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.
Oh, and scratch the part where I wrote, "If he lives all year." It's a monthly check. Therefore, if you want to characterize it as paying someone "for doing nothing except existing," it only works that way for the very first prebate check. After that, it's a rebate of (some of) the tax he paid in the previous month.
Like buying an egg's worth of mustard.
"At least with a child tax credit, ostensibly, the person receiving some money is raising a child which adds value to our society, as I said, ostensibly."
According to the tax practitioners I know, the Earned Income Tax Credit is one of the more widely abused areas of our current system. This is an area that is rife with fraud today. "Ostensibly" this is a program which helps lower income individuals raise their families.
Rather that repeat, I refer you to AG's post #50.
It doesn't matter what's in it. Aside from a reasonable number of gifts from your Canadian relatives (or whatever) you may be subject to receiveing a letter you don't want if you are deluged with packages from overseas.
And if you get caught you just pay the tax? Do you honestly think that's what will happen? You can just go off and do it again?
No. An item with the current cost of $100 drops to $77 after payroll taxes and corporate income taxes go away.
No it wouldn't, it's mathematically impossible...unless the wage base is reduced.
Even if your impossible dream was true, it doesn't change the fact that:
An item with a cost of $100.00 before federal tax would cost $130.00 (gross payment) after federal tax.
With the system of cascading taxes and (over-)withholding that we have in place today, it's no wonder few citizens want to monkey with it. When you mention "income tax" to the vast majority, they think of the annual refund (read, "gift") from Uncle Sam, which today averages > $2000 per return.
As if that's not enough to kill it dead, others worry that the NRST would leave the government without enough money to function. (Oh, the horrors of that...)
That it doesn't take more than one person to cheat a NRST.
And that is different from now under the income tax?
The idea that we shouldn’t go to an NRST or any new way of taxation
Because someone might cheat is moot point.
Hate to break it to you but the FairTax was never revenue neutral at 23%. The inclusive rate would have to be ~30% inclusive.
And as far as the inclusive/exclusive rate system works if you check out my posts on this thread #16, 24, 166, 110 and 134 I think you’ll see I have an idea of what those term are and how they work.
Don’t get me wrong I see problems with the NRST it’s not perfect but I think it’s problems are the best known and most easily worked out. Of all the taxation systems
I’ve seen the NRST seem to be the most fair and the most workable of them not to mention the best for the economy and therefore US.
It doesn't matter what's in it. Aside from a reasonable number of gifts from your Canadian relatives (or whatever) you may be subject to receiveing a letter you don't want if you are deluged with packages from overseas.They are going to be counting my packages now?
And if you get caught you just pay the tax? Do you honestly think that's what will happen? You can just go off and do it again?Yup. As a purchaser I am liable for paying the taxes on items I import. If anyone says "you just received a package and didn't pay taxes on it" (of course they don't know what was in it) I just say "here ya go" (and tell them I paid 1/3 of what I actually did) and there's nothing they can do. No risk, great reward.
"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?"
And that $10 wage actually costs $18-20 an hour. As a result of tax policy we have just doubled the cost of labor! I agree that we don't need to waste our resources sewing shirts and the cost of shipping those shirts is cheap, as a result the efficient thing to do is have the Asians sew shirts. Now, when you consider larger items that are expensive to ship, the straight wage disparity is offset by logistics costs. Therefore it is more efficient for us to build the larger items here.
BTW, the actual wage in most LCC's discussed isn't $2 per day but I'll save that for a different thread.
Researchers at Stanford University, The Heritage Foundation, The Cato Institute, and Fiscal Associates have reached similar conclusions (found rates from 22.3 to 24 percent).
An example initial estimates and tax rate calculations based on 1995 tax law, refer to Cato Policy Analysis paper#272, April 15, 1997
==>Emancipating America from the Income Tax:
How a National Sales Tax Would Work
And a more recent verification of the rate by the American Farm Bureau Econonmists in evaluating the Fair Tax legislation in 2003 based on 2000-2001 tax revenues and NIPA:GDP data.
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American Farm Bureau December 1, 2003 source==>An Economic View of the FairTax Proposal PDF Page 7 Calculating the FairTax Base The National Income and Product Accounts (NIPA) developed by the Bureau of Economic Analysis of the U.S. Department of Commerce provide much of the data needed to estimate the size of the tax base under the FairTax and the tax rate needed to replace current tax revenues. While these are estimates based on assumptions about how the tax would be applied, they provide a good indicator of the tax rate needed to generate the same amount of revenue as the existing taxes. NIPA data for this analysis are for the calendar year 2001. These will be compared to federal tax receipts for fiscal year 2001, October 1, 2000 to September 30, 2001. *** SNIP *** Bunch of statistics *** SNIP *** Total federal personal and corporate income taxes, social insurance taxes and estate taxes in fiscal year 2001 were $1,867.8 billion. The tax rate on a tax exclusive basis (sales tax) would be 30.0 percent. On a tax inclusive basis (income tax) would be 23.1 percent. The fact that the tax rates came out at 23 percent and 30 percent (the same rate as suggested by the FairTax supporters) is purely a coincidence. The percentages could have been higher or lower depending on the year chosen or the assumptions used for the adjustments to personal consumption expenditures. Also, we do not know for certain how consumers will adjust to the transition from the current tax system to the FairTax. What can be said is that the 23 percent on a tax inclusive basis and 30 percent on a tax exclusive basis are reasonable rates for public policy discussion purposes. |
To compare apples to apples, you would then need to add in to the $100 item the complaince costs associated with payroll and corporate taxes then compare that to what it would be with an NRST. Right now, your $100 item would retail for $130, or more, under our current tax scheme, but only $123 under the NRST +/- maybe a $1 for reporting the retail income. Of course, if you were buying it second hand or recycled, then it'd only cost $100 less whatever you wanted to negotiate for wear and tear with the current owner. This would make durable goods more attractive as they would hold their value longer. This would be an incentive for companies to make higher quality goods on top of everything else.
But that wasn't what you wanted to say was it? You wanted it to somehow prove that todays progressive, imbedded, and layered taxes were somehow LESS than the NRST by itself would be.
Well, sorry. No matter how much the opponents of an NRST want to try and fudge the numbers, it just doesn't add up that way to anyone who wants to be honest about its impact.
AND if it does then "they" are up to, NO GOOD..
I.E. Give me a national Sales Tax TODAY, and I'll pay you back a VAT next Tuesday- WIMPY(Popeye)
Please explain.
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.
Absolutely:
refer Tax Freedom Day 2005 PDF: http://www.taxfoundation.org/sr134.pdf
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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 | 19.6% | 10.2% | 29.8% |
| 2003 2 | 18.8% | 10.1% | 28.9% |
| 2004 3 | 18.4% | 10.2% | 28.6% |
| 2005 | 19.0% | 10.1% | 29.1% |
| 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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Looks like a 23.5% exclusive, 19% inclusive Fair Tax rate remains a fine number to target for.
Looks like a 23.5% exclusive, 19% inclusive Fair Tax rate remains a fine number to target for.I wasn't aware that net national product was the base for the FairTax.
Killing someone could be called "stabilizing" them.
And no I have not seen the dreaded and oft-predicted collapse of real estate prices we are warned about every couple of years by various cranks. If you think adding 30% to the cost of a house is going to do anything but destroy the real estate market I cannot imagine what kind of economic model you accept. It is a no brainer. Especially if you recall that adding such an increment to the price means that you will pay it MANY times over through a thirty year mortgage. Since cars are also mostly financed over a five or six year period it will make ownership impossible for a large segment of the population. It costs 30 grand per year for my son's college and you think making it 40 is going to win converts? Such cases are only a few of the many flaws in the concept.
The fact of the matter is such a tax system will vastly complicate the economy and personal lives. In my case I would pay at least twice as much in such taxes as with income taxes. This will also be the case with the vast majority of taxpayers.
But the bright spot is we won't have to worry about it since the chances of repealing the 16th amendment is about as remote as anything I can think of. You don't seriously believe that will happen do you?
FAIRTAX.ORG ENDORSES BIG
"Although it’s easy to miss on their website, 'fairtax.org' endorses a small basic income guarantee, which they call a tax rebate. The website advocates the restructuring of the tax system in favor of a single sales tax of 23%. To ensure that those who live at the poverty line pay no net taxes, they advocate a tax rebate for all citizens equal to 23% of the poverty level. This is essentially a small BIG with a break-even point at the poverty line. You can find out more about it at http://www.fairtax.org."
Oh, so a tax rebate is a "Basic Income Guaranty"? So I suppose taxpayers who get a refund back when they file their 1040 at the end of the year are getting another form of "Basic Income Guaranty". LOL!!
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