The national sales tax (Why the NRST is dopey)

Town Hall ^ | May 3, 2005 | Bruce Bartlett

[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.

[RobFromGa]

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.

THis is my problem with the Linder proposal. Too many things are bought for business (hotels, meals, gas, copying, printing, plane tickets, rental cars, ...) that are also used personally. Now these items are deductible from business income when you fill out your corporate taxes, in the future they would just be exempt from taxes by showing your exemption card, and then no other records are kept? In this scenario, everyone tries to get a card.

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.

[RobFromGa]

for your input...

[samtheman]

Sounds like a dopey idea to me.

[datura]

This is not the "Fair Tax" proposal at all, this one is screwed.

[RobFromGa]

In what way is this not the Fair Tax?? This is exactly what they have been talking about as the Fair Tax- a 23% sales tax imposed on all goods and services at the point of purchase.

[Conservative Infidel]

Good article. But beware! This is going to get the NRST Fanatics after you. I have made some of these same arguments in other posts concerning NRST. Each time, I get flamed so badly, I generally refrain from looking at FreeRepublic for several weeks. 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.

[DustyMoment]

. . . with a 30 percent national retail sales tax (NRST) . . . . .

The article starts off with a lie (the NRST will top out at 23% - NOT 30%) and goes downhill from there.

Bartlett is the one who is dopey to me. He is doing the same thing that the "leave SS alone" crowd is doing.

Here's the problem - the definition of insanity is doing the same thing over and over and expecting a different result. That is the classical example of what our government does and Bartlett appears to be one of the cheerleaders of this philosophy.

[Chi-townChief]

"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."

They go with the VAT because it hides very well the big tax money you're shelling out. With the sales tax, it's there for all to see.

[RobFromGa]

Here's the problem - the definition of insanity is doing the same thing over and over and expecting a different result.

My definition of insanity is to propose a radical new policy about how we fund our government, on the premise that the existing system sucks, and then put your fingers in your ears when anyone dares to ask how in the H-E-double toothpicks the dang new plan is going to be any better.

I for one, as a small business owner, do not think this plan will work as I have heard it described. If it will work for people like me, then it will also be abused terribly by people pretending to be small business owners, and there will be a huge beauracracy trying to figure out which is which-- which will mean compliance costs, audits, etc.

At least now, with the present flawed system, they are up front about the record-keeping required. And that scares most off the fraudulent types off.

[robertpaulsen]

"In this scenario, everyone tries to get a card."

Exactly. Think of it as a 30%-off coupon.

Want to buy a car? First, set up a small business. Then buy the car for business purposes, present your tax exempt certificate, and save 30%. All legit.

Then use the car for personal use -- illegal, yes. But some will think that it's worth taking the chance on a $50K car to save $15K.

People commit murder for less.

[robertpaulsen]

If the NRST supporters insist on calling it a "sales" tax, then get used to the 30% number. When people hear "sales tax", they figure that it is a tax added to the retail price.

The 23% figure would more correctly be called the "retailer income tax on sales". If a retailer receives, as income, $100 in sales, then he is taxed $23. on that income. Yes?

But the way everyone figures "sales tax" is they look at the retail cost (above) of $77., then add a sales tax of $23. Sorry, but that looks like a sales tax rate of 30% to me.

[crz]

Now it is 30% The lies are starting to come out the rip this idea apart. Although I do not agree with the idea of taxing services, I am for it overall.

BUT..

Quit bitchin about the IRS and the present system as they'll bever change it. And I am starting to think the American people dont deserve to have it changed. I hope they get what they deserve and the present socialist tax system rate goes to 80 plus percent (with state and local taxes).
How's that?

[palmer]

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.

From what I read, it's even more complicated. Your employers payments towards your health insurance are taxable, either you pay it, or if you are lucky your employer will pay it for you. Presumably your own insurance premiums will be taxed too (although I didn't see this on the fairtax site). Then when you go to the hospital, the services paid for by your insurance are not taxed, but if you pay yourself they are. The net result will be a lot more third party payment which will keep driving up healthcare costs.

[DustyMoment]

At least now, with the present flawed system, they are up front about the record-keeping required. And that scares most off the fraudulent types off.

From the "Better to Stick with the Devil You Know than the Devil You Don't" school of thought?

What I see is a lot of naysaying by people who are willing to give something different a chance. Yes, the initial implementation may have flaws, but let's a least try it instead of rejecting it out of hand. We can always fix the flaws, but the current tax plan is so draconian and obsolete that even the Russians have figured out how to get by with a flat tax of 13%.

We're supposed to be the smart guys with the most experience in captitalism, and we can't get this right.

A lot of opposition was made before "Passion of the Christ" was finally released and, when it was, pretty much nothing that the naysayers said came to pass.

We all want tax reform, but the journey of a thousand miles begins with a single step. If we aren't willing to take a step . . . . ANY step . . . . how are we to begin the journey?

[ConservativeLawStudent]

Rebuttal to Bruce Bartlett:

http://www.fairtaxvolunteer.org/smart/BartlettRebuttal.pdf

http://www.fairtaxvolunteer.org/smart/rebuttals.html

[Texas Patriot]

First let me say I like the NRST but, the first problem with it is with the fact that it is an inclusive tax. Simply meaning that the NRST on $100 would work out to $129 since $29 is 23% of $129. Not as you and I think in terms of a regular state sales tax which is exculsive in that the tax on $100 would be $23 and thus a total cost of $123.
they say 23% tax because it sounds better than 29% especially when you start adding another 10% for the state taxes.
Although they arent "LIEING" they are being deceiptive which ruins thier credibility this is the first(among many) things they need to fix with thier presentation if they don't want people to turn them off when they figure out the difference between inclusive and exclusive taxation rates

(it's early I might have gotten the terms reversed the numbers are still true)

[DustyMoment]

The trouble is that the numbers are misapplied. Let's start with the 23% number. That's the amount of tax that goes to the federal government in place of income tax. Rather than the government taxing us on the basis of income, they tax us on the basis of consumption. So, for starters, we can control the amount of taxes we pay to the government by controlling spending.

Secondly, essentials such as food are exempt from the tax. So, now, take your check stub and assume that the Gross Pay and Net Pay numbers are the same. No federal witholding at all. You take home and keep everything that you earned until you buy a taxable item.

Third, this is a totally fair tax. No exemptions. Poor people pay the same rate and percentage as rich people. NO exemptions or exclusions.

Finally, businesses do not pay taxes. They are middle-men who pass the taxes on to their customers by adding it into the price of their goods. So, if you sell an item for $100, the price (with the NRST) to the consumer isn't $100, it is $123. The tax is handled as a sales tax (thus the name) just as sales tax is handled today. If the price of an item is $77, then the price to the consumer is $77 PLUS 23% of whatever $77 is (I'm too lazy to open a calulator, this morning). The tax is passed-through, it does not come out of the retailer's pocket. A 23% tax that came out of the retailer's pocket would be stupid and drive retailers out of business. Retailers are mostly comprised of small businesses (preaching to the choir, I know) and they are the lifeblood of America, so to tax a retailer at a rate of 23% would be insane and counterproductive.

Today, do you charge a customer $5.00 for an item, then charge yourself (for example) 7% of $5.00 to pay the governor? Or do you charge a customer $5.00 for an item and add the 7% for the governor to the $5.00 sales price? At the end of the day, when you close the till, the 7% of the gross that you deduct and send to the governor should still leave you the base price of the item plus your margin. So, if you paid $3.50 for the item you sold for $5.00, you should still have that $1.50 margin before operating expenses. If not, you might want to adjust your price structure.

[biblewonk]

I think it's dopy too.

[snowsislander]

It would be very tempting to change the formula to aid the poor and penalize the rich, just as the current tax code does.

After seeing the Republicans now proposing to means test Social Security (something I don't like), the threat of an introduction of a means test for the "prebate" must be considered as a real possibility.

I would rather see the whole "prebate" (which already reminds all too much of McGovern's negative income tax) dropped from the NRST proposals. That would mean the rate could be dropped from 23%(inclusive)/30%(exclusive) to something more reasonable.

[DustyMoment]

See my post #17. I don't know how you came up with the $129 number, but your initial number is flawed and throws the rest of your numbers off.

However, let's assume that you are right, that 23% of $100 is $129 (my 4-function calculator disagress with that number, but we'll play along). Even is that is really the amount, considering the grand total that we pay in all of the assorted taxes (state, federal and local) approaches 45 - 50%, by eliminating the tax on income, we still end up with more money at the end of the day.

If I take robertpaulsen's 30% sales tax number and apply it to sales on $100 for a total amount to the consumer, that 30% number sounds high. However, when you subtract the current federal tax component that averages around 33 - 35% (including income taxes and all other federal taxes), a sales tax of 30% that includes the federal, state and local component is a pretty good deal, IMO. It beats the heck out of paying 7% to the governor and mayor, and paying an additional 30-something% in witholding and other federal taxes.