The Heritage FoundationPosted on Fri, Feb. 25, 2005Posted on 02/25/2005 9:58:41 AM PST by ancient_geezer
By Daniel J. MitchellThe Heritage FoundationPosted on Fri, Feb. 25, 2005
Tax reform is high on President Bush's list of second-term priorities.
Considering the mess that our tax code has become, this is welcome news. More than 90 years of social engineering and back-door industrial policy have created a tax system that combines punitive class warfare and special-interest loopholes.
Unfortunately, this silver cloud may have a dark lining. There are signs that a few people in the Bush administration may be sympathetic to a European-style value-added tax (VAT), a form of national sales tax imposed at each stage of the production process.
Enacting such a tax in America, though, would be a tragic mistake. A VAT might have some theoretically attractive features, but it is a perniciously effective way of raising revenues and inevitably leads to bigger government.
The best evidence comes from Europe.
Back in the mid-1960s, the burden of government in Europe wasn't that much higher than it was in the United States. Tax revenues consumed about 30 percent of gross domestic product in Europe. The United States had a small advantage: Including state and local governments, the tax burden was about 27 percent of GDP.
But then European governments started adopting the VAT. In 1967, Denmark was the first, followed by France and Germany, with many other European nations imposing the tax within five years.
For politicians, the VAT was great news. Besides being a new source of revenue, the VAT has been a disturbingly easy tax to increase because it's built into the price of products and hidden from consumers. Moreover, even small increases generate a big pile of revenue because the tax base is so broad. The tax has become so easy to raise that VAT rates in Europe average more than 20 percent.
For taxpayers, though, the news has been disastrous. Thanks to this levy, the burden of government in Europe today is much higher than it is in the United States. On average, taxes consume about 41 percent of Europe's economic output. Although other taxes also have climbed, the VAT certainly has helped finance the explosion of social welfare spending that creates such a drag on European economies.
In the United States, by contrast, the total tax burden as a share of GDP is about where it was 40 years ago -- 27 percent (which helps explain why America is growing faster and creating so many more jobs than European nations).
So if the VAT is a money machine for big government, why would anybody inside the Bush administration support it?
Money is reportedly the biggest attraction. The president has said that tax reform must be "revenue-neutral." This means the pro-growth, revenue-reducing parts of tax reform -- lower tax rates, repeal of the alternative minimum tax and a shift from depreciation to expensing -- must be financed by revenue increases.
Ideally, these pro-growth elements of tax reform would be paid for by eliminating shelters, deductions, exemptions, credits and other tax breaks.
But this would be a daunting task. Special-interest groups almost surely would fight to protect the major loopholes, including the deduction for state and local tax payments and the exclusion for employee fringe benefits.
That's why a VAT is alluring. It is a relatively nondestructive way to raise tax revenue. Like a flat tax, it is a single-rate system that doesn't penalize saving and investment. It's understandable that officials would be tempted to enact a VAT and use the money to finance much-needed reforms to the income tax.
On paper, this would be a good trade. But in the real world, America would be taking the first step toward fiscal destruction.
Many European governments used the same argument when enacting the VAT. They claimed that more destructive taxes would be reduced or repealed once the VAT was implemented. In the short term, this was true: As late as 1975, taxes on income and profits were lower in the EU than they were in the United States.
But this was a transitory phenomenon. Income tax rates quickly began climbing and almost immediately jumped above U.S. levels. Ironically, the VAT facilitated higher tax rates on income because politicians often argued that a higher VAT had to be accompanied by higher income tax burdens to ensure that the tax burden wasn't being shifted to lower-income taxpayers.
There is only one scenario that would make a VAT acceptable: If U.S. lawmakers were willing to repeal the 16th Amendment and abolish all taxes on income, a VAT would be an acceptable risk. But until that happens, taxpayers should vigorously resist the Europeanization of America.
Daniel J. Mitchell is the McKenna Fellow in political economy at the Heritage Foundation. 214 Massachusetts Ave. N.E., Washington, D.C. 20002 www.heritage.org
A Taxreform bump for you all.
If you would like to be added to this ping list let me know.
John Linder in the House(HR25) & Saxby Chambliss Senate(S25), offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright, and provide a IRS free replacement in the form of a retail sales tax:
H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.Refer for additional information:
Note to FReepers: The VAT is wholly different than the Fair Tax (national sales tax). Do not confuse the two.
No VAT! NRST, or even a flat tax, OK, but not a VAT, which stands for Violent Anal Trauma...
How about anything other than the (9000 page+) income tax? Fairtax (Fairtax.org) is the only realistic option.
The difference between an NRST such as that described in HR25/S25 and European style VAT is the difference between night and day!
The VAT is wholly different than the Fair Tax (national sales tax). Do not confuse the two.
Definition [ http://www.encyclopedia.com/articles/13330.html ]:
value-added tax
levy imposed on businesses at all levels of production of a good or service, and based on the increase in price, or value, added to the good or service by each level. Because all stages of a value-added tax are ultimately passed on to the consumer in the form of higher prices, it has been described as a hidden sales tax. Originally introduced in France (1954), it is now used by most W European countries.
OTOH; The NRST is a single stage(Retail), single rate(23%), visible to the consumer tax, on the "retail" sale of new(untaxed) goods and service. It is not a VAT and is expressly paid by the consumer not the business and is completely visible to the consumer by a receipt mandated by the law. The NRST is not levied on purchases made for investment or business purposes.
Purpose of the NRST is to replace all Federal income/payroll taxes and gift/estate taxes with a single tax levied on all new goods and service once and only once at the retail level paid by the final consumer(the purchaser) of those goods or services. Goods that have been previously taxed under the NRST (i.e. used) are not taxed on resale.
The NRST is a specific remedy and replacement for the current federal tax system in which we now pay in the form of higher prices and lower income(i.e. the corporate income/payroll tax). The NRST repeals over 95% of all Federal taxes currently in place and replaces them with one simple, easy to administer and understand, Retail Sales Tax.
Don't need to explain it to me. But there are far too many FReepers who think the FairTax is the same as a VAT and thus oppose it.
The same group that raised the initial 25mm to research, design and promote the fair tax have stated they will be able to raise 100mm to promote it this year.
The fair tax group has received pledges from corporations that they will immediatey lower their prices should the NRST be implemented and the income tax abolished. They are currently working with Wal-Mart to get their pledge.
There are currently 600,000 fair tax volunteers. Linder thinks they can overwhelm Washington with 1 million volunteers this year.
:O)
Strange, I keep hearing from the opposition that income taxes don't affect prices. Yet all of these corporations say that they do. Which should I believe?
Decisions, decisions...
Also, Linder said he has received heads up from a lot of foreign corporations that they would locate plants here immediately if the NRST is in.
American corporations who have "off shore headquarters" would also return as the sole purpose of the carribian island headquarters is to avoid the paying of income taxes the companies earnings OUTSIDE of the US.
This is crap. My burden of income taxes approaches 40% of my take home pay. Tying it to "economic output" is a shell game of hiding what the true burden is.
Just say HELL NO to VAT tax.
Linder said he has received heads up from a lot of foreign corporations that they would locate plants here immediately if the NRST is in.
Which is in full agreement with what foreign corporations have said all along about an NRST.
Chairman of the House Ways and Means Committee,
Rep. Bill Archer (R-TX)
August 12, 1996
- "A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."
Heck, even just reducing corporate taxes recently has that kind of impact, image the results of removing corporate tax burdens entirely:
U.S. Companies Bring Overseas Profits Home; May Create Thousands of Jobs
WASHINGTON (AP) -- Led by drug makers, American companies have started announcing their plans to use a temporary tax break and shift back to the United States billions of dollars in profits that have been stashed abroad.
An incentive to invest in the U.S. economy -- that's how lawmakers promoted the short-term relief that lets companies avoid as much as 85 percent of the taxes they might otherwise pay on earnings abroad.
The reason the sponsorship got cut in half is that some lost their seats, some went to the Senate etc. but for the new sponsors signing on the reason is: their constituents are bombarding them with support for the NRST!!!!
For politicians, the VAT was great news. Besides being a new source of revenue, the VAT has been a disturbingly easy tax to increase because it's built into the price of products and hidden from consumers.
About the Fair Tax:
The Fair Tax amount added to prices will be shown on each receipt so the cost of government is clearly visible on each and every taxable purchase. Each taxable purchase will elicit a "dang, them thar taxes is too high".
...hence pols who lower taxes get elected....
OTOH; The NRST is a single stage(Retail), single rate(23%), visible to the consumer tax, on the "retail" sale of new(untaxed) goods and service. It is not a VAT and is expressly paid by the consumer not the business and is completely visible to the consumer by a receipt mandated by the law. The NRST is not levied on purchases made for investment or business purposes.AG, you know full well that the most popular VAT, the credit-invoice VAT, is totally transparent to the consumer. The full amount of tax paid appears on the receipt just like a NRST.
Strange, I keep hearing from the opposition that income taxes don't affect prices. Yet all of these corporations say that they do. Which should I believe?Which corporations? Give me a list.
Also, Linder said he has received heads up from a lot of foreign corporations that they would locate plants here immediately if the NRST is in.Names?
American corporations who have "off shore headquarters" would also return as the sole purpose of the carribian island headquarters is to avoid the paying of income taxes the companies earnings OUTSIDE of the US.So? Their operations are already here. They just have a post office box offshore. What would we gain without a corporate income tax?
The Fair Tax amount added to prices will be shown on each receipt so the cost of government is clearly visible on each and every taxable purchase. Each taxable purchase will elicit a "dang, them thar taxes is too high".Just like a VAT.
You'll have to ask him. I know, I know, he was lying. Every thing about the fair tax is a lie, right?
They still have to maintain a physical presence on that country. True, it is very small. But it is not just a "PO Box" as so many contend.
Also, it would remove another arrow from the liberals quill. They could no longer run around bad mouthing American companies and calling them evil (to solely get votes from those who have corporations) for "leaving the country", which we all know they did NOT do.
Just like a VAT.
So your telling me that if I go to a Euro country with a VAT, when I purchase something ALL of the individual VATs from all levels of production will show up on my receipt?
I would think not.
You'll have to ask him. I know, I know, he was lying.Not saying he's lying, but why would a corporation make a pledge to the AFT to lower prices? What exactly was the "pledge"?
With the NRST they would have to lower the prices. The law of the free market demands they do. All it takes is 1 store to lower the price and ALL the others must do so or die.
So your telling me that if I go to a Euro country with a VAT, when I purchase something ALL of the individual VATs from all levels of production will show up on my receipt?Yes. They use a credit-invoice VAT. The full percentage of the VAT is charged at every level and the seller claims a credit for the VAT they've paid.
VAT
Payment
Credit
(Tax - Credit)Raw Materials Manufacturer Wholesaler Distributor Retailer
Do they have a VAT in England or Scotland? Those are the only European countries I have ever traveled to and not one of my reciepts ever contained such information.
Lets get it out in the open. What is your major objection to the FairTax? Why? And what is your preferred method of taxation and why?
With the NRST they would have to lower the prices. The law of the free market demands they do. All it takes is 1 store to lower the price and ALL the others must do so or die.They might be able to lower there prices some, but not nearly as much as the FairTaxers claim, at least not without reducing nominal wages (which would be very difficult to do).
Response to William Gale
by Dan Mastromarco and David Burton
[authors of the FairTax]
Memorandum, March 16, 1998If we assume that consumption taxes are fully incident on the factors of production, then the return to capital and the return to labor will decline by the amount of the tax. As noted earlier, under this incidence assumption, tax-inclusive prices would not be higher but the return to workers and capital would decline. Thus, in the absence of a special rule, government workers would experience a windfall. Their consumption prices would not go up and their wages would go up by the amount of the repealed income and payroll taxes. Since government value added is not taxed, their wages would not appear to be subject to downward pressure.
Taking the alternate incidence assumption, namely that the FairTax would be fully passed forward and borne by consumers, government employees would pay the tax just like private sector workers, since tax-inclusive prices would be higher by the amount of the FairTax.
Criticism of the Sales Tax for Residential Real Estate Isn't Built on a Solid Foundation
by Dan R. Mastromarco and David R. Burton
[authors of the FairTax]
Tax Notes, June 29, 1998, p. 1779Footnote #13: The degree to which after-tax wages will increase is a function of the incidence of both the sales tax and the repealed taxes. If the income tax and payroll taxes are incident on income recipients and the sales tax is incident on consumers, then after-tax wages and returns will go up quite considerably as will tax inclusive prices. If the sales tax is incident on the factors of production, then after-tax wages and the after-tax return to capital will not go up to any considerable degree (at first) but producer prices will fall and retail prices, even including the sales tax, will remain roughly comparable. The real purchasing power of wages will undoubtedly increase considerably over time because of a larger capital stock (increasing productivity), microeconomic efficiencies caused by a more efficient allocation of scarce resources, and higher productivity from lower compliance costs.
The Price Level
Switching to an indirect tax such as a valued-added tax (VAT) or national sales tax will probably cause a one-time jump in the price level, with no permanent change in the inflation rate. By contrast, any consumption-based tax that levies taxes directly on households will probably have little or no effect on the price level.
A VAT or sales tax is likely to boost the price level because each one collects the tax on labor income from the firm or retailer. That treatment represents a change from the current income tax system, which collects tax on labor income directly from the worker. Because the cost of labor to the firm would include the new tax, real compensation paid to workers would initially have to fall to match the value of their so-called "marginal product" and keep them fully employed.
Real compensation can fall in two ways: nominal compensation can drop or the price level can rise. What happens will ultimately depend on the Federal Reserve. If it fixes the price level, nominal compensation will have to fall--an event that workers might accept because they would no longer have to pay income tax and hence would take home about the same pay as now. Most analysts note, however, that workers have resisted cuts in nominal compensation in the past. Those analysts expect that firms fearing morale problems or facing union contracts will hesitate to make such cuts. In that case, nominal compensation may fall slowly to its new level, leading to higher unemployment rates in the interim. To prevent that outcome, the Federal Reserve is expected to allow the price level to rise. For example, a VAT or sales tax of 10 percent would lead to a one-time jump of 10 percent in the price of consumer products.
Further price increases may ensue if compensation is indexed to inflation. In that case, the price rise will cause a corresponding rise in compensation, and real compensation will not drop enough to maintain full employment, requiring a further price rise--that is, a wage-price spiral. That problem occurred in the United Kingdom when it adopted a VAT in 1979, although the extent of indexing there was greater than it is in the United States.
Source: U.S. Congressional Budget Office. (1997). The Economic Effects of Comprehensive Tax Reform. Washington DC: Government Printing Office.
Setting aside for a moment temporary inflexibilites in contracts for wages, bonds, and so forth (we address these later), whether ther overall level of prices changes or not does not materially affect this story.16 Even if prices do not rise at all, moving to a consumption tax would cause the purchasing power of both wages and existing wealth to decline by an average of 20 percent relative to a situation with no taxes. Nominal wages would be forced down because firms would be earning 20 percent less, after taxes, from the output produced by workers. The nominal value of existing capital assets - in the form of, for example, share prices - which constitute much of old wealth, would also decline because the output they produce provides 20 percent less in after-tax revenues.
- Whether in fact consumer prices would rise in the event of tax reform depends on the monetary policy set by the Federal Reserve Board.
Source: Slemrod, Joel and Jon Bakija, Taxing Ourselves: A Citizen's Guide to the Great Debate over Tax Reform, MIT Press: Cambridge, 2004.
Transition Costs and Macroeconomic Adjustments
One of the most difficult issues to address in considering a shift to consumption taxes is the transition from the current system to the new tax regime.5 While all shifts to a consumption tax cause some common transitional disturbances and windfall gains and losses, the most serious problems arise from a shift to a national retail sales tax or to a value added tax. In these cases, a tax formerly largely collected from individuals is now collected at the firm level -- either from retailers on total sales or from both final and intermediate producers' value added. Flat taxes avoid this problem but can result in confiscatory taxes on existing assets.
Price Accommodation and Short-run Contractions Under a Retail Sales Tax or VAT
Holding prices fixed, these firms would need to reduce payments to workers to retain profit levels. In fact, many firms would not have enough of a profit margin to pay the tax without something else -- either prices or wages -- adjusting. Consider, for example, a grocery retailer that may have a 1% or 2% profit margin now owing a tax equal to 20% of receipts. This firm simply does not have the cash to pay the tax. If it is difficult to lower wages (and presumably it would be), a significant one-time price inflation, to allow these costs to be passed forward in prices instead, would be required to avoid a potentially serious economic contraction. Note that the price increase, were it possible to implement correctly and precisely, would solve the transition problem because although prices would rise, individuals would have more income to purchase the higher priced goods -- and demand would not fall. It is difficult, however, for the monetary authorities to engineer such a large price change. Moreover, even with the monetary expansion in place to do so, the imposition of such a tax would be disruptive if firms are reluctant to immediately raise prices, again leading to an economic contraction. That is, firms could contract their business, or even close down, until output had contracted enough to raise prices.
These disruptions are not minor in nature -- imagine the difficulties of engineering and absorbing a one-time price increase that is likely to be close to 20% (the level, approximately, that might realistically be needed to replace the income tax).6 Even if such an inflation could be managed, there are always concerns that any large inflation could create inflationary expectations -- it's hard to manage a single one-year price increase. In fact, economists who judge a consumption tax to be superior to an income tax may nevertheless be skeptical about the advisability of making the change because of these transition effects.
- See CRS Report 98-901, Short-Run Macroeconomic Effects of Fundamental Tax Reform, by Jane G. Gravelle and G. Thomas Woodward for a more detailed discussion of these issues.
- The rate would depend on whether and the extent of any family exemption. A 20% tax exclusive rate would correspond to a tax inclusive rate between 16% and 17%.
- 7 U.S. Congress, Joint Committee on Taxation, Tax Modeling Project and 1997 Symposium Papers, committee print, 105th Cong., 1st sess., Nov. 20, 1997, JCS-21-97 (Washington: GPO, 1997), p. 24.
Source: CRS Report for Congress: The Flat Tax, Value-Added Tax, and National Retail Sales Tax: Overview of the Issues. Esenwein, Gregg A. and Jane Gravelle.
Prices.
Prices for consumer goods and services quickly rise by the amount of the tax, and then some. The portion of the price increase in excess of the tax is due in part to the higher cost of imports (from the weaker dollar) coupled with the ability of some domestic producers of competing goods to hike their price to that of imports. Consumer prices similarly rise 25 percent -- roughly the nominal rate of sales tax, unadjusted for any exemptions or transition rules -- by 2002 and gradually drop from that peak to a level that remains about 18 percent above the pre-change baseline.
Examined on a year-over-year basis, these price increases generally amount to a large, one-time hike in prices as the NRST is imposed, with some moderation of this increase in the longer run. Due to a weaker dollar, merchandise import prices increase by nearly 4 percent shortly after the NRST is imposed and are 6.5 percent over baseline levels in 2010. Merchandise export prices are also above baseline levels. In 2001 and 2002 they are nearly 3 percent above the baseline. However, due to lower interest rates, which reduce business costs, export prices are only slightly greater than baseline levels for most of the remainder of the forecast period. The overall impact on prices is measured by the change in the GDP deflator, which initially rises 20 percent above the baseline price level before settling back to a 13 percent price rise relative to the baseline.
The notion espoused by some that pre-tax prices would drop some 20-30 percent under a NRST (so that after-tax prices would not rise and may even decline) is a peculiar one. This could only happen if all of the personal income tax, the corporation income tax and payroll taxes are currently embodied in retail prices. Tax incidence -- that is, who actually bears the ultimate tax burden -- is an elusive question that has been the focus of many economic papers, because the answer is not clear. However, the general consensus among economists is that perhaps a portion of the corporate income tax may be passed on to consumers in the form of higher prices, but that the majority is ultimately paid by corporate owners in the form of lower after-tax profits and by employees in the form of lower compensation. Most economists concede that personal income taxes and payroll taxes are ultimately borne by labor and are not passed on to consumers in the form of higher prices.
Source: Statement of John G. Wilkins, Managing Director, Barcroft Consulting Group, on behalf of National Retail Federation. Testimony Before the House Committee on Ways and Means. Hearing on Fundamental Tax Reform. April 11, 2000.
Transitional Issues in Tax Reform
Price Level Effects
Because the flat tax is similar in structure to the existing income tax system, its implementation would have relatively little effect on the absolute price level. Both before- and after-tax wages would be roughly similar before and after reform, so that nominal prices remain roughly constant.
In contrast, the effect of implementing an NRST on the absolute price level is less certain. One possibility is that the tax could be fully shifted forward in the form of higher prices for consumption goods, with no change in the price of investment goods, which are untaxed under the NRST. At the other end of the spectrum of possible responses, nominal prices could remain constant. Under this scenario, before-tax real wages would have to fall roughly to the level of prereform after-tax real wages in response to the elimination of the income tax. Intermediate responses between the "full price adjustment" and "no price adjustment" scenarios are of course also possible.
Choosing between these various scenarios requires making necessarily speculative assumptions about the response of the monetary authorities to the imposition of the NRST. However, most analysts assume that the monetary response would be sufficiently accommodating that the full price adjustment scenario would obtain.
The primary rationale underlying this assumption is the view that the downward flexibility of nominal wages is quite limited, in part because most wage contracts and agreements are specified in nominal terms. Thus, a tax reform that required wage reductions to reach a new equilibrium would be quite costly as these wage reductions would initially be distributed unevenly across industries. This in turn might result in considerable unemployment in sectors characterized by rigid wages, as well as misallocations of labor, at least in the short run. Proponents of the full price adjustment view assume that monetary policy would be expansionary to avoid these costs.
Most observers fall into the full price adjustment camp. For example, McLure (1996, p. 23) concludes that it would be "hard to imagine the monetary authorities not accommodating such an increase in prices." Gravelle (1995, p. 59) argues that full price adjustment is likely because a "national sales tax would tend to produce an economic contraction if no price accommodation is made." In its analysis of the distributional implications of implementing consumption taxes, the Joint Committee of Taxation (1993, p. 59) concludes that, "Unless there are convincing reasons to assume otherwise, the JCT staff assumes the Federal Reserve will accommodate the policy change and allow prices to rise." Finally, Bradford (1996a, p. 135), in discussing the same issue in the context of a value-added tax, observes that, "It is commonly believed that introducing a value-added tax of the consumption type will bring with it a monetary policy adjustment that would result in a one-time increase in the price level ;and no change in payments to workers in nominal terms."
Nevertheless, opinion on this issue is certainly no unanimous. For example, the alternative assumption [that wages will fall] is implicitly made by Jorgenson and Wilcoxen, who argue that implementing a national sales tax would reduce producer prices on average by 25 percent. Auerbach (1996) takes a compromise position by assuming partial price adjustment. In addition, European experience with the introduction of the VAT is mixed, generally suggesting partial price adjustment. On the other hand, Besley and Rosen (1999) find full (or even more than 100 percent) forward shifting of state sales taxes in the United States.
Source: Zodrow, George R. (2002). "Transitional Issues in Tax Reform." In United States Tax Reform in the 21st Century, George Zodrow and Peter Mieszkowski, Editors. Cambridge University Press.
Monetary Implications of Tax Reforms
Does it matter how the central bank responds when the tax system is reformed? Some economists would argue that in a very general sense it does not. Many would argue that the central bank's response would have little long-run effect, because what really matters is the productive capacity of the economy and because there could be no money illusion in the long run.
And, in the short run, the standard relation between prices and money makes it clear that, under limiting assumptions, the central bank need not change monetary policy. Consider the transition from our present tax system to a consumption tax. Ignoring any incentive effects caused by the tax reform, velocity and output are unchanged. With a revenue-neutral tax reform, aggregate after-tax income is unchanged, so there need be no demand-driven effects on consumer prices. Under these conditions, v, y, and q remain unchanged as a result of the tax reform, and thus maintenance of the status quo implies that the central bank need not change its policy. Assuming that output is constant, the central bank could eliminate any transitory price changes in the long run by leaving monetary policy unchanged.
But things may not be that simple. The implied changes to wages and producer prices require a degree of flexibility in the economy that many might find unlikely. Specifically, for the consumer price to stay constant, the producer price must fall by the amount of the tax. And because a drop in the producer price means that the business revenue produced by hiring another worker drops, the before-tax wage must drop by a corresponding amount. Many have argued that such price and wage changes are implausible and that the central bank should "accommodate" a transitory change in the consumer price level by adjusting monetary policy so that it is consistent with constant producer prices and wages.
Source: Bull, Nicholas, and Lawrence B. Lindsey. 1996. "Monetary Implications of Tax Reforms." National Tax Journal 49.3 (September): 359-79.
The Price Level
When Britain adopted consumption taxation in 1979, the price level rose by the amount of the new tax. This jump in prices caused substantial disruption in the economy, partly because it stimulated further rounds of wage and price increases through indexation formulas that failed to exclude consumption taxes from the measured cost of living. Standard macroeconomic analysis suggests that the underlying cause of such a price effect is the contractual determination of wages in money terms. Under an income tax, the wage is set in pretax terms. Workers finance consumption out of what remains of their wages after paying taxes. Under a sales tax or a value-added tax (VAT), the wage is set on an after-tax basis. Workers use their entire wages for consumption and pay their consumption taxes as they consume. When an income tax is replaced by a sales tax or VAT, the wage bargain should be revised to lower the purchasing power of wages or by raising the prices of consumption goods. As a practical matter, the second always occurs.
One of the advantages of a flat tax or a personal cash-flow consumption tax is that both leave the wage bargain in pretax form. There is no disruptive jump in the price level. Unlike other effects I have discussed, the increase in the price level is not intrinsic to a consumption tax, but is the result of a particular choice about how to administer the tax.
Source: Potential Disruption from the Move to a Consumption Tax, by Robert E. Hall. The American Economic Review.
Does anyone know which countries have a completely visibly credit-invoice vat?
Lets get it out in the open. What is your major objection to the FairTax? Why?Two main reasons. It puts every American family on the government dole. And it simply won't work at the rates required.
And what is your preferred method of taxation and why?Flat tax or VAT. A NRST has zero chance of being implemented. It would be the end of the Republican party.
Yes and no. While every American family would get a check from the government every month, that is far superior to having a long and contentious battle and never ending arguments over what should be exempt from the tax as "neccessities". I remember a particular sales tax fight over just such a thing in NJ. Bath tissue was going to be an exempted item. It devolved into an extended battle over what constituted "bath tissue."
And it simply won't work at the rates required.
Evidence please.
We need a real conservative party, running for all levels of office, not just some egomaniac who only reaches for the brass ring.
Do they have a VAT in England or Scotland? Those are the only European countries I have ever traveled to and not one of my reciepts ever contained such information.They may have been showing the tax inclusive price. But that's irrelevant. We could do what we want and I'm sure we would want the VAT charged shown on the receipt.
Names...details...otherwise it's just more BS from the FairTaxers.
Dunno. He said it to the audience in the room and Boortz's radio sydication across the country. So if it's more BS it very widespread BS. He specifically mentioned Wal-Mart.
He also said something that contradicted one of your earlier statements. You had posted that dozens of countries had tried a sales tax and it hadn't worked. He pointed out that no country had ever taken it as far as this proposal does, with the abolition of the income tax etc.
Evidence please.Every country that's had a high-rate NRST has switched to a VAT. Evasion is too easy and the reward is too great.
Note the fundamental difference in nominal wages and real wages.
A bubbling VAT of toxin I believe was on the Boeing Cafeteria menu this afternoon.
They also continued to have their income and other taxes. All they did was add an additional tax, increasing the desire for avoidance.
With the NRST the income tax, Fica, Medicare/Medicaid and other are ELIMINATED.
He pointed out that no country had ever taken it as far as this proposal does, with the abolition of the income tax etc.What does that have to do with the ease of evasion? That's a straw man.
Irrelevant? You just said that the tax not being shown (one of the major objections to the VAT) would not be an issue - so we could drop that objection.
Now you say it's irrelevant whether the tax is shown?
That just more anti-reform BS.
An nrst alone?...........
AG, you know full well that the most popular VAT, the credit-invoice VAT, is totally transparent to the consumer.
Strange how in the EU, those receipts often lose or reduce that tax line item for the retail consumer when the VAT rates climb, and goods are "exempted" at the retail level or charged lower "retail sales taxes" while a full VAT hits the up stream business.
The shenannigans possible in a VAT upto the whosale level are endless and out of sight of the electorate, who often sees only a low retail sales tax if anything at all with business dealing with multiple rate VATs at different stages of production, or for goods and services with "exemption" not allowing them to pass the VAT along visibly to the customer or collecting credit on VAT paid to their suppliers. Zero rating of some goods but not the supplies going into their manufacture.
Many many varitions on the theme all designed to effect ecomomic or political goals and to hide the actual burdens from the retail customer/voter.
VAT is a money machine because its inherent structure hitting all levels of production creates an audit trail promoting VAT collections as well as enforcement of income and payroll taxes out of the in depth reporting required, and is one of the most powerful tools for political shell games out outhere.
The VAT is no small part of the reason that nations such as Norway, Sweden, Italy, Spain, Belgium, France, Germany... are in deep in the dumps.
Australia -- Cash economy continues to grow
The full amount of tax paid appears on the receipt just like a NRST.
For business purchases so they can reclaim credits (where allowed to). Retail purchases are a different story subject to many different manipulations.
The VAT rate at retail level is whatever a government allows the consumer/voter to see, after playing games throughout the rest of the chain of production.
Why do you continue to spread misinformation?
See Phantom Lord's post #42.
Now you say it's irrelevant whether the tax is shown?It's irrelevant whether the UK chooses to show the tax on receipts or not. What they choose to do does not change the fact that, if we choose to, we can show the full tax on receipts.
See Phantom Lord's post #42.See my post #43.
Your seriously contending that a retail sales tax ON TOP OF an income tax reduces peoples desire to avoid the tax?
Hell then, why not increase our income tax, throw a 45% retail sales tax on everything, and add some other new taxes. That should drive compliance to 100%
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