Skip to comments.The national sales tax (Why the NRST is dopey)
Posted on 05/03/2005 3:16:24 AM PDT by RobFromGa
The national sales tax
Bruce Bartlett (back to web version) | Send
May 3, 2005
According to columnist Robert Novak, House Majority Leader Tom DeLay, R-Texas, is adamant about replacing the entire federal tax system -- payroll and income taxes -- with a 30 percent national retail sales tax (NRST) collected by the states, such as that in H.R. 25, sponsored by Rep. John Linder, R-Ga.
I have written many times before about what a dopy idea I think this is. Following is an effort to summarize the key arguments against it that appear over and over again in the scholarly literature.
-- People will still have to keep records, file income tax returns and get audited, because the states and some cities will continue to have income taxes. There is no reason whatsoever to think that the states will get rid of their income taxes if the federal income tax is abolished.
Quite the contrary, they are likely to view the federal government as co-opting their traditional tax base -- the general sales tax. Therefore, the states will just take over the tax base being given up by the federal government -- the income tax -- and abolish their state sales taxes, which would otherwise come on top of the NRST.
The only way this can be prevented is if the federal government prohibits the states from imposing income taxes at the same time it abolishes the federal income tax, which is probably impossible constitutionally. And if the states keep their sales taxes, the federal government will have to force them to conform to its tax base. Right now, no two states have exactly the same sales tax systems and none come anywhere close to taxing sales as broadly as contemplated by the NRST.
-- There is a very severe problem of taxing business inputs under a sales tax. These must be exempt from tax in order to avoid cascading -- taxes being levied on taxes -- which creates serious economic distortions. To avoid this under a NRST, every business, no matter how small, would need some sort of exemption certificate, which would create unlimited opportunities for evasion, or they will have to be extensively audited in ways at least as onerous as under the income tax.
-- Services are by their nature much more difficult to tax than goods. For this reason, no state makes any effort to tax more than a few of them. Yet the NRST would tax 100 percent of services, including medical services and government services. Every time you go to the hospital, you will have to pay 30 percent on top to the federal government. And local governments will also be taxed by the federal government on services they provide, which will sharply raise property taxes.
-- In order to offset the regressivity of the NRST, it would establish a massive new government entitlement program costing hundreds of billions of dollars that would send rebate checks to every American on a monthly basis. This system would be based on the poverty level income established by the Census Bureau. People would get 23 percent of this amount annually in 12 monthly installments based on their family status. Quite apart from the massive complexity of this proposal, it would clearly require an enormous enforcement mechanism to avoid fraud and would undoubtedly be manipulated by politicians. It would be very tempting to change the formula to aid the poor and penalize the rich, just as the current tax code does.
-- Every serious analysis has concluded that a NRST would have massive evasion. Taxing the spending of drug dealers and others not currently paying income taxes will not come close to compensating for the new evasion opportunities that will be created. Since it is not in the interest of either retailers or consumers to pay the tax, and because all of the revenue is collected at the point of final sale, it will be too easy for tax-free deals to be made with producers and wholesalers.
Although evasion of state sales taxes is relatively small, that is only because the rates are low enough that it is not worth the trouble. However, where rates are high on things like tobacco, evasion is also high. A vast amount of foreign experience indicates that retail sales taxes cannot be collected much above 10 percent without breaking down.
Under our current tax system, there is withholding of taxes on wages, which is the vast bulk of the tax base. Under a value-added tax (VAT), something similar occurs because taxes are paid at each point of the production-distribution system. Thus, if the retailer fails to collect the tax, only a small portion of the total revenue is lost, whereas with a NRST, all of it would be lost.
Primarily for this reason, every single country that has ever contemplated something like a NRST has instead chosen a VAT, which the NRST people oppose.
THis is my problem with the Linder proposal. Too many things are bought for business (hotels, meals, gas, copying, printing, plane tickets, rental cars, ...) that are also used personally. Now these items are deductible from business income when you fill out your corporate taxes, in the future they would just be exempt from taxes by showing your exemption card, and then no other records are kept? In this scenario, everyone tries to get a card.
I don't see how this can work unless it is at least as bad as the present system in terms of record-keeping and "proving" business use.
for your input...
Sounds like a dopey idea to me.
This is not the "Fair Tax" proposal at all, this one is screwed.
In what way is this not the Fair Tax?? This is exactly what they have been talking about as the Fair Tax- a 23% sales tax imposed on all goods and services at the point of purchase.
Good article. But beware! This is going to get the NRST Fanatics after you. I have made some of these same arguments in other posts concerning NRST. Each time, I get flamed so badly, I generally refrain from looking at FreeRepublic for several weeks. I know, as a small business owner, that my overall costs coupled with my costs of compliance are going to be as bad, if not worse, than what it costs me now.
My definition of insanity is to propose a radical new policy about how we fund our government, on the premise that the existing system sucks, and then put your fingers in your ears when anyone dares to ask how in the H-E-double toothpicks the dang new plan is going to be any better.
I for one, as a small business owner, do not think this plan will work as I have heard it described. If it will work for people like me, then it will also be abused terribly by people pretending to be small business owners, and there will be a huge beauracracy trying to figure out which is which-- which will mean compliance costs, audits, etc.
At least now, with the present flawed system, they are up front about the record-keeping required. And that scares most off the fraudulent types off.
Exactly. Think of it as a 30%-off coupon.
Want to buy a car? First, set up a small business. Then buy the car for business purposes, present your tax exempt certificate, and save 30%. All legit.
Then use the car for personal use -- illegal, yes. But some will think that it's worth taking the chance on a $50K car to save $15K.
People commit murder for less.
The 23% figure would more correctly be called the "retailer income tax on sales". If a retailer receives, as income, $100 in sales, then he is taxed $23. on that income. Yes?
But the way everyone figures "sales tax" is they look at the retail cost (above) of $77., then add a sales tax of $23. Sorry, but that looks like a sales tax rate of 30% to me.
Now it is 30% The lies are starting to come out the rip this idea apart. Although I do not agree with the idea of taxing services, I am for it overall.
Quit bitchin about the IRS and the present system as they'll bever change it. And I am starting to think the American people dont deserve to have it changed. I hope they get what they deserve and the present socialist tax system rate goes to 80 plus percent (with state and local taxes).
From what I read, it's even more complicated. Your employers payments towards your health insurance are taxable, either you pay it, or if you are lucky your employer will pay it for you. Presumably your own insurance premiums will be taxed too (although I didn't see this on the fairtax site). Then when you go to the hospital, the services paid for by your insurance are not taxed, but if you pay yourself they are. The net result will be a lot more third party payment which will keep driving up healthcare costs.
Rebuttal to Bruce Bartlett:
First let me say I like the NRST but, the first problem with it is with the fact that it is an inclusive tax. Simply meaning that the NRST on $100 would work out to $129 since $29 is 23% of $129. Not as you and I think in terms of a regular state sales tax which is exculsive in that the tax on $100 would be $23 and thus a total cost of $123.
they say 23% tax because it sounds better than 29% especially when you start adding another 10% for the state taxes.
Although they arent "LIEING" they are being deceiptive which ruins thier credibility this is the first(among many) things they need to fix with thier presentation if they don't want people to turn them off when they figure out the difference between inclusive and exclusive taxation rates
(it's early I might have gotten the terms reversed the numbers are still true)
The trouble is that the numbers are misapplied. Let's start with the 23% number. That's the amount of tax that goes to the federal government in place of income tax. Rather than the government taxing us on the basis of income, they tax us on the basis of consumption. So, for starters, we can control the amount of taxes we pay to the government by controlling spending.
Secondly, essentials such as food are exempt from the tax. So, now, take your check stub and assume that the Gross Pay and Net Pay numbers are the same. No federal witholding at all. You take home and keep everything that you earned until you buy a taxable item.
Third, this is a totally fair tax. No exemptions. Poor people pay the same rate and percentage as rich people. NO exemptions or exclusions.
Finally, businesses do not pay taxes. They are middle-men who pass the taxes on to their customers by adding it into the price of their goods. So, if you sell an item for $100, the price (with the NRST) to the consumer isn't $100, it is $123. The tax is handled as a sales tax (thus the name) just as sales tax is handled today. If the price of an item is $77, then the price to the consumer is $77 PLUS 23% of whatever $77 is (I'm too lazy to open a calulator, this morning). The tax is passed-through, it does not come out of the retailer's pocket. A 23% tax that came out of the retailer's pocket would be stupid and drive retailers out of business. Retailers are mostly comprised of small businesses (preaching to the choir, I know) and they are the lifeblood of America, so to tax a retailer at a rate of 23% would be insane and counterproductive.
Today, do you charge a customer $5.00 for an item, then charge yourself (for example) 7% of $5.00 to pay the governor? Or do you charge a customer $5.00 for an item and add the 7% for the governor to the $5.00 sales price? At the end of the day, when you close the till, the 7% of the gross that you deduct and send to the governor should still leave you the base price of the item plus your margin. So, if you paid $3.50 for the item you sold for $5.00, you should still have that $1.50 margin before operating expenses. If not, you might want to adjust your price structure.
I think it's dopy too.
After seeing the Republicans now proposing to means test Social Security (something I don't like), the threat of an introduction of a means test for the "prebate" must be considered as a real possibility.
I would rather see the whole "prebate" (which already reminds all too much of McGovern's negative income tax) dropped from the NRST proposals. That would mean the rate could be dropped from 23%(inclusive)/30%(exclusive) to something more reasonable.
See my post #17. I don't know how you came up with the $129 number, but your initial number is flawed and throws the rest of your numbers off.
However, let's assume that you are right, that 23% of $100 is $129 (my 4-function calculator disagress with that number, but we'll play along). Even is that is really the amount, considering the grand total that we pay in all of the assorted taxes (state, federal and local) approaches 45 - 50%, by eliminating the tax on income, we still end up with more money at the end of the day.
If I take robertpaulsen's 30% sales tax number and apply it to sales on $100 for a total amount to the consumer, that 30% number sounds high. However, when you subtract the current federal tax component that averages around 33 - 35% (including income taxes and all other federal taxes), a sales tax of 30% that includes the federal, state and local component is a pretty good deal, IMO. It beats the heck out of paying 7% to the governor and mayor, and paying an additional 30-something% in witholding and other federal taxes.
Yeah, this'd put a hugh dent in yer Harley plans, eh?
Seriesly though, please tell us why you think it's "dopy."
This statement alone shows that Bartlett is either disingenuous or just flat-out lazy. The states only manage a reasonably effective income tax enforcement because they piggy-back off of the federal IRS. Without the feds providing the bulk of income tax information collection, the states would have to work much, much harder to maintain, let alone add, an income tax.
It was not the Fair Tax movement, but Dennis Haster who threw out the "23%" number on Foxnews H&C about a year ago.
I'm sorry if I'm not communicating well this morning I'm not saying that 23% of 100 is 29. I guess I didin't make it clear later in my post that 23% of 100 is 23 but we are not talking about straight percentages here were talking about taxes. if you go to thier website they will use the same numbers I just did to explain that as currently propsed the NRST is a inclusive Tax they want to charge a 23% inclusive tax on a retail purchase which is where they get that 129 number. So if you make a purchase of 100$ they figure the tax INCLUSIVE so you would pay 129 for you goods because 23% of 129 is 29 and 129-29=100 not like the exclusive state sales tax I pay here in Texas where if the rate were 23% (thank God it's not) the straight forward tax on $100 would be $23 for a total of $123 go to thier website and see for yourself.
#1, Unlike socialized medicine, which is a pretty poor idea with a couple of good points, this kooky scheme is not currently being used by anyone anywhere in the world....is it?
#2, This is a question, are the CSX's and Rockwell collins's and GE's and Aliant's of the nation jumping up and down to go to this method of taxation? If not, and I seriesly doubt I'm wrong, then this is #2.
(Think of it as one of your wind energy sites advocating the Fair Tax instead of wind energy. ;O)
I assume you have a point? Are we now going to use the EU's VAT as a reason for us to use something similar, but very much fundamentally different?
The NRST is not perfect. Very few are claiming it is. However, it is a heck of a lot better than our current progressive, socialistic income tax scheme. Kind of make you wonder why people need to make up lies about what it really does to bolster their arguments against it.
I know, as a small business owner, that my overall costs coupled with my costs of compliance are going to be as bad, if not worse, than what it costs me now.Do you do any processing of credit cards in your business? If so, do you mind sharing what your transaction fee is (I'm assuming it's a percentage of the transaction).
I don't think you'd know an awful lot about windmills or some of my other personal favorite study topics if I just pointed you to the source rather than answer any question that ever popped into your mind.
This statement alone shows that Bartlett is either disingenuous or just flat-out lazy. The states only manage a reasonably effective income tax enforcement because they piggy-back off of the federal IRS. Without the feds providing the bulk of income tax information collection, the states would have to work much, much harder to maintain, let alone add, an income tax.I've never bought this argument. The state seem to be able to run complicated sales and property taxes without piggybacking on the federal government.
That's certainly true. And, if you had the same level of expertise regarding windmills as I do on the Fair Tax, I'd be a lot better off if you'd just send me to a Web site.
Trite response. I should have known better than to expect more.
The article starts off with a lie (the NRST will top out at 23% - NOT 30%) and goes downhill from there.
The NST is "23% of the gross payment" (including everything in a "gross payment).
An item with a cost of $100.00 before federal tax would cost $130.00 (gross payment) after federal tax.
$30.00 is 23% of $130.00 (gross payment).
and goes downhill from there.
Where is that law written?
NRST proponents insist Amendment XVI must be repealed before NRST becomes an option. What am I missing?
I'm wondering why you responded that way. Maybe there's a communication breakdown somewhere.
I've always had reservations about this and now I can see several reasons why.
My main objection was that I think this would create havoc in the economy. Why mess with it now?
It sounds like in effect it would be a net tax increase when you add in things like services and state, local and business spending.
Also, a 30% tax rate is way high enough to give merit to the rampant evasion theory. From reading this article 30% now seems too high.
No. An item with the current cost of $100 drops to $77 after payroll taxes and corporate income taxes go away. At point of retail sale, that $77 dollar item is taxed back up to around $100.
The so-called "Fair Tax" is DOA in the Congressional Committees. The whole idea is complete nonsense.
Also, the rate purposed is %23, not %30.
And a progressive income tax, with its millions of loopholes, makes more "sense"? Which dictionary are you using for your definition of "sense"?
Politicians like cascading taxes; these taxes tend to be hidden from the payer.
Good luck with that.
But a progressive income tax where the botton 52% don't actually pay any taxes is NOT "socialist/communist"?
But a progressive income tax where the bottom 52% don't actually pay any taxes is NOT "socialist/communist"?
I don't see how this can work unless it is at least as bad as the present system in terms of record-keeping and "proving" business use.
The opportunity get away with evading a sale tax and risk of exposure is much greater with a retail sales tax system than the current income tax system and provides stronger disincentive to engage in evasion. Only 20 % of business (the largest) do 80% of the dollar volume in retail sales and are subject to the NRST. The current system income tax system has evasion rates of approximately 20% of GDP in this country an NRST will do no worse. And it is in comparison to the income tax system that we are replace we must make our comparisons. That is unless you are advocating the income tax/VAT combination the Bruce Bartlett advocates because of the ability of the VAT to extract a higher percentage of tax revenue from an economy than either the income tax or retail sales taxes.
Business is a choice, not a condition one is born to as being an individual filer under the current income tax is. You don't want to be monitored, its simple enough, don't get a business certification and pay the tax on your purchases.
The present system audits both business and the individual in his family income and opens the individual's life to the intrusion of federal government. The NRST as proposed in the FairTax legislation removes the federal government from the individual and business' affairs and turn administration over to the states. One wolf pounding on the door instead of two.
There are one tenth a many business filers as there are individual filers under the current system. Those who evade the current system can be expected to under an NRST, but with more difficulty as they are required to register (thus known, unlike the current system) and monitorable.
Furthermore, if people are unwilling to abide by a high tax rate under a retail sales tax system where everything is out in the open and visible to the electorate, what does that say about the government collecting those taxes. There are good reasons why the founders of this nation preferred above board straight forward consumption taxes over other tax systems:
"Imposts, excises, and, in general, all duties upon articles of consumption, may be compared to a fluid, which will, in time, find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions. "
"It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess.
They prescribe their own limit, which cannot be exceeded without defeating the end proposed - that is, an extension of the revenue."
When applied to this object, the saying is as just as it is witty that, "in political arithmetic, two and two do not always make four."
If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds.
This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.
Note the bottom line choice of a system with a natural limitation of the power of imposing the tax.
A condition that is not true of wage taxes and VAT. In fact such taxes are what are indeed recommended by folks like Bartlett because of their efficacy in extracting the the ultimate blood from the taxpaying turnip.