Consumption taxes are not the answer

Two tax issues seem to be getting a lot of discussion on the Internet these days. First is a big increase in the gasoline tax in order to discourage oil consumption and make the nation less vulnerable to the OPEC oil cartel. Second is the idea of replacing the Social Security payroll tax with a progressive consumption tax. Both have serious flaws.

The idea that a higher gasoline tax will help our energy situation is ludicrous. All European countries have far higher gasoline taxes, and they are just as vulnerable to increases in the price of oil as we are. If a higher oil price translates into a 50-cent per gallon increase in gasoline prices (net of tax), then the Europeans and we are both going to pay 50 cents more per gallon.

The reason is that oil is an internationally traded commodity. Whether you are importing oil or exporting it, you are going to pay the world price one way or another when you use oil. If you are an oil exporter, you can hold the price of gasoline down for your citizens, but then the nation as a whole pays an opportunity cost equal the foregone profit. In the end, it is no different than an oil importing country using public funds to subsidize the price of gasoline.

The point is that from the point of view of a consumer, it makes no difference whether you live in a country that is self-sufficient in terms of oil or one that is not. When fundamental market forces cause the price of oil to rise, everyone pays. There is no way of insulating yourself except by shifting the cost to someone else.

Raising the gasoline tax may reduce domestic oil consumption, but this will happen only very slowly. It takes time for people to trade-in their gas-guzzling SUV's for fuel efficient Mini Coopers. Leaving aside the loss of welfare for those forced to drive in tiny little cars when they would rather be in something much bigger, let's suppose that the lower demand lowers the world oil price. Unless it goes down by an amount equal to the tax, consumers are still worse off.

In the end, the only beneficiaries of a higher gasoline tax are the government and the road building industry. That is because under current law, revenues from the federal gasoline tax go into the highway trust fund, which is used to build roads, bridges and such. When there are uncommitted funds in this trust fund, Congress tends to treat them like free money that can be used for any stupid pork barrel project as long as it involves transportation.

As a consequence, increases in the gasoline tax don't even reduce the budget deficit except for the minuscule amount of time between when the tax is imposed and the time it takes for Congress to spend it. Of course, the law could be changed to put higher gasoline taxes into general revenues. But the road builders and others who benefit from increased transportation spending will strenuously oppose this. Hence, this is unlikely to occur.

The idea of replacing the payroll tax is similarly unworkable. This system of funding Social Security benefits was created for a specific reason that is still valid. By tying a worker's contributions directly to his benefits, workers tend to view the payroll tax not so much as a tax, but rather as a payroll deduction for his 401(k) plan, life insurance or medical benefits. To the extent that this is the case, the payroll tax is viewed as part of a worker's pay and not a subtraction from it.

Of course, a worker loses the use of his payroll tax deduction. But most get it all back with interest. Indeed, because of the highly progressive nature of the Social Security benefit system, low-income workers get a very high return on their payroll taxes. They get back benefits in retirement that are far greater than the money they paid in. In this respect, the Social Security system reinforces work incentives, rather than being a simplistic "tax on work" that it is often portrayed as.

Replacing the payroll tax with some other broad-based tax that is unconnected to a specific worker's wages breaks the link between contributions and benefits. It will convert Social Security into a pure welfare program, rather than a government pension. The effect would be to reduce political support for the program and work incentives at the same time. Any disincentive effects from the replacement tax would come on top.

If we are going to replace some tax with a progressive consumption tax, it should be the income tax, not the payroll tax. If done properly, this would increase incentives for work, saving and investment that would boost real economic growth.

Replacing the payroll tax with some other broad-based tax that is unconnected to a specific worker's wages breaks the link between contributions and benefits.

Wasn't aware that a tax is a "contribution" to anything other than the coffers of government as a politician's slush fund to redistribute in accord with political expediancy.

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."

If we are going to replace some tax with a progressive consumption tax, it should be the income tax, not the payroll tax.

Hmmmm! Last I looked, the Social Security/Medicare payroll tax on wages is an income tax.

Title 26 US Code Subtitle C Sec. 3101. Rate of tax

(a) Old-age, survivors, and disability insurance
In addition to other taxes, there is hereby imposed on the income of every individual a tax equal to the following percentages of the wages (as defined in section (a)) received by him with respect to employment (as defined in section (b)) - ***

(b) Hospital insurance
In addition to the tax imposed by the preceding subsection, there is hereby imposed on the income of every individual a tax equal to the following percentages of the wages (as defined in section (a)) received by him with respect to employment (as defined in section (b)) - ***

And goes into general revenues just like any other income tax:

Title 26 US Code Subtitle C Sec. 3501. Collection and payment of taxes

(a) General rule
The taxes imposed by this subtitle shall be collected by the Secretary and shall be paid into the Treasury of the United States as internal-revenue collections.

To be redistributed at political whim.

If done [convert to a consumption tax] properly, this would increase incentives for work, saving and investment that would boost real economic growth.

Certainly would so why do a half job on it?

I guess some folks just seem to want to keep the 16th amendment and income taxes around and live forever under the income/payroll tax system.

A pile of excretement called by any other name still smells and sticks to the bottom of shoes.

"a free people that pays slave taxes to its government is willingly training itself for bondage."

Alan Keyes 1999

A Taxreform bump for you all.

If you would like to be added to this ping list let me know.

Uh-oh. The Kool-Aid drinking NRSTers are going to be all over this in no time.

Getting the adhominens in early, I see. Guess I had better ping in a few Kool-Aid drinkers to handle the rush. I'd hate to disappoint you YN.

The over/under for this tread is 200 by the end of the day.

Well I certainly hope so, the more that learn of the National Retail Sales Tax and its advantages over the income/payroll tax system the sooner it will be enacted.

Dramatically reduce the costs of goods and services by 20 to 25 percent.

Allow you to keep 100 percent of your paycheck, pension, and Social Security payments.

Gross Domestic Product will increase by almost 10.5 percent in the first year after enactment.

Compliance costs would decrease by 90 percent.

Real investment would initially increase by 76 percent relative to the investment that would be made under present law. While this increase would gradually decline, it remains 15 percent higher than under the existing tax structure.

Exports would increase by 26 percent initially and would remain more than 13 percent above the level under the current tax system.

Real wages will increase.

The working poor would experience an increase in real lifetime consumption of between 8 and 14 percent.

Increases incentives to work by as much as 20 percent in many households, leading to higher economic growth and efficiency.

Interest rates will fall 25 to 35 percent.

John Linder in the House & Saxby Chambliss Senate, offer a comprehensive bill to kill all income and payroll taxes outright, and provide a IRS free replacement in the form of a pure consumption tax:

H.R.25, S.1493
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: http://www.fairtax.org & http://www.salestax.org

"A pile of excretement called by any other name still smells and sticks to the bottom of shoes"

A very good description of the NRST.

There are obviously those who hold such personal opinions.

OTOH, there are those who come to a much different conclusion rooted in economics and the Constitutional basics:

Federalist #21:

"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.
Impositions of this kind usually fall under the denomination of indirect
taxes, and must for a long time constitute the chief part of the revenue
raised in this country." (Emphasis added).

Ludwig von Mises as Policy Analyst: Monetary Reform, Fiscal Policy, and Foreign Exchange Controls by Richard M. Ebeling
Heritage Lecture #754

http://www.heritage.org/Research/PoliticalPhilosophy/hl754.cfm#pgfId-1023417

"Austria, Mises said, would be a poor country. The destruction of war, the consumption and misuse of capital, the destruction of a large portion of the Austrian entrepreneurial class due to the expelling or murder of so many Jewish businessmen and financiers, and the debilitation of the labor force from death and permanent injury in battle would require Austria to turn its back on its socialist, interventionist, and welfare-statist past. Only economic freedom and hard work could restore Austria from a condition that we might nowadays loosely refer to as "third world" status.
Fiscal policy, therefore, would have to be designed to do everything possible to unleash private sector incentives and opportunities for investment, capital formation, and entrepreneurship. Virtually all taxes, Mises suggested, should be skewed toward consumption and away from production. What type of broadly based consumption taxes? He proposed:

(1) excise taxes on alcoholic beverages, tobacco, and related tobacco products;
(2) a sales tax exclusively on the sale of goods and services to the final consumer; there should be no explicit or hidden value added taxes;
(3) a progressive consumption tax based on housing expenditures, but with an exemption for housing expenditures for those in the lower income brackets;
(4) a tax on luxury automobiles for private or personal use;
(5) a tax on lottery winnings;
(6) a stamp tax on playing cards;
(7) administrative fees for certain government services, such as issuing patent rights, brand name registrations, determination of weights and measures, and "official stamps" to cover the cost of providing various types of documentation;
(8) a wage tax paid by employers that was not deducted from the employee's salary to fund existing social insurance programs; and
(9) a moderate net profits tax on shareholders and limited liability partnerships when annual disbursements exceeded 6 percent of the enterprise's capital assets; retained earnings by the enterprise would be exempt from taxes so as not to discourage capital formation.

Except for the net profits tax and the wage tax for social insurance costs, all income and business earnings would be completely tax-exempt. And a perusal of Mises' proposed list of taxes clearly shows that he thought that, besides the general sales tax, the fiscal burden should primarily be in the form of what nowadays would be classified as "sin taxes" and a narrow selection of "luxury" expenditures. Mises' long recognized advocacy of "laissez-faire" did not mean a hands-off indifference to the path taken by the market economy. What would be produced, where and how goods would be produced, and for which segments of the consuming public would be determined by the pattern of market demand and the profit-driven entrepreneurs. As Mises expressed it in the early 1940s, "If there is any hope for an new [economic] upswing [at the end of the war] it rests with the initiative of individuals. The entrepreneurs will have to rebuild what the governments and politicians have destroyed."

***
It should be mentioned that Mises' apparent concession to the welfare state in his listing among his fiscal suggestions of an employer's tax for social insurance expenditures did not mean his belief in their desirability or necessity. This was clearly an admission that, given the political currents, not everything could be reformed at once. For example, in 1942 Mises was invited to lecture in Mexico for six weeks during which he had the opportunity to studying the economic conditions in the country. The following year, in 1943, he prepared a lengthy monograph for an association of Mexican businessmen on "Mexico's Economic Problems." His recommendation was to not establish social insurance programs in the first place. If part of the cost of such social insurance schemes falls on the shoulders of the employers, it would only succeed in raising the cost of employing workers, with the negative effect of pricing some members of the work force out of the job market. At the same time, such government-mandated insurance policies restricted the freedom of the employee to weigh the opportunity costs of allocating his income in various ways more reflective of his own preferences and that of his family.

Alan Keyes: Taxes & Government Spending:

"The income tax in effect makes us vassals to the government – the politicians decide how much income we can keep. No mere “reform” of this slave tax, such as flattening the rate, can correct its fundamental denial of control over our own money. Only the abolition of the income tax itself will restore the basic American principle that our income is both our own money and our own private business - not the government's."

"Replacing the income tax with a national sales tax would rejuvenate independence and responsibility in our citizens. True economic liberty and moral revival go hand in hand."

"A national sales tax would also put the American citizen back in control of national fiscal policy. The best way to curtail government spending is to cut taxes, because they can’t spend what they don’t get. But with a sales tax, we could deny funds to a spendthrift government – and give ourselves a tax cut – whenever we make the private choice to alter our spending and saving habits."

Sorry, I forgot to add the ;-)

BTW, I was wonder if you could clear something up for me. What exactly does this part of the law mean?:

`SEC. 902. TRANSITION MATTERS.

`(a) Inventory-

`(1) QUALIFIED INVENTORY- Inventory held by a trade or business on the close of business on December 31, 2004, shall be qualified inventory if it is sold--

`(A) before December 31, 2006;

`(B) by a registered person; and

`(C) subject to the tax imposed by section 101.

`(2) COSTS- For purposes of this section, qualified inventory shall have the cost that it had for Federal income tax purposes for the trade or business as of December 31, 2004 (including any amounts capitalized by reason of section 263A of the Internal Revenue Code of 1986 as in effect on December 31, 2004).

`(3) TRANSITIONAL INVENTORY CREDIT- The trade or business which held the qualified inventory on the close of business on December 31, 2004, shall be entitled to a transitional inventory credit equal to the cost of the qualified inventory (determined in accordance with paragraph (2)) times the rate of tax imposed by section 101.

`(4) TIMING OF CREDIT- The credit provided under paragraph (3) shall be allowed with respect to the month when the inventory is sold subject to the tax imposed by this subtitle. Said credit shall be reported as an intermediate and export sales credit and the person claiming said credit shall attach supporting schedules in the form that the Secretary may prescribe.

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