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.
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.
Because you are the expert in this area and I just asked a question. I was actually hoping you'd answer it and I'd trust your answer.
A Warfare-Welfare Empire is expensive to maintain.
Thanks for the clarification. That's not my understanding of how this is supposed to work because, if true, it sounds as though it is double taxation.
I want to dig into it a little deeper and see what's going on.
"Third, this is a totally fair tax. No exemptions. Poor people pay the same rate and percentage as rich people. NO exemptions or exclusions."
Fair only in the sense that he who consumes the most pays the most.
Who consumes the most? Married couples who have children.
These people are favored under our current tax structure.
This in effect removes that favored status and places them in the most unfavorable tax position.
Are you married with children?
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:
They do not pay income tax but if they work they pay a high payroll tax. One of the ideas of proposing a national sales tax as offered by Greenspan is to collect some taxes from folks who may not pay much now, to add revenue to the treasury, but to do it in a subtle way by only starting with 3% or so initially. There has never been the thought of eliminating income taxes, at least by people who count. The payroll tax is regressive and that is an issue often discussed by liberals but over the years the liberals have gotten their way and the tax brackets and rates have shifted to offset the regressive payroll tax. I would say a flat income tax would be best but then the working poor couldn't afford the 30%, the small business individual, before expensing income, would pay more, the the rich entertainers would pay less. As it has been said, be careful, you may get what you ask for.
You think everyone should suffer because we don't agree with you and you ask "How's that"? I'd say that's pretty childish.
First thing I can see is a nose-diving economy as people reign in spending as they adjust themselves to the new system.
The damage from that alone is enough to scare me off this until we already have a bad economy.
Don't mess with consumer spending. It's what keeps this whole ship afloat, and when it goes the show is over. Thats will be a good time to make changes.
Couple the benefits of a consumption tax, the inherent "fair"-ness in it, and the fact that foriegn companies would set up tax havens here and contribute to our tax base... How is this NOT a win-win situation? Other than the IRS would be decimated and a lot of "tax lawyers" would need some retraining?
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