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.
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.
You're dismissed.
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.
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