Consumption taxes are not the answer

TownHall.com ^ | Friday, May 28, 2004 | by Bruce Bartlett

[JohnHuang2]

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.

[Your Nightmare]

Keep coming up with reasons to keep the income tax

The biggest reason is I pay less with the income tax than I would with the NRST. You don't really believe we can all pay less and the government can generate the same revenue, do you? That's just not possible. Use some common sense. To generate the same revenue it has to be a zero-sum game. If someone is paying less, other's (mainly the middle class) pay more. I'm one of the others.

[patriot_wes]

Hey a_g I knew you'de be hangin over here on this tax thread and that's cool. Here's an interesting case from the USSC

EVANS v. GORE , 253 U.S. 245 (1920)

Your comments please.

[ancient_geezer]

Won't this reduce the revenue collected the first two years?

No, because the revenue was collected prior to sale under the income/payroll tax system. Thus the inventory for which the credit is received is merely being refunded what is due after being taxed a second time.

Won't this reduce the revenue collected the first two years?

No because the revenue is collected twice, once before the implementation (income/payroll tax system) when it should be and once after implementation NRST in excess. The refund effects only inventory previously taxed. It effectively leaves older inventory as used(i.e. already taxed and received as revenue) goods not subject to the NRST.

Was this reduction in revenue compensated for in the 29.87% rate?

There is no 29.87% tax on the seller who is liable for remitting the tax. The seller remits 23% of his sales receipts (less any state or local taxes) for products subject to the NRST per the legislation.

The NRST only levies a tax with regard to products on which no federal tax has been collected, and thus is fully compensated in the NRST rate of 23% of the payment for taxable goods and services.

Prices of goods and services are less the taxes repealed under the NRST but include the NRST itself.

Thus product pricing under the NRST is tax included pricing, the tax separated and reported as a line-item on the retail sales ticket for visibility to the customer along with the tax included prices of products sold.

[Sloth]

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.

Stupid workers, perhaps.

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.

If they live long enough.

Replacing the payroll tax with some other broad-based tax ... will convert Social Security into a pure welfare program

It already is one!

The effect would be to reduce political support for the program.

Good!

[Sloth]

I would definitely pay more with the NRST. It's still the right thing to do. "Progressive" income taxation is morally wrong, IMO.

[Zon]

In some countries it is legal for a husband to beat his wife. That bad law doesn't change the fact that it's a crime that violates the woman's individual rights. Similar, the income tax is bad law as it is both fraud and extortion that violate individual and property rights. What rationalization do you offer in your support for government fraud and extortion via the income tax?

[ancient_geezer]

You're not effecting supply, just demand. What does the law of supply and demand say will happen to prices when demand increases?

What does supply & demand say when there is no additional supply of money that is paying for goods and services. How does demand for goods go up when their is more incentive to invest and save over spend.

Supply has to increase proportionately (and there is no way that will happen across the board) or prices go up.

Supply of what? No increase in money supply, demand for goods & services is the same as always, the only difference being where taxes are taken out, before the citizen gets paid(income/payroll tax)or when he spends(NRST) the same amount of money is involved.

You seem to believe that the economy can grow at >10% and inflation won't be a problem.

Certainly it can, through productivity increases arising from enhanced investment and lower costs and taxes with regard to non-retail businesses, and retail business inputs lower from their suppliers.

The NRST it adds no money to the monetary system to feed inflation. It just changes where the tax is collected, from income/payroll to point of expenditure.

The economy is growing 3-5% each and every year now with little inflation. That makes for 10% ever 2-3 years with no problems. Doubling that growth for or more for a short time arising from an initial impulse to productivity does not add to inflation but certainly adds to a stonger dollar and a stronger economy.

[Final Authority]

You haven't had to read my replies of late because as I read the threads on tax issues my efforts have born fruit, that is, we now believe that a sales tax if ever enacted will be another layer of broad based taxes adding to the levy of the income tax.

When you quote Keyes, a good and Honorable man but not a national leader, and use Mises screed to make a point you seem to be connected to a group with a certain unusual level of interest with respect to taxes, the trouble is all I can see here is that most groups just want to send more money to Washington and could care less about "fairness" which as I reach for my legal dictionary, isn't in there, because there is no such term of art.

[Zon]

...we now believe that a sales tax if ever enacted will be another layer of broad based taxes adding to the levy of the income tax.

What collectivist cult do you belong that you speak for its members?

[Principled]

You don't really believe we can all pay less and the government can generate the same revenue, do you? That's just not possible.

Who said you'd be paying less under the nrst? Most of us will pay the same (for the first year, anyway).

Nevertheless you are omitting the elimination of billions of dollars of compliance costs in your "zero-sum".

[Final Authority]

In 41 you comment on the idea of keeping the income tax, and it is a good reason. The reason I say to defeat any move on levying a sales tax nationally is that in all likelihood we will still have the income tax as the sales tax can never be progressive enough for liberals and the income tax can be used to keep the "rich" paying "their fair share".

I believe the sales tax proponents will offer bills in congress to fund certain government programs such as Medicare and prescription drugs. They will suggest a tax rate of 2 or 3 percent and say that this won't be a burden as they will suggest tax credits for the "poor" to offset such additional taxes. Now can one see the problems? Then they will want to use the enactment of such a tax to make it easy to increase the sales tax rate at will. Just look to NY and MA for such history as history is instructive as it does repeat.

[Final Authority]

I belong to no socialist or communist cult. How from my comments did you come to some fantasy that I am a collectivist? Next time you write I suggest you verify your vocabulary using a dictionary. Better, don't bother to write unless you can add to the discussion in a positive way.

[El Cid]

Re: Post #8.
Items to add to your list:

* Incredible uptick in productivity by eliminating the hours wasted in completing the many forms, and maintaining copious records for years.

* Eliminates loopholes for the wealthy

* Eliminate need for an army of tax lawyers to create loopholes.

* Eliminates the need for the huge IRS bureaucracy, and the army of intrusive IRS agents.

I frankly only see upside with the proposal to substitute a sales tax for the income tax; but also have no illusions about believing it will ever come to fruition. Our Congress folks derive their power from special favors they can grant through the complex tax code; and it is also in their best interest to hide the taxes in as many shadows they can create. A National Sales Tax provides neither of these 'attributes', and Congress will never support it.

Great idea though.

[ancient_geezer]

You figured out how much the transition inventory credit is going to cost yet? The number I come up with are ~ $140 billion.

Did you subtract the income & payroll taxes collected on that inventory that have already been paid into the system? Remember it is a refund of overpayment of taxes, just as a income tax refund is a return of dollars paid in excess of taxed actually owed.

I don't remember seeing this in the computation of the 29.87% NRST rate.

Since there is no computation for a 29.87% NRST rate, only a conversion factor for what is added on to theoretical taxfree prices, you know like how many additional dollars one has to earn to pay the price of goods and services with income & payroll taxes on the individual today.

Under the NRST no additional dollars are added to the tax inclusive pricing on "new" goods and services. New meaning taxes not already collected, i.e. product built after the implementation of the NRST.

OTOH, under the tax embedded pricing we pay today where we must not only pay business taxes embedded into those goods and services, but have to earn on average 20% more just to have the aftertax income to pay for those goods and services.

• Total federal taxes as reflected through gross family income is 23.5% (taxfoundation) less business taxes paid into federal revenues fed = 15%
• Total state taxes reflected through gross family income is about 10.2% (taxfoundation)
• The current net personal savings/investment rate is about 1.2%.(BEA personal income)

family consumption expenditure is gross income less taxes and savings.

Thus the additional % that must be earned over family consumption expenditure to purchase goods and services today = fed/(1-state-fed-savings) =

15/(1-.15-0.102-0.012) = 20.38%

paid in addition to the tax embedded price of products under the income/payroll tax system.

[ancient_geezer]

What do marginal tax rates have to do with anything?

The higher the marginal tax rate, the cheaper the price of leisure, and the more valuable a tax shelter becomes. Why should anyone earn more when going fishing or golfing is more pleasurable than paying more taxes. Stick your investments into non-tax/low-tax cubbyholes as marginal tax rates rise, and go fishing instead of working or risking that additional dollar.

You know damn well you can't compare marginal tax rate to a flat tax rate.

Certainly you can by plotting the combined(income/payroll) marginal rates on what your income is and compare them to the marginal rate of the NRST with respect to total payments for what you spend:

 

The Reagan tax cuts is a flawed example.

LOL, your */~rdavis whoever he is, constructs a strawman, and does a lousy job of analysis. The base issue is one of tax avoidence behavior which increases with increasing marginal rates, and decreases with decreasing marginal rates.

Marginal tax rates matter as they effect the tax avoidance actions of those who pay the most taxes, seen by evaluating the effect of the '86 and subsequent tax law changes on the income producing/reporting behaviour of the highest tax brackets.

As marginal rates increase, tax reportable income decreases(folks move income production towards non taxable gains & returns and sheltering income) as marginal rates decrease tax reportable income increases(folks move income production toward more profitable taxable ventures outside of tax shelters.)

http://www.ncpa.org/ea/eamj94/eamj94o.html

Laffer Curve Redux

The increases in marginal tax rates imposed by the Clinton administration and Congress are likely to raise little or no additional revenue. Instead, the high-income people subject to the higher rates will reduce the amount they work, take more of their pay in fringe benefits rather than in taxable income, increase their deductions and invest their income in tax-free municipal bonds rather than taxable bonds. All of these measures will reduce taxable income, and thus the expected revenue will not be forthcoming.

How do we know this? Because when the top marginal tax rate was cut, going from 50 percent in 1986 to 28 percent in 1988, high-income people did the opposite. As a result, the taxable income of people who were in the 49 percent and 50 percent marginal tax brackets in 1985 rose by 20 percent relative to overall income growth for the economy.

If high-income people did not change any of their behavior, then the tax rate increases of 1993 would generate additional tax revenue of $25.8 billion. But taxpayers will respond to the disincentives in the law. Economists have used computer simulations to estimate that:

• A couple whose taxable income would have been $180,000 will respond in ways that reduce it by 12 percent.
• If that happens, instead of paying $3,305 more in taxes, the couple will pay about $4,864 less.
• A couple whose taxable income would have been $500,000 will respond in ways that will almost wipe out any additional taxes.
• The couple's tax bill will increase by only about $1,460 rather than the $37,585 of additional taxes they would have paid if they had not changed their behavior.
• Overall, the tax increase will generate at most only $3.4 billion in revenue rather than the $25.8 billion. - David R. Henderson.

Source: Martin Feldstein, "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," NBER Working Paper No. 4496, October 1993, National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge, MA 02138, (617) 868-3900.

[ancient_geezer]

EVANS v. GORE , 253 U.S. 245 (1920)

Your comments please.

Overturned in O'Malley vs Woodrough, 307 US 277 (1939),

"To suggest that it makes inroads upon the independence of judges who took office after Congress had thus charged them with the common duties of citizenship, by making them bear their aliquot share of the cost of maintaining the Government, is to trivialize the great historic experience on which the framers based the safeguards of Article III, 1.9 To subject them to a general tax is merely to recognize that judges are also citizens, and that their particular function in government does not generate an immunity from sharing with their fellow citizens the material burden of the government whose Constitution and laws they are charged with administering.

Ever since judges salaries have been held subject to the income tax as a general duty of all citizens not affecting judicial independance, thus not a "dimination" for the intent of the founders.

My personal opinion; The courts crossed the line on this one, same as Roe did.

However that does not change the fact that you, I and judges are seen to be subject to the income tax statutes and will be held accountable to them by the courts that generated the above opinion until all taxes on incomes and payrolls are removed from the statutes.

[Your Nightmare]

LOL, your */~rdavis whoever he is, constructs a strawman, and does a lousy job of analysis.

rdavis is a fellow Freeper named Remember (AFAIK). You can take up his analysis with him. He seems to have done a good job to me.


"The increases in marginal tax rates imposed by the Clinton administration and Congress are likely to raise little or no additional revenue." Martin Feldstein - 1993

Well that prediction didn't turn out too well, now did it. Thank you for the beautiful example of how wrong economists can be when they try to predict the future. (Beside the fact he doesn't seem to understand what Laffer was saying with the Laffer Curve. He said raising the tax rate could raise or lower revenues depending on where you are on the curve.)

[Your Nightmare]

Since there is no computation for a 29.87% NRST rate, only a conversion factor for what is added on to theoretical taxfree prices, you know like how many additional dollars one has to earn to pay the price of goods and services with income & payroll taxes on the individual today.

Didn't the people who computed the required rate for the NRST use current consumption level to determine what was needed to be "revenue neutral"?

[ancient_geezer]

we now believe that a sales tax if ever enacted will be another layer of broad based taxes adding to the levy of the income tax.

Who is "we"? Got a mouse in your pocket?

It certainly does not include myself, nor the many others that work for the replacement of all income and payroll taxes, nor does your august pronouncement from high reflect the intent as laid out by the legislation in HR25:

http://thomas.loc.gov/cgi-bin/query/z?c108:H.R.25:

H.R.25

Fair Tax Act of 2003 (Introduced in House)

 

---

TITLE I--REPEAL OF THE INCOME TAX, PAYROLL TAXES, AND ESTATE AND GIFT TAXES

• SEC. 101. INCOME TAXES REPEALED.

• SEC. 102. PAYROLL TAXES REPEALED.

• SEC. 103. ESTATE AND GIFT TAXES REPEALED.

• SEC. 104. CONFORMING AMENDMENTS; EFFECTIVE DATE.

TITLE II--SALES TAX ENACTED

• SEC. 201. SALES TAX.

 

you seem to be connected to a group with a certain unusual level of interest with respect to taxes

Yep sure enough you caught me out, I intend to see the end of the income/payroll tax system through the normal acts and processes of the Constitution.

the trouble is all I can see here is that most groups just want to send more money to Washington

My interest is a bit more basic, to remove perception of the tax burdens of the individual, is to remove the goad which assures accountability of government to the electorate. Federal tax rates are high and government grows ever larger because a majority of the electorate do not perceive proportionately the burden their demand for largess imposes on the minority of citizens.

The siren call for representation without taxation is the formula that got us where we are at today. The ability to hide or disguise taxation from the view of large sectors of the electorate allows the Congress to get away with the creation of the evergrowing monster that it fosters.

Liberty and freedom have a price, responsibility. If the perception price is voided there are no brakes on the growth of government, the ultimate result is the end of freedom through creeping socialism.

 

and could care less about "fairness"

For those that pay few taxes, any tax is fair so long as it's the other guy paying.

For the rest of us finding a fairer mode of taxation rather than who pays what is a better guide:

Patrick Henry, Virginia Ratifying Convention June 12, 1788:

• "the oppression arising from taxation, is not from the amount but, from the mode -- a thorough acquaintance with the condition of the people, is necessary to a just distribution of taxes. The whole wisdom of the science of Government, with respect to taxation, consists in selecting the mode of collection which will best accommodate to the convenience of the people."

 

Federalist #12:

• "The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury."

 

[Montesquieu wrote in Spirit of the Laws, XIII,c.14:]

• "A capitation is more natural to slavery; a duty on merchandise is more natural to liberty, by reason it has not so direct a relation to the person."
  --Thomas Jefferson: copied into his Commonplace Book.

 

As held by Thomas Hobbes, in Leviathan it is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income.

Taxes are however Constitutional, and necessary to the functions of government:

Federalist #12:

• "A nation cannot long exist without revenues. Destitute of this essential support, it must resign its independence, and sink into the degraded condition of a province. This is an extremity to which no government will of choice accede. Revenue, therefore, must be had at all events. In this country, if the principal part be not drawn from commerce, it must fall with oppressive weight upon land."

which as I reach for my legal dictionary, isn't in there, because there is no such term of art.

Whatever, it is also held as a legal maxum that the label of a bill has no legal standing.

However that may be, we can use the ordinary meanings of words as they may apply to the content of the legislation which is a retail sales tax that repeals the income and payroll taxes and puts in their place a retail sales tax on consumption.

Chisom v. Roemer, 501 U.S. 380,404-405 (1991)

"It is a statute. I thought we had adopted a regular method for interpreting the meaning of language in a statute: first, find the ordinary meaning of the language in its textual context; and second, using established canons of construction, ask whether there is any clear indication that some permissible meaning other than the ordinary one applies. If not - and especially if a good reason for the ordinary meaning appears plain - we apply that ordinary meaning. See, e.g., West Virginia University Hospitals, Inc. v. Casey, 499 U.S. 83, 98-99 (1991); Demarest v. Manspeaker, 498 U.S. 184, 190United States v. Ron Pair Enterprises, Inc., 489 U.S. (1991); 235, 241Public Welfare v. Davenport, 495 (1989); Pennsylvania Dept. of U.S. 552, 552485 (1990); Caminetti v. United States, 242 U.S. 470, (1917); Public Citizen v. Department of Justice, 491 U.S. 440, 470 (1989) (KENNEDY, J., concurring in judgment).

[ancient_geezer]

Didn't the people who computed the required rate for the NRST use current consumption level to determine what was needed to be "revenue neutral"?

That consumption level as necessary to reflect all factors taxed, meeting the conditions of "revenue neutrality" under the requirements of the Budget Enforcement Act using the Congressional Budget Office methodology in establishing tax rates of the revenue bills presented to Congress. The particular taxrate of the NRST applied from the perspective of the vendor of goods and services in regard to tax inclusive pricing.