the mortgage interest deduction.

Assuming their income goes up at 3% per year, in 5 years they will be making $67,531 but will only be saving $406 more than they would be saving if they utilized the standard deduction. {6}

The amount of income tax savings is decreasing because the amount of interest is less each year and the amount of principal increases each year. The amount of mortgage interest paid in the fifth year will be $8,367 and the amount of principal will be $1,692.

$67,531 - 5,166 FICA {7} - 8,245 Federal Income Tax - 10,059 Mortgage Payment $44,061 Net Amount Remaining

However, if Fred and Joan want to actually own their home they will see a rapidly decreasing benefit from the mortgage interest deduction as they pay down the loan. In fact, by the 14th year, it will be better for Fred and Joan to take the standard deduction of $6,900 rather than the standard deduction of $6,900 rather than the mortgage interest deduction of $6,888. {8} Moreover, if Fred and Joan had purchased a home with a mortgage of $99,000 instead of $126,000, they would have saved nothing from the mortgage interest deduction.

This is one of the primary reasons that 65,400,000 Americans are home owners {9} but only 29,396,016 Americans take the mortgage interest deduction.{10} For many of these 29,396,016 Americans the benefits of the mortgage interest deduction are, like for Fred and Joan, marginal and more illusory than real.

If they actually pay the mortgage on their $140,000 home, Fred and Joan will have paid $175,781 in interest and $126,000 in after-tax principal for which they would have had to earn $148,000 and pay $22,000 of federal income taxes to net $126,000.

Contrast the above scenario with the situation if Fred and Joan purchased their home after the passage of the NRST using the same purchase price and 30-year mortgage at 7% interest.

Fred and Joan will receive their income without any income tax withholding. They, not the bureaucrats in Washington, will decide how much income tax they pay by how much they elect to spend on retail purchases. No longer are Fred and Joan treated as children or mentally deficient adults but as adults capable of making their own decisions.

Fred and Joan receive $58,234 in income, which is the earnings of $60,000 reduced by $4,590, the amount of the FICA withheld and increased by $2,824, the amount of the NRST rebate {11} to a family of four. Like under the federal income tax, the NRST will tax the principal of the house purchased by Fred and Joan. Under H.R. 2001, the bill introduced by Congressmen Dan Schaefer (R-CO) and Billy Tauzin (R-LA) that replaces the income tax and the IRS with an NRST collected by the states, the $140,000 purchase price of the house will be taxed by the NRST, resulting in a tax owed of $24,706. This tax can be paid either at the time the house is purchased or over a 30-year period. If the election is made to pay the $24,706 over 30 years then Fred and Joan will pay $73 per month or $876 per year.

The $8,780 of mortgage interest will not be subject to the NRST. {12} At the end of year one we see the results shown in figure 2.

After 5 years under the NRST, and assuming a 3% increase in their income, Fred and Joan would have the following net amounts of money under the NRST and the present income tax as shown in figure 3.

Now, we have assumed that the interest rate to be paid by Fred and Joan would be the same under the present income tax and the NRST.

This is really not the case. Economists agree that interest rates under the NRST will decline by at least as much as the difference between the municipal bond rate and the standard, non-tax free bonds. Some believe that the reduction will be much greater as America becomes the greatest place for investment and funds flood into the United States from all around the world. However, if we just assume the smaller reduction this will mean that the mortgage rate will be not 7% but 5.5%. {15}

This would mean that the mortgage payments and total cost of the mortgage for Fred and Joan would be reduced. Below are comparisons of the present income tax and the NRST with the lower interest rate. Here is a recap of the new costs and the comparison shown in figure 4.

This means that the total cost of paying off the mortgage under the NRST is $131,548 of interest, $126,000 of principal and $24,705 NRST tax for a total of $282,253. Contrast this to $323,781, the amount that would have to be earned and spent under the federal income tax, a difference of

Yet another factor we have not addressed is that under the NRST, it will be much easier for Fred and Joan to save the money needed to purchase their home. Under the present income tax in order for Fred and Joan to save the $10,000 that they need for the down payment on their home, they will have to earn $11,765 and pay income taxes of $1,765 to net $10,000. If they deposit the money in a savings account then the interest will also be taxable.

However, under the NRST, Fred and Joan will only have to earn $10,000 and save that amount because earnings are not taxable under the NRST. Any interest earned on a savings or investment will not be taxed under the NRST. The NRST gives Fred and Joan the ability to keep all the money that they don't spend whether the source is earnings or a return on their savings and investment.

There are a number of other things that we have not taken into account when we do our comparison. The foremost of these is that the economic studies that have been done on the affect on the rate of growth in the economy after the enactment of the NRST all show increased rates of growth and increased rates of productivity. This is very important because increases in income are derived from increases in productivity.

What does the increased economic growth mean to each of us? If the economy had grown at the same rate since 1973 as it did prior to 1973, the average family would have an additional $10,000 per year in disposable income.

It is time for Americans to quit accepting $5,000 cats and demand a tax system that really works for America, the NRST.

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{2} Each family member receives a $2650 personal exemption or $10,600 for a family of four.

{3} For purposes of our example we are not considering any deductions that might be available would increase the amount of itemized deductions because these vary widely among taxpayers.

{4} The $457 in savings would be increased if there were additional itemized deductions like real estate taxes, state income taxes and charitable donations. For example, if Fred and Joan had an additional $1000 of deductions then they would have saved an additional $150 in their 15% income tax bracket.

{6} This actual savings from the mortgage deduction will likely be less because the standard deduction will also have been increased.

{8} Again, this is assuming that the standard deduction for a family--of four remains at $6,900 which it will not. Therefore, the standard deduction will likely exceed the mortgage interest several years earlier.

{11} The NRST rebate is determined by family size. It provides a rebate to Americans equal to the NRST on their purchases up to the poverty level. For a family of four this would be a rebate on the first $16,000 of purchases.

{13} Fred and Joan would not pay NRST on the FICA payment, the NRST payment and the mortgage payment. We are assuming that the family has savings or expenditures of an additional $5,000 not subject to the NRST - like charitable donations, education expenses or savings.

{15} Many economists believe that the mortgage interest rate will likely be even lower because of the increase of savings and the infusion of vast amounts of capital from around the world.

{16} This assumes that the family saves or spends a total of $5,000 on items not subject to the NRST.

Compare that to 23% sales tax and show my the computations to make the comparison.

All calculations made in tax inclusive terms.

Income/payroll tax system total "effective tax rate" calculation.

Given

My effective tax rate (income tax + FICA) on my income is 19.77%
Assume family of three (husband, wife, and child) making $100,000, current consumption is $77,500. Compare the 19.77% to 23%.
consumption spending contains a 20-25% corporate income/payroll tax related burden,

The family's effective total tax amount under the current system is:

0.1977 * $100,000 gross income = $19,770 individual federal tax
$100,000 - $77,500 - $19,770 = $2,730 savings plus state/local taxes
0.2000 * $77,500 gross payments for consumption = $15,500 embedded federal tax burdens

Net tax paid by family under federal income/payroll tax system (ITnet):

ITnet = $19,770 + $15,500 = $35,270

Total effective tax rate (ITrate) paid by family under federal income/payroll tax system:

ITrate = ITtotal/GrossIncome = $35,270/$100,000 = 35.20%

NRST total "effective tax rate" calculation.

NRST only, all individual and corporate income & payroll taxes repealed.

Given from preceding ITrate calculations and parameters:

$2,730 savings and/or state taxes held constant from above,
$100,000 gross income from above

Net tax paid by family under NRST tax system (NRSTnet):

Amount available for consumption from gross income

Ci = $100,000 - $2730 = $97,270

Annual FCA tax compensation received by family of three

FCA = $4,646

Tax paid on consumption(NRSTci)

NRSTci = (NRST*Ci )- FCA = (0.23 * $97,270) - $4,646 = $17,726.10

spend additional consumption dollars available from FCA at NRST margin rate (NRSTfca)

NRSTfca = 0.23 * $4646 = 1068.58

accumulated NRST taxes paid by family spending entire amount.
NRSTnet = 17,726.10 + $1,068.58 = $18,794.68
total spent on gross payments for consumption including FCA under NRST

$97,270 + $4,646 = $101,916 retaining $2,730 savings & state tax
Gross family income including FCA = $104,646

Total effective tax rate (NRSTrate) with respect to total income to family under NRST tax system:

Bottomline

NRSTrate = NRSTnet/GrossIncome = $18,794.68/$104,646 = 17.96%

Compared to

ITrate = ITnet/GrossIncome = $35,270/$100,000 = 35.20%

http://www.cato.org/pubs/pas/pa-272.html

Uncle Sam already taxes themselves and the states by taxing their employees wages and salaries....

A Note on the Sales Tax and Government Output

Under the sales tax system outlined in this study, government output would not be exempted from the sales tax. Hence, government output is included in the tax base. Since this is an issue of some controversy, the following is a brief explanation of the logic for this tax treatment. [35]

Our goal is to create a sales tax system where the government can provide the same amount of output at the same real cost as it does under the current income tax structure. We want to ensure that the relative prices of a government service versus a privately provided service are unaltered after the tax shift. In sum, the government should be held harmless by the switch to the national sales tax.

The Gross Domestic Product includes both government value added and private value added. Government value added is included at "cost," which is approximately equal to the wages paid to its employees. Under the income tax, output is taxed whether the source is government or the private sector. The government pays its employees a gross amount and then deducts the income tax from their paychecks. IN OTHER WORDS, BY IMPOSING AN INCOME TAX ON THE WAGES AND SALARIES OF GOVERNMENT WORKERS, UNCLE SAM ESSENTIALLY COLLECTS A TAX FROM ITSELF. It could, of course, just pay them a lower tax-free wage, but we choose not to do that and have higher spending (from paying pre-tax wages) and higher tax revenue (from the income tax on wages paid by the government). If government did not impose a tax on the wages of government workers, then we would not want to do so under the sales tax regime, or else those workers would be adversely affected.

Subtraction method value added taxes or VATs (sometimes referred to as "business transfer taxes" or BTTs) do not typically tax government value added. By contrast, the Hall-Rabushka flat tax introduced by Rep. Armey (R-Tex.) and Sen. Shelby (R-Ala.) does tax the income of government workers. [36] Unlike a normal subtraction method VAT, the flat tax allows a deduction for wages and then taxes wages at the individual level. Its tax base is consequently larger than a normal BTT.

Similarly, under a sales tax system, if government payrolls were not taxed, the tax base would be smaller than it is under the current income tax and under the proposed flat tax. The rate of tax on all other goods and services would thus have to be higher than under the flat tax because of that difference in the tax base.

One way of examining this issue further is to simply take the National Income Product Accounts and start calculating the tax base under the various tax systems. If one goes through that exercise to demonstrate the oft-repeated equivalence of the various consumption tax plans, it becomes clear that the flat tax has a broader base than a sales tax that does not tax government output because the flat tax taxes government wages. Similarly, a pure income tax is broader not only by the amount of unconsumed capital income but also by the amount of government wages. [37]

In the context of a sales tax, then, a payroll tax on government wages simply achieves parity with the income tax and the flat tax. Failure to impose this tax would exempt government value added from tax for the first time and constitute a dramatic incentive to consume through the medium of government. [38] In other words, failure to tax government output would alter relative prices in favor of government output. A sales tax should also be imposed on government purchases from the private sector. [39]

Government Services and Purchases

The question of the proper tax treatment of government services--such as municipal garbage collection, utilities, visits to national parks, and rides on Amtrak--presents special problems. [56] To the fullest extent possible, a national sales tax should provide parity between government services and private services. Excluding commercial activities of the government from the tax base would provide a tax advantage when government is competing with private providers of services. Hence, when the government sells a good or service, such as public transit or publications, the sales tax should be imposed on the sale price. [57]

The complication is that most government goods and services are not sold in the marketplace. They are often given away and in many cases no market price exists for the services in question. Moreover, the recipients or beneficiaries of the services are unclear or unknown. For example, how would we allocate the benefits conferred on the public by national defense, the State Department, the Environmental Protection Agency, National Public Radio, or the White House?

Taxing this part of the economy is not as administratively simple under a sales tax as it is under an income tax. Government services are taxed by both the current graduated income tax and the flat tax--through the income tax imposed on government workers' wages and salaries (i.e., most of government value added). One conceivable way to tax government fully and equally under the NST system would be to impose a separate excise tax on government wages. That is the approach we have adopted in this study. [58]

You didn't keep consumption consistent from the income tax to the NRST. You're assuming consumption will increase.

Silly me, you mean the family has a choice to save more under the NRST? Now why didn't I think of that?

I assumed you wanted to compare the worst case effective tax rate of the NRST for the particulars of your example to the family's tax burden under the current system.

We can always do the calculation assuming no change in dollars spent and provide that number. After all it becomes the family's choice to do which ever they wish, instead of one driven by government extracting it's pound of flesh limiting the family options of utilizing their resourses as they see fit.

How can you compare a tax on income to a tax on consumption if they aren't consistent?

Easy by looking at worst cases, and noting the family is still much better off under the NRST, as well as the economy from expansion of sales.

I thought a benefit of the NRST is people will save and invest more. If you want to show a reduction of prices, you will have to reduce the cost of consumption, not raise the amount of consumption.

"A" benefit yes, and one a family can choose to take advantage of to the full degree of their available resources before government can take its cut out of them.

So let the family choose to save/invest the maximum they can after holding their expenditure to the original level of $77,500.

If you hold the expenditure constant to $77,500 expenditure, and save, invest, etc. $27,146 each year instead, the family's effective tax rate of the NRST will drop to

NRSTrate = 100*((0.23*$77,500)-$4,646) / $104,626 = 12.59%

They will purchase approximately the same amount of stuff with $77,500 since prices would fall 20-25% under competition, build a nice retirement, provide capital for enhancing productivity and the creation of new industry expanding the economy, with expanding revenues to the government under the Laffer effect.

OTOH, they could choose keep paying a 35% tax burden, making out report cards on there family life to the IRS, and continue to have their retirement taxed away as well, by not supporting the NRST.

It's all a matter of the family's choice.

Save max:

NRSTrate = 100*((0.23*$77,500)-$4,646) / $104,626 = 12.59%

Spend max

NRSTrate = NRSTnet/GrossIncome = $18,794.68/$104,646 = 17.96%

Or anything inbetween max invest and minmum possible spending to max spending and no saving and investment as the individual citizen may choose.

Or limit individual liberty to make such choices, because government has already limited your options for you:

ITrate = ITnet/GrossIncome = $35,270/$100,000 = 35.27%

If you want to show a reduction of prices, you will have to reduce the cost of consumption, not raise the amount of consumption.

Prices can certainly fall as consumption & demand rises my friend. Prime example of point being computers, where high productivity and strong competition drives prices down while consumption & demand grow.

With the removal of the income/payroll tax system the economy becomes more efficient, thereby allowing reductions in price under market competition.

Even with maximum consumption dollars flowing into the economy, the indivual benefits through increasing wages earned, greater returns on investment and increases in productivity for higher corporate earnings distributed to individuals, and prices constrained as company's compete for market share in an expanding economy.

And on taxing state and local government expenditures

As such are taxed now, as a consequence of states purchasing goods and services in which federal income/payroll taxes are now embedded to the tune of 20-25% of prices.

(which may be unconstitutional),

The specific issue is addressed here:
http://www.freerepublic.com/forum/a3971d4b96c73.htm

As well as keeping in mind, the mere insinuation of ones opinion does not make for unconstitutionality as regards a court challenge of a statute, especially as regards the federal authority to tax commercial activity, (i.e. sales) with a general tax paid by all, as opposed to the direct taxation of a state government agency or the state itself by the federal government:

FLETCHER v. PECK, 10 U.S. 87 (1810)

"The question, whether a law be void for its repugnancy to the constitution, is, at all times, a question of much delicacy, which ought seldom, if ever, to be decided in the affirmative, in a doubtful case. The court, when impelled by duty to render such a judgment, would be unworthy of its station, could it be unmindful of the solemn obligations which that station imposes. But it is not on slight implication and vague conjecture that the legislature is to be pronounced to have transcended its powers, and its acts to be considered as void. The opposition between the constitution and the law should be such that the judge feels a clear and strong conviction of their incompatibility with each other."

who pays for that (state would have paid ~$360 billion in 2001)? We do.

Yep just as we do now. 20-25% worth of federal imposed tax burden in everything that state and federal govenment purchases today. Only problem is the bill is hidden from the view of the electorate. So it just keeps growing as government keeps growing. Out of sight Out of mind, is the rule of government hiding the costs of its excess.

There will be "embedded federal taxes" in our state and local taxes

Nothing new in that.

just like there are "embedded taxes" in the products we currently buy.

Which the NRST would make visible to the citizen/voter to get angry and government about.

It's a shell game.

It is a multi pathed economy that loops through government, the citizen, and consumption, Dollars are fungible and flow throughout those loops focusing through consumption.

The NRST makes tax dollars VISIBLE to the electorate where they can experience and hold representatives accountable out of knowledge instead of ignorance of the costs they bear as a consequence of federal largess.

The first step to putting the Federal monster on a diet, and decreasing the size of government is for the people of the United States to preceive the cost of the government, personally in open view.

As long as a substantial proportion of the people continue to believe some guy behind the tree or mean old corporations pay the bill, what do they care about the extravegance or growth of government.

Those that do not perceive paying the bill, for their freebees are a readymade constituency for more government spending and bigger government.

Time to remove the government imposed horseblinders and quit playing the ostrich.

Ostriches may be a somewhat successful species by making themselves look like a bush or tree hiding their head in the sand and not see the lion. Unfortunately low flying buzzards roost in trees and sh't all overthem.

With the NRST, both the expenditure and the revenue it creates is on budget.Expenditures will go up the exact amount of the revenue created (actually, a little less revenue after the tax collection fees are removed).

LOL, lets see because tax revenues are visible, the budget naturally requires that the all revenue be spent rather than decrease the tax rate.

Unlike today where tax revenues are visible, and the budget continues to grow even faster with demands for higher taxes on businesses and the "rich" where the voter doesn't need see it.

It's like me giving myself a loan and counting it as income.

And this is something new for govenment? In fact government actually does create itself loans on itself it can spend can spend Social Security & Mediscare taxes it receives immediately.

Lock boxes and TrustFunds indeed ROTFLM(|)O!!!.

All they are, are calls for future tax hikes, to fund future layouts for SS/Medicare out of future general revenues collected.

HELVERING v. DAVIS, 301 U.S. 619 (1937)

Title VIII(Social Security Act), as we have said, lays two different types of tax, an 'income tax on employees,' and 'an excise tax on employers.' The income tax on employees is measured by wages paid during the calendar year. Section 801 [26 USC 3101]. The excise tax on the employer [26 USC 3111] is to be paid 'with respect to having individuals in his employ,' and, like the tax on employees, is measured by wages.
. The proceeds of both taxes are to be paid into the Treasury like internal revenue taxes generally, and are not ear-marked in any way. Section 807(a)[26 USC 3501]. There are penalties for nonpayment. Section 807(c), [26 USC 7203].

CRS Report for Congress (98-422 EPW)
Social Security: and the Federal Budget:

"Its taxes like all other federal funds flow into the U.S. Treasury and its benefit payments flow out of the U.S. Treasury. The Treasury Department issues federal securities to the Social Security trust funds to reflect receipt of these taxes, and redeems securities from the trust funds to reflect Social Security expenditures, but the money itself flows to and from the Treasury."

"Taking the Social Security trust funds "off budget" has not changed how Social Security funds are handled. They are treated the same way today as they were in 1937 when Social Security taxes were first levied -- the tax receipts flow into the U.S. Treasury and benefit payments flow out of the U.S. Treasury. The Treasury Department issues federal securities to the Social Security trust funds to reflect the receipt of these taxes, and redeems securities from the trust funds to reflect Social Security expenditures, but the money itself flows to and from the Treasury. "

"While the trust funds have an important role in monitoring the finances of the program and maintaining its fiscal discipline, they are basically accounting devices. The federal securities they hold are not assets for the government. When an individual buys a government bond, he or she has established a claim against the government. When the government issues a bond to one of its own accounts, it hasn't purchased anything or established a claim against some other entity or person. It is simply creating a form of IOU from one of its accounts to another. It certainly establishes legal claims against the government for the Social Security system (i.e., it is a legal form of indebtedness of the government and does count as part of the federal debt; see Table 3 on the next page), but the system is part of the government. Those claims are not resources the government has at its disposal to pay for future Social Security claims. Simply put, the trust funds do not reflect an independent store of money for the program or the government, and taking Social Security "off budget" did not change this. "

You just can't do it, can you. You can't use what is necessary to compare the effects on a family of the income tax vs. the NRST. What's needed is the tax exclusive rate.

Your "save max" still assumes a consistent expenditure rate, not a consistent consumption rate. You say "They will purchase approximately the same amount of stuff with $77,500 since prices would fall 20-25% under competition." You're making an assumption that prices falling and the sales tax will be a wash. You can't do that, you have to factor in the falling prices into your equation. (As it turns out, a 20% price reduction is not a wash. Tax inclusive prices go up.)

Here it is with a theoretical 20% drop in prices:

NRSTrate = (($77,500 * 80%) * 29.87%) - $4,646 / $104,626 = 13.26%

Now looky there. I made an accurate comparison of the effects of the income tax vs. the NRST using the tax exclusive sales tax rate. How is that possible?

Here it is with a theoretical 20% drop in prices:
NRSTrate = (($77,500 * 80%) * 29.87%) - $4,646 / $104,626 = 13.26%
Now looky there. I made an accurate comparison of the effects of the income tax vs. the NRST using the tax exclusive sales tax rate.
How is that possible?

I never said it wasn't possible,

You asked and I quote:

Compare that to 23% sales tax and show my the computations to make the comparison.

That is what I gave you.

I notice you had to convert the the gross expenditure to price and to do so you used the least price decline of all products (why not the largest or the average or all of them in a tabel?), apply the "tax exclusive" rate, and then covert to the tax inclusive NRSTrate

to compare with the tax inclusive rate ITrate.

ITrate = ITnet/GrossIncome = $35,270/$100,000 = 35.27%

Didn't you?

Which is precisely what I said had to be done to compare rates between systems of different bases. The have to be converted to the same base for comparison.

ancient_geeser #114: "To be able to add or substract or compare between the two measures you have to first convert them to the same base."

For total accuracy and completness however you failed in coverting to price. Ideally you should have chosen the range of (20-25%) that product prices may decline or their average (22.5%) for an better comparison.

Then show the computed minimum ITrate for comparison purposes.

ITrate = ITnet/GrossIncome = $35,270/$100,000 = 35.27%

However for a more complete presentation, both ITrates & NRSTrates should be calculated with high, average, and low price declines and presented in table form don't you think?

An exercise which is of debatable value when the essential message can be presented a much more compact and understandable form and whichthe calculations confirm in spades:

Under the NRST with FCA, one pays less than 23% of personal consumption in tax vs the average of greater than 23% of gross income of the income/payroll tax.
The NRST will be no worse than the current system in tax burden laid upon the individual family.

The alternative is a page filled with calulations and numbers to cause eyes to glaze over with the essential missed for complexity and verbosity.

But then we could ignore the calculations and just put up nrst worstcase results of effective taxrates for a family of three with gross income of $100,000 spending $77,000

NRSTrate = (($77,500 * 80%) * 29.87%) - $4,646 / $104,626 = 13.26% saving the rest for a idillic and pastoral retirement

Compared with the income/payroll tax system lowest rate results:

ITrate = ITnet/GrossIncome = $35,270/$100,000 = 35.27% and government get to decide who gets that idillic and pastoral retirement on your nickel.

And let folks decide which they prefer, without all the arithmetic and overstate the more modest message of NRST proponents as it can be stated for all income groups.

I never said it wasn't possible,

What about all that "apples to apples" stuff?

That is what I gave you.

No it isn't. You changed their consumption level. How is that a fair comparison of an income tax vs a consumption tax?

I notice you had to convert the the gross expenditure to price and to do so you used the least price decline of all products (why not the largest or the average or all of them in a tabel?),

Because this discussion wasn't about how much prices would drop. It was about whether or not using the inclusive sales tax rate was nessesary to make a comparision to the income tax. It isn't. In fact it makes it harder. Reinforcing my belief that the use of the much less understood tax inclusive sales tax rate is only because it's a smaller number. It's just deceptive marketing.

We could talk all day about the issue of "embedded taxes" and how much they affect prices. It won't get us anywhere. It's all speculation.

Which is precisely what I said had to be done to compare rates between systems of different bases. The have to be converted to the same base for comparison.

But you didn't show me the equation with the tax inclusive rate. That's because you have to use the tax exclusive sales tax rate before you can figure out what portion of your income is going to taxes (the tax inclusive income tax). There still is no reason to use the tax inclusive sales tax rate except to confuse people. (I would say that is the main intent, no one has been able to show me why the inclusive rate is important, which means it's not unintentional confusion, but outright deception.)

For total accuracy and completness however you failed in coverting to price. Ideally you should have chosen the range of (20-25%) that product prices may decline or their average (22.5%) for an better comparison.

Again, we weren't really discussing the final percentage, just how you get there. But to totally accurate you would have to factor out state and local sales taxes before you reduced the prices and factor them back in after. You would also have to ask if the 20-25% drop is a drop in retail prices or a drop in manufaturing cost and factor that into your price drops. (example: $80 manufacturer cost + $20 profit = $100 retail price. $60 reduced manufaturer cost + $20 profit = $80. A 25% drop in manufacturing costs only equals a 20% drop retail price cost.) But we could go on like this for days.

And let folks decide which they prefer, without all the arithmetic and overstate the more modest message of NRST proponents as it can be stated for all income groups.

But then we get into how much prices might drop and if the 29.87% would generate enough revenue for the government. Both of which are as suspect as the need to use the tax inclusive sales tax rate.

Anyway, back on topic, it seems you weren't able to show me a comparison between my income tax rate and the tax inclusive sales tax rate after all.

Would you not agree that the cost of state and local governments paying sales tax (would have been $360 billion in 2001 - even with the ~~mythical~~ minimum 20% drop in prices it still would have been $293 billion ) will be passed on to the taxpayers.

Thanks, $360billion to $293billion reduction in state expenditures you say? Hmmm, an improvement by my standards, since one must note those burdens are implicit in the prices those state & local governments pay for consumption now, and thus are embedded in the taxes you pay them today.

Won't these federal taxes be "embedded" in our state & local taxes the same way corporate taxes are currently embedded in prices?

Seeing the NRST will be collected by the state as well, embedding in taxes paid by the individual for which he recieves a detailed receipt has little meaning don't you think?

The issue of embedding is one of visibility of the whole tax burden on the individual, (i.e. the measure of cost of government to the citizen). You wish to reform the state tax systems to create more visibility for the citizen of your state above and beyond what the NRST can provide for federal tax on the individual. I won't stand in your way.

Tax embedded in a tax? The issue is visibility of taxes burdens because we cannot perceive nor properly distiguish the role of government from business on consumer prices.

The goal of the NRST is to provide a visible federal tax system, that the electorate may act out of knowledge as regards federal government cost in their personal lives, and to put greater distance between the family and federal government where the collection to taxes is concerned.

To get the NRST legislation even to the floor of Congress it must conform to the Budget Enforcement Act provisions of revenue neutrality for one as measured agains the current tax law by CBO methodology. The provisions in the NRST bill accomplishes that goal by allocating taxes between public and private sector expenditures in the same proportions as tax burdens are distributed today that it's primary goals may even have a chance for enactment.

The CBO methodology mandated through the Budget Enforcement Act does not allow a dynamic analysis of tax law impacts on the economy to establish the tax rate, thus the language requiring taxes on the sale of goods to government as well as the citizen becomes necessary as government today pays taxes through its purchases of goods and services via income/payroll taxes embedded in the price of goods and service.

Saying its stupid will not change political reality, to reform tax law political reality must first be served.Once a system is in place and the calculus changes then modification becomes possible. The initial legislation repealing one tax law and replace it with another, must meet the Budget Enforcement Act requirements of revenue neutrality and all the dumb rules it demands.

All it takes is one Congress Critter's point of order to kill a bill that cannot meet the CBO measure of neutrality. That is where you get the liberal chant of "paying for tax cuts" which is just a coded way fo saying prove it's "revenue neutral". Why true cutting of taxrates not offset somewhere else in the tax code by closing deductions etc. nigh to impossible. with the prime maxim of politics being:

A government which robs Peter to pay Paul can always depend on the support of Paul.
-George Bernard Shaw

As long a government can keep Paul believeing that it is Peter paying the freight,

"It's like me in the restaurant: What do I care about extravagance if you're footing the bill?"
Walter Williams

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