Prices for consumer goods and services quickly rise by the amount of the tax, and then some. The portion of the price increase in excess of the tax is due in part to the higher cost of imports (from the weaker dollar) coupled with the ability of some domestic producers of competing goods to hike their price to that of imports. Consumer prices similarly rise 25 percent -- roughly the nominal rate of sales tax, unadjusted for any exemptions or transition rules -- by 2002 and gradually drop from that peak to a level that remains about 18 percent above the pre-change baseline.
Examined on a year-over-year basis, these price increases generally amount to a large, one-time hike in prices as the NRST is imposed, with some moderation of this increase in the longer run. Due to a weaker dollar, merchandise import prices increase by nearly 4 percent shortly after the NRST is imposed and are 6.5 percent over baseline levels in 2010. Merchandise export prices are also above baseline levels. In 2001 and 2002 they are nearly 3 percent above the baseline. However, due to lower interest rates, which reduce business costs, export prices are only slightly greater than baseline levels for most of the remainder of the forecast period. The overall impact on prices is measured by the change in the GDP deflator, which initially rises 20 percent above the baseline price level before settling back to a 13 percent price rise relative to the baseline.
The notion espoused by some that pre-tax prices would drop some 20-30 percent under a NRST (so that after-tax prices would not rise and may even decline) is a peculiar one. This could only happen if all of the personal income tax, the corporation income tax and payroll taxes are currently embodied in retail prices. Tax incidence -- that is, who actually bears the ultimate tax burden -- is an elusive question that has been the focus of many economic papers, because the answer is not clear. However, the general consensus among economists is that perhaps a portion of the corporate income tax may be passed on to consumers in the form of higher prices, but that the majority is ultimately paid by corporate owners in the form of lower after-tax profits and by employees in the form of lower compensation. Most economists concede that personal income taxes and payroll taxes are ultimately borne by labor and are not passed on to consumers in the form of higher prices.
I don't know your basis for saying this, but it certainly comports with my gut feel. The NRST supporters' claim that prices would decline 20%-30% doesn't pass the smell test for me. However, the link you provided to a study paid for by opponents, appears to tilt the analysis in the other direction and is also suspect.
However, I'm very glad you linked me to the article because it cleared up a mystery for me. I have been trying to reconstruct a calculation that demonstrated that a 23% tax would raise sufficient revenues and I kept falling short. I now realize that the tax is actually a 30% tax not a 23% tax. NRST supporters should acknowledge that their proposal is a 30% tax (rather than calling it a 23% tax through mathematical subterfuge) and let it stand or fall on its actual merits.
Ancient_Geezer, did you know the tax is actually 30%? If so, why didn't you just point it out to me when I kept coming up short using 23%? It would have saved me lot's of time.
If this is true, then the NRST won't reduce prices but will increase wages, which is effectively the same thing.