Walter Williams: NRST a Joke!

25 Jun 2004

[balrog666]

Filling in for Rush, Dr. Walter Williams implies that the NRST is just re-arranging the deck chairs, the real problem is government spending.

[ancient_geezer]

By the way, taking the statement from the baker study in view of equilibrium prices that are output of the intertemporal general equilibrium model implemented by Jorgenson in the Baker Study:

"The Sales Tax reduces the price of consumption by a little over three percent in 1996, but this price decline increases to more than ten percent by 2020.

Shelf price as marked on products by shopkeepers are reduced:

3%-(23% NRST) = 26% reduction of marked shelf prices in the first year.

Increasing to > (10% - (23% NRST) = >33% reduction of marked shelf prices 15 years later.

The 20-25% consumer shelf price reductions I generally assume for discussion purposes is very conservative in comparison to what the Jorgenson GEM study indicates for an NRST that replaces all income and payroll taxes.

[Your Nightmare]

First off, your math is bad. You can't just add 3% to 23% and get the price reduction.

Second, you may want to check the NRST rate he was using. He's not including the repeal of FICA taxes or the Family Consumption Allowance, so he calculated the required rate to be 15.7% in 1996, rising to 21.4% in 2020.

According to my calculations, if you add on the social security, Medicare taxes, and FCA that translates to a required rate of 31.8% (inclusive, 44.8% exclusive) in 1996 and rising to 37.5% (58.7% exclusive) in 2020.

I guess that's why he says "It is well known that the ST and AFT [Americans for Fair Taxation] sales tax proposals fail to achieve revenue neutrality and tax rates must be increased substantially above the levels proposed by the authors of the plan." His own research shows it.

[lewislynn]

First off, your math is bad. You can't just add 3% to 23% and get the price reduction.

Yea no kidding. How does a 3% reduction plus a 23% tax equal a 26% reduction?

[balrog666]

I guess that's why he says "It is well known that the ST and AFT [Americans for Fair Taxation] sales tax proposals fail to achieve revenue neutrality and tax rates must be increased substantially above the levels proposed by the authors of the plan." His own research shows it.

Doesn't that just say it all!

[Remember_Salamis]

lewislynn, balrog666, and your nightmare: a three-headed liberal monster.

[lewislynn]

It's pathetic when your best retort is unprovoked name calling.

It's awful to have your world crash down under the weight of truth and your hopes and dreams ruined by reality.

Shooting the messenger won't change anything.

[balrog666]

lewislynn, balrog666, and your nightmare: a three-headed liberal monster.

Liberal???? BWAAAAAAAAAAAAAAAAAHAHAHAHA!!!

Dream on!

[ancient_geezer]

First off, your math is bad. You can't just add 3% to 23% and get the price reduction.

You are right you can't for a precise number only an estimate of magnitude.

However,

You will note that I use a much more conservative estimate of 20-25% reduction of on retail prices based on the Jorgenson 22% reduction in producer prices, and not 26%+ that could be inferred from his price of consumption figures.

I use 20-25% retail price reduction, even though it is readily apparent the projected 22%₍₁₉₉₆₎ to 25%₍₂₀₂₀₎ producer price decrease of Jorganson's NRST case must be less than the reduction that could be expected where both income and SS/Medicare taxes are repealed.

The Jorgenson study for the Baker Institute analyzing the Armey/Shelby Flat Tax, implemented an equivalent NRST collected out of the same size taxbase as the Flat Tax for comparison purposes. Jorgenson defined the amount of the taxbase to be gross business sales less business purchases, plus wages. (no tax on investment or business purchases)

For the income tax revenue neutral standard of Jorgenson's Baker Institute paper, the Flat Tax was 25.1%₍₁₉₉₆₎ collected from the incomes of all businesses and individual wages less personal exemptions, the NRST was 15.7%₍₁₉₉₆₎ collected from gross retail business sales equal to the same amount, with no exemptions.

Repealing SS/Medicare taxes would increase the implemented NRST rate by approximately 6% out of gross retail sales based on the 1996 consumption base relative to 96 SS/Medicare taxes (NIPA '96 & FY '97 US budget). With the repeal of SS/Medicare payroll taxes producer prices can reasonably be expected to fall another ~6*22/15.7 = 8% assuming proportionate effects for repealing the federal payroll tax on producer prices Jorgenson calculates for repealing corporate & individual income taxes. In total producer prices would drop to about 100*(1-0.22)(1-0.08) = 0.72% of current system producer prices.

Finally, we come to the dreaded FCA demogrant to all legal residents we need to finance from our NRST, the FCA would add about 3.5% points to the NRST rate increasing the gross cost to customers about 3.6% with after declines in gross prices arising from lower producer prices. For practical purpose I see change in gross retail costs to the consumer a wash even though the price of consumption is readily seen to be much lower for the declines in producer prices involved.

Overall, against Jorgenson study conditions for 1996, an NRST with FCA and repeal of both income and payroll taxes, a 1996 FairTax type NRST comes out with ~25% out of gross retail sales as compared to Jorgenson's 15.7%₍₁₉₉₆₎ NRST out of gross retail sales, which repeals only income taxes and has no FCA.

[ancient_geezer]

According to my calculations, if you add on the social security, Medicare taxes, and FCA that translates to a required rate of 31.8% (inclusive, 44.8% exclusive) in 1996 and rising to 37.5% (58.7% exclusive) in 2020.

Garbage in Garbage out.

[Your Nightmare]

You sure do make a lot of assumptions (to go along with your bad math). I guess it's necessary when you have to rationalize a bad idea.

You will note that I use a much more conservative estimate of 20-25% reduction of on retail prices based on the Jorgenson 22% reduction in producer prices, and not 26%+ that could be inferred from his price of consumption figures.

Why would you infer anything? Why not figure it out exactly? Jorgenson calculates a 18.2% drop in retail prices. If you ask nicely, I'll tell you how to calculate it.

The rest of your calculations are so off I don't have time tonight to correct them. But as the good doctor says: "It is well known that the ST and AFT [Americans for Fair Taxation] sales tax proposals fail to achieve revenue neutrality and tax rates must be increased substantially above the levels proposed by the authors of the plan."

[Your Nightmare]

Garbage in Garbage out.

You're right. I got my numbers from the legislation and the AFT.

[Your Nightmare]

BTW, the "Fair"Tax general revenue rate is 14.91 percent with the family consumption allowance. Dr. Jorgenson's general revenue rate was 15.7 percent without it.

Which means the "Americans for Fair Taxation sales tax proposal fail to achieve revenue neutrality and tax rates must be increased substantially above the levels proposed by the authors of the plan."

[ancient_geezer]

Why would you infer anything? Why not figure it out exactly?

Jorgenson calculates a 18.2% drop in retail prices.

Nice to see youare able to apply the model output results to come up with that conclusion.

You appear to be finally grasping terms like "price of consumption": meaning gross(tax included) cost to the consumer, and have finally recognised the utility of the use of the tax inclusive rates used by Jorgenson and AFT for comparative tax reform analysis.

http://www.salestax.org/fair/dan2.htm

VI. The Wrong Camera: The Denominator of the
Tax Incidence Equation.
Dan R. Mastromarco LLM, Argus Group
Tax Analysts Document Number: Doc 1999-32575 (25 original pages)
October 8, 1999

---

[129] In making comparisons between alternative taxing systems it is important to ensure therefore that these comparisons are consistent, fair in terms of expectations, and are well explained. Fair comparisons eliminate and do not exacerbate confusion over a relatively critical point as the means of expressing the tax rate. The only means to do so is to ensure that a tax-inclusive rate is compared with a tax-inclusive rate.

 

As you have found, Jorgenson's result indicates the price of consumption falls to (1-0.03) yielding 0.97 gross cost to consumer on repeal of just income taxes.

Of that gross cost i.e. price of consumption 15.7% is the jorgenson NRST, and 84.3% retail price.

Obviously the final retail price is 0.97*0.843 = 0.81771 * initial price of consumption, a reduction in retail price to the consumer of 18.229% arising from the 22% reduction of producer prices paid by retailers.

However the Linder NRST yields even lower retail prices arising from the even lower producer prices that result from repeal of the combination income and payroll taxes reducing business costs and increasing production efficiencies even more.

If you ask nicely, I'll tell you how to calculate it.

Don't bother, I already was aware of the 18.229% result from the Jorgenson 15.7% NRST which only repeals the income tax, and not SS/Medicare taxes.

That however is not the answer for the Linder 23% NRST implimentation which additionally repeals all payroll taxes, and for which I apply conservative estimate of (20-25%) retail price decreases.

It is however of value that you have finally admitted the utility of tax inclusive rates in computing the effects of tax reforms as they compare with income tax systems as Jorganson does.

Furthermore it is good you have recognised that Jorgenson's "price of consumption" is gross cost(tax included price) to customer.

Now, that we agree at this stage it will be interesting to see if you can go forward and calculate the approximate retail price reductions that arise from repealing both Income and SS/Medicare taxes.

18.23% is nice, but the additional retail price reductions that come with the additional repeal of payroll taxes are significantly better.

[Remember_Salamis]

you're the one that calls people idiots. And I posted what I posted because you three posted back-to-back-to-back comments saying nearly the same thing.

[Remember_Salamis]

If you're not a liberal, then what do you propose? Give me your revenue-neutral tax plan (we ALL want spending cuts).

[Your Nightmare]

Maybe you can tell me why you say repealing payroll will only add 6% to the rate when the legislation adds over 8% for social insurance.

Also, I sure would like to see your numbers on how the FCA is only going to add 3.5%.

While your at it, show me the numbers on how repealing payroll taxes is going to drop prices. Esp. since most economist believe it is the employee who pays the full amount through lower wages (which one can assume would go up with their repeal).

[Your Nightmare]

Some more words straight from the good doctor's mouth

SECOND IN SERIES ON THE EXTRATERRITORIAL INCOME REGIME

HEARING BEFORE THE SUBCOMMITTEE ON SELECT REVENUE MEASURES OF THE COMMITTEE ON WAYS AND MEANS HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS SECOND SESSION

MAY 9, 2002

---

Mr. JORGENSON. Yes. I wanted to make a point again that I suggested in my earlier testimony. I think that if you think in terms of the potential impact of tax reform, the consumption tax achieves about 40 percent of that potential, and that is essentially with the most optimistic assumptions. I am overlooking all of the issues that Bill Gale just raised.

Another issue is why don't we have a consumption tax? As you remember, Chairman Archer held hearings for many years which many of us participated in. There is lots and lots of testimony about all the plans that have been discussed here about a consumption tax. The reason is because the tax rates are staggering.

For example, if you have a progressive national retail sales tax -- this is what Archer originally was interested in -- the marginal tax rate, the tax that you would have to collect on every dollar at the retail level -- just imagine this -- is 40 cents. That is what we are talking about. So, it is not a very practical idea. I think that is what led to the neglect of consumption tax reform when this issue was very thoroughly discussed by the Committee on Ways and Means in the middle 1990s.

I think you have really put your finger on the issue here. The issue here is not how to benefit the corporations which have been up to this point benefiting from the export subsidies that have now been struck down by the World Trade Organization, the issue here is how to enhance the productivity of the U.S. economy. We have an extremely productive economy. Since 1995 our economy has been growing at more than 4 percent a year. If you look at the way that productivity is behaving in the current recession, it is running at about 1.1 percent above what it has in previous recessions throughout the whole postwar period. We are in a new economy. What do we need to do to deal with the issues of a new economy? We need to focus on investment and how to stimulate investment, and that, it seems to me, is where the attention should be directed rather than toward a consumption tax.

source

[ancient_geezer]

Maybe you can tell me why you say repealing payroll will only add 6% to the rate when the legislation adds over 8% for social insurance.

We are modifying Jorgenson's no FCA, no payroll 15.7% NRST, relative to time 0, '95 , when the SS wage base had lower caps & less collected.

The 8% in the Linder NRST legislation includes the proportionate amount of FCA attributable to SS/Medicare,. same as the 14.91% general revenue rate contains FCA proportionately applicable to it.

The convention used in the Linder bill allows separability of SS/Medicare provisions vs General Revenue provision per House Ways & Means requests.

Also, I sure would like to see your numbers on how the FCA is only going to add 3.5%.

The 3.5% additional I compute covers the FCA as a separate lump sum.

But you know all that seeing as you claim

Your Nightmare: "The rest of your calculations are so off I don't have time tonight to correct them."

You have surely done the basic calculations necessary to make such a statement, have you not?

Or is it that we have caught you blowing hot air once again.

While your at it, show me the numbers on how repealing payroll taxes is going to drop prices. Esp.

Producers no longer pay the employers excise, because its repealed and is indistiguishable from the effect of repeal of corporate income taxes.

[ancient_geezer]

since most economist believe it is the employee who pays the full amount through lower wages .

Regardless of any convention economist might like to say about the employer excise in other contexts, the reality is 26 USC 3111, with the employers excise is sent straight into Treasury 26 USC 3111 as aggregate internal revenue collections right along with corporate income taxes due.

Reality, is that SS/Medicare payments are an appropriation indistinguishable from any other, are financed out of general revenues, and always have been.

HELVERING v. DAVIS, 301 U.S. 619 (1937)

• Title VIII(Social Security Act), as we have said, lays two different types of tax, an 'income tax on employees,' and 'an excise tax on employers.' The income tax on employees is measured by wages paid during the calendar year. Section 801 [26 USC 3101]. The excise tax on the employer [26 USC 3111] is to be paid 'with respect to having individuals in his employ,' and, like the tax on employees, is measured by wages.
• . The proceeds of both taxes are to be paid into the Treasury like internal revenue taxes generally, and are not ear-marked in any way. Section 807(a)[26 USC 3501]. There are penalties for nonpayment. Section 807(c), [26 USC 7203].

No lockbox,

CRS Report for Congress (98-422 EPW)
Social Security: and the Federal Budget:

"Its taxes like all other federal funds flow into the U.S. Treasury and its benefit payments flow out of the U.S. Treasury. The Treasury Department issues federal securities to the Social Security trust funds to reflect receipt of these taxes, and redeems securities from the trust funds to reflect Social Security expenditures, but the money itself flows to and from the Treasury."

"Taking the Social Security trust funds "off budget" has not changed how Social Security funds are handled. They are treated the same way today as they were in 1937 when Social Security taxes were first levied -- the tax receipts flow into the U.S. Treasury and benefit payments flow out of the U.S. Treasury. The Treasury Department issues federal securities to the Social Security trust funds to reflect the receipt of these taxes, and redeems securities from the trust funds to reflect Social Security expenditures, but the money itself flows to and from the Treasury. "

and no ownership or guarantee of continued SS benefit even leaving the above taxes in place:

What Social Security Trust Fund

"The U.S. Supreme Court ruled in Fleming v. Nestor (1960), 363 US 603; that there is no Constitutional right to Social Security benefits. Social Security benefits can legally be cut or eliminated at any time, and beneficiaries have no recourse. The Court held that, "To engraft upon the Social Security System a concept of 'accrued property rights' would deprive it of the flexibility and boldness in adjustments to ever changing conditions which it demands."

[ancient_geezer]

"There is lots and lots of testimony about all the plans that have been discussed here about a consumption tax. "

Yep, including Armey/Shelby Flat Tax, numerous variations of VATs, transaction taxes etc. All discussed in the context of converting of WTO treatment of boarder adjustable taxes. Even the Corporate income tax is viewable as a "consumption" tax is the context Jorgenson is speaking of here.

http://www.taxfoundation.org/foundationmessage03-00.html

"The economic equivalence of an European-style VAT and a subtraction-method VAT is well-established. A subtraction-method VAT is essentially identical to a business income tax except that all purchases of plant and equipment may be expensed, rather than depreciated as under current U.S. law."

"the marginal tax rate, the tax that you would have to collect on every dollar at the retail level -- just imagine this -- is 40 cents. That is what we are talking about. So, it is not a very practical idea. I think that is what led to the neglect of consumption tax reform when this issue was very thoroughly discussed by the Committee on Ways and Means in the middle 1990s."

The good professor is right when one narrows a sales tax base by exempting some products and not others and not taxing services as many traditional state sales taxes do, a 40% marginal rate is what is to be expected.

OTOH, Linder's bill (H.R.25) is designed to specifically reach the broadest possible consumption taxbase for that very reason and specifically limits the federal marginal rate to 23%, while providing an environment that enhances investment and encouraging thift:

 

The beauty of H.R.25 is that it puts the voter in control control how much taxes he pays. If you happen to save, invest or spend a portion on used [previously taxed] items, one can easily get effective tax rate below 9%.

To illustrate examine the tax burden that a family of four can achieve at various annual expenditure levels.

 

And one really should look at all the testimony of that hearing.

Committee on Ways and Means, Select Revenue Measures Subcommittee, 107-77, Second in Series on the Extraterritorial Income Regime

Seems that every form of tax system under the sun was discussed pro and con. All the testimony should be reviewed, especially in context of what the hearing was about, creating a tax system that treats imports the same as the sale our own domestic manufacture, while removing the federal tax burdens embedded into our export goods and services.

The fact is, under a reasonable national retail sales tax system such as HR25 offers, businesses in those EU/WTO countries view as a real incentive to transferring manufacuring to our shores. Instead of the current trend we experience of jobs & manufacturing fleeing this nation.

Chairman of the House Ways and Means Committee,
Rep. Bill Archer (R-TX) 1996

• "A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."