Bruce Bartlett (back to web version) |
SendPosted 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.
We get it but, so what? 2% of 30% is six tenths of a percent. And that is only on credit card transactions. Most people are moving or have moved to debit cards. I don't see it as a major factor. It certainly can be absorbed easily.
Someone in Asia is willing to work for $2 a day stitching shirts when a US worker would make $10 an hour and wages are the biggest issue? Come on. Be reasonable. For certain jobs, labor is cheaper in other countries and it always will be. We have better uses for our limited labor resources than sewing shirts."You don't think the cost of labor might have something to do with it?"Not wages so much as the cost of labor associated with government policies.
Here's another revealing article from the esteemed Mr. Bartlett:
http://www.townhall.com/columnists/brucebartlett/bb20050112.shtml
I found this passage particularly revealing.
"Having been chief of staff of a congressional committee, I know from experience that field hearings are expensive and difficult to organize but seldom yield any useful insights. On an issue like tax reform, virtually every important expert is already in Washington. The idea that some farmer or businessman or housewife from the hinterlands is going to have some idea previously unknown to those who study taxes for a living is just a pipe-dream."
Now THERE is an inside-the-beltway elitist if ever I heard one. The idea behind public hearings is NOT so that some creative, never before heard tax proposal can be discovered. The basic concept is that our tax system's design and structure is something which should be of vital importance to all Americans and that those who have to bear the burden should have some input into the process. Mr. Bartlett's comment practically drips with arrogance and condescension. It is obvious that he has spent his entire career in and around Washington and, more particularly, around K street lobbyists.
If I ever met him, I would inform him that there is indeed life outside of Washington, DC and that those of us who live outside the beltway count, also, at least to some people.
$23 would be your sales tax if the cost was $100 and not $77. 23% of $77 is $17.71. BTW, you are also assuming prices will remain the same. You do not factor tax inclusive which is in our products right now.
Interestingly, if one notes the 23% tax inclusive rate of the legislation is based on pre-Bush administration tax lawl established back in 1999 looking at Clinton administration tax revenues when the FairTax legislation was first introduced.
Were Congress to make the Bush administration tax cuts permananent. The revenue neutral rate to replace federal tax revenues as a percentage of net of national product would be around 19% give or take a percentage point.
refer Tax Freedom Day 2004 PDF http://www.taxfoundation.org/sr129.pdf
|
Total Effective Tax Rates by Level of Government |
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| Year | Federal | State | Total |
| 1997 | 21.8% | 10.3% | 32.1% |
| 1998 | 22.4% | 10.4% | 32.8% |
| 1999 | 22.5% | 10.4% | 32.9% |
| 20000 | 23.1% | 10.4% | 33.5% |
| 2001 | 22.2% | 10.5% | 32.7% |
| 2002 1 | 19.7% | 10.2% | 29.2% |
| 2003 2 | 18.5% | 10.1% | 28.6% |
| 2004 3 | 17.9% | 10.0% | 27.9% |
| Notes: Leap day is omitted to make dates comparable over time. Since depreciation is not available to pay taxes, GDP is an overstatement of spendable income for the purpose of measuring tax burdens. Depreciation is netted out of NNP. 0 Last year of Clinton administration when the HR25(Fair Tax Act) rate was estimated 1 Economic Growth and Tax Reform Reconciliation Act of 2001 Sources: Office of Management and Budget; Internal Revenue Service; Congressional Research Service; National Bureau of Economic Research; Treasury Department; and Tax Foundation calculations. |
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Updating the FairTax rate for revenue neutrality with the Bush tax cuts would appear to be around 23.5% tax exclusive as a state retail sales tax is generally expressed.
Cheating under the NRST requires collusion between at least two people.No it doesn't. I could use my business certificate for personal use items. I could collect the tax from my customers and not remit the tax. I could order from out of the country and not remit the tax. I could apply for the family consumption allowance for people I'm not eligible for. et cetera.
Nice job.
Next time, I won't bother.
We get it but, so what? 2% of 30% is six tenths of a percent. And that is only on credit card transactions. Most people are moving or have moved to debit cards. I don't see it as a major factor. It certainly can be absorbed easily.LOL. Do you know how much people put on their credit cards every year? It's about one and a half trillion! Even a small fraction of that is quite large.
All of the above is true. But for the average taxpayer it would require collusion. It would require collusion for most transactions. No doubt there will be cheating under NRST just as there is cheating now.
Your example of using your certificate for personal items can easily be verified. Collecting and not remitting would be a little more difficult but such thievery not only falls under tax law but criminal laws agains theft by taking. Ordering from out of the country is easily checked using the US postal service if necessary. I don't see how you would game the allowance for long, US Census Bureau.
How??? Unless there is some kind of cross-correlation reporting of every transaction. But then that blows a lot of your simplicity away. This is a big reason countries go to a VAT after trying a sales tax. It is just way too easy to cheat a sales tax, especially when you attempt to tax services when that has never been successfully done.
Your numbers are old. The Tax Foundations new number for 2004 is 18.4%, not 17.9%, and for 2005 it is 19%. I'm sure you will update your chart.
Ordering from out of the country is easily checked using the US postal service if necessaryHow? I get a packaged delivered from Canada how do they know what's in it? And if they catch it, I just pay the tax.
I found this passage particularly revealing.
Even more revealing is his stand on a VAT coupled with the current tax system:
ECONOMY; A New Money Machine for the U.S.; The old ways can't keep up. We need a value-added tax to meet revenue demands.
August 29, 2004 Sunday
by Bruce Bartlett
The United States needs to adopt a value-added tax. Passage of the prescription drug legislation last year demonstrated that there is no longer any hope of holding the line on government growth -- especially when Republicans voted for the multitrillion-dollar entitlement program.
That being the case, the only relevant question is how to finance the growth of government. A value-added tax, or VAT, isn't the complete answer. Other taxes are also going to rise. But a value-added tax is the least bad way of raising the needed revenue because there is little likelihood that spending will be cut enough to avoid that necessity. If some of a VAT is used to finance improvements to the tax code, more total revenue could conceivably be raised at less economic cost.
*** SNIP ***
In effect, the United States would slowly move toward European levels of spending as a share of GDP. And if we spend like Europeans, we will have to tax like them too, and embrace a value-added tax.
*** SNIP ***
From the point of view of consumers, a value-added tax is embedded in prices, which tends to make it less transparent than the state and local sales taxes Americans pay. And because a VAT falls only on consumption, it doesn't burden saving or investment. This makes it a highly efficient tax in the sense it discourages less economic output -- what economists call the "deadweight" cost of taxation -- than income taxes of similar magnitude.
The lack of transparency and the low economic cost of a value-added tax make it possible for this tax to raise substantial revenues relatively easily, both politically and economically. The average VAT in Europe is 20%, and European governments raise about one-third of their total revenue from consumption taxes, including excise taxes on gasoline, tobacco and other items. The U.S. raises about half that, including sales taxes at the state and local levels.
In short with hidden taxes of a VAT coupled with current income tax system, the turnip can be squeezed more effeciently and at lower cost to government than with other forms of taxation encouraging ever more growth of government for generations to come.
The direction of the Beltway and insiders like Bartlett becomes all to "TRANSPARENT".
WTR s/b WRT, as in, with respect to.
WRT #73, that is, if they actually file.
And your point is?That it doesn't take more than one person to cheat a NRST.
we now have a chance at a basically fair system and if Ancient_geezers recent post is true then we could make the burden a true 23.5% exclusive rate not the 29%(Exclusive) rate proposed now.Hate to break it to you but the FairTax was never revenue neutral at 23%. The inclusive rate would have to be ~30% inclusive.
The prebate is returning his money to him before he spends it. If he lives all year, he's going to give all that money back to the government.
Now, if you still insist on characterizing it the way you did, bear in mind it only works that way the first year. Every year after that, he's getting back the money he paid in the year before.
One word. BIG.
One word: Huh?
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