(President) Bush Says National Sales Tax Worth Considering

Rueters on Yahoo ^ | 8/10/04 | Reuters

[NormsRevenge]

NICEVILLE, Fla. (Reuters) - President Bush (news - web sites) said on Tuesday that abolishing the U.S. income tax system and replacing it with a national sales tax was an idea worth considering.

"It's an interesting idea," Bush told an "Ask President Bush" campaign forum here. "You know, I'm not exactly sure how big the national sales tax is going to have to be, but it's the kind of interesting idea that we ought to explore seriously."

Republican economists who speak regularly to the White House have said that the Bush campaign has been mulling the idea of an overhaul of the tax code as part of an agenda for a second term should Bush win reelection.

Some lawmakers have floated ideas of simplifying the tax code by putting in place a "flat" income tax rate or a national sales tax. But those ideas have so far not gained much traction in Congress. Opponents say such a system would not be in the best interests of the poor and the middle class who would pay the same tax rate as the wealthy even though they have less disposable income.

[rintense]

Disagree. The offset is that your salary would actually BE your salary. Instead of taking home $33,000 out of a $52,000 salary, you'd be taking him close to $52,000. The offset in wage adjustment allows YOU to control what you buy and when.

[Your Nightmare]

This is assinine even by your standards -- the state will do it for their own cut. Regardless of what tax system the state will be using, someone shielding personal expenses as business items will be depriving them of their own revenue. The 0.25% kickback is for administrative overhead.

The problem with all these "piggy back on the states" arguments is that the NRST will tax 150% more businesses than the state taxes. The "overlap" is not nearly what people anticipated. The incentive for the states to enforce the NRST on these businesses is slight. They will make cursory efforts to collect the tax, but will go to no great efforts to seek out evaders from this group of businesses. They don't owe the state any money, what do they care if the business didn't pay their NRST?

On the subject of business use for personal use evasion, the occurrence of this will be significantly higher with the higher tax, but the incentive for the states to increase their enforcement efforts is slight. The state has already worked out the ROI for enforcement efforts, they will not get enough return enforcing the NRST to increase their investment.

[kevkrom]

The problem with all these "piggy back on the states" arguments

That's a complete non-sequiteur designed to hide that fact that you're misleading people yet again. I specifically stated that regardless of what tax system the state uses, hiding personal use as a fake business cost would reduce the state's revenue. For that reason alone, they would have incentive to go after the cheaters. You implied that all the states would get out of it was .25% of the take -- which is provably (and laughably) false.

but the incentive for the states to increase their enforcement efforts is slight. The state has already worked out the ROI for enforcement efforts

But again you contradict yourself. You say that the NRST would dramatically increase evasion, but then you turn around and say that the states, whose own bottom line would be severely impacted by any kind of "off the books" transaction or fake business expense, wouldn't re-assess the need for enforcement? Make up your mind -- either the evasion won't be as bad as you're saying, or the states are going to have incentive to increase their enforcement efforts. You can't have it both ways.

[ancient_geezer]

Cato has a paper discussing this.

When governments try to extract tax revenue from the economy, they foster an array of responses from citizens who have an economic incentive to avoid the tax. Higher tax rates create even greater incentives for avoidance, evasion, and black-market activity. New York City's experience with cigarette taxes vividly illustrates these problems.

So do others

Tax Evasion: The Underground Economy

The FairTax and Tax Evasion
Opponents of the FairTax like to assert that a federal sales tax would increase tax evasion. It is more likely, however, that the FairTax would increase tax compliance while reducing compliance costs at the same time. It is impossible to argue in good faith that the current approach is doing its job since the problem is getting worse with the passage of time despite major and ever more intrusive attempts to address the problem.

Estimated Tax Gap by Source[14] for 1981 and 1992, in Current Dollars (Dollars in millions)
Description	1981 Tax Gap Amount	1992 Tax Gap Amount
Individual filers Wages and salaries	$2,378	$1,919
Interest	1,969	1,891
Dividends	2,075	2,142
State tax refund	127	102
Alimony	124	253
Capital gains	1,822	11,535
Form 4797	217	1,264
Pensions and annuities	456	144
Taxable unemployment	107	388
Farm income	2,350	1,909
Partnership income	2,755	2,246
Small business (S) corporation	912	729
Estates and trusts	49	73
Rents and royalties	2,012	4,481
Non-farm sole proprietors	18,714	30,173
Other income	4,366	3,465
Taxable Social Security	0	44
Adjustments to income	752	694
Deductions	3,540	3,889
Exemptions	1,844	2,224
Credits	1,313	1,274
Math errors	487	1,521
Individual non-filer tax gap	5,231	10,233
Individual remittance gap	8,300	11,400
Total individual tax gap	$61,900	$93,994
Small corporation tax gap	4,461	6,999
Large corporation tax gap	8,638	23,716
Unrelated business income gap	56	218
Fiduciary tax gap	111	202
Corporate remittance gap	800	2,000
Total corporate tax gap	$14,065	$33,135
Total tax gap	$75,966	$127,129

Some of the problems regarding the underground economy that exist under the income tax would remain under the FairTax, particularly those involving cash transactions made in the illegal economy or with the explicit intent of evading taxation. However, as the costs of compliance shrink and the perceived fairness of the tax system increases, some of the hostility to the tax system will decline. People who are in noncompliance because they perceive the present system as unfair or illegitimate may choose to comply with the FairTax. Most importantly, because of lower marginal tax rates, the benefit from lawful tax avoidance or illegal tax evasion will be much less at the margin relative to either the present system[15] or competing alternative tax systems, such as the USA Tax or flat tax[16], that have higher marginal tax rates, particularly on wages or self-employment income.[17] Research has confirmed the intuitive relationship between higher marginal tax rates and higher rates of evasion.[18] Lower rates, all other things being equal, imply lower evasion because the benefits from evasion decline while the costs of evasion remain comparable.

Much is made from the fact that a federal sales tax would place the responsibility for tax collection with the retailer, a sector of the economy in which small businesses are better represented. Small businesses are viewed as more likely to evade taxes since the owner, and beneficiary of tax evasion, is more likely to also be responsible for keeping the books and filing the tax returns. While there is, of course, some truth to the proposition that evasion rates among small businesses are higher, it is highly implausible to suggest that evasion would increase under the FairTax. First, those small businesspersons that are inclined to cheat on their sales tax are probably already cheating on their income tax and would be inclined to do so under any tax system. Second, the economic importance of small firms in the retail sector is usually grossly overstated According to the Joint Committee on Taxation (JCT), small firms only account for 14.9 percent of gross receipts by all retailers, wholesalers and service providers.[19] Since the gross receipts of wholesalers would not typically be subject to tax, the true scope of the small "problem" companies is smaller still. However, sole proprietorships, perhaps the most likely to evade tax under the present system and under the FairTax, are not included in the JCT figures.

Share of Total Gross Receipt by Firms with less than $1 million of Gross Receipts[20] ($ millions, 1993)
Industry	Entity Type	Firm Sales Under $1 mil.	Firm Sales All Firms	Small Share Percent
Retail and Wholesale Trade	C Corp.	116,929	2,663,541	4.4%
Services	C Corp.	91,383	610,438	15.0
Retail and Wholesale Trade	S Corp.	358,566	959,501	37.4
Services	S Corp.	98,721	283,680	34.8
Retail and Wholesale Trade	Partnership	22,938	112,112	20.5
Services	Partnership	30,783	187,588	16.4
Total	Combined	719,319	4,816,860	14.9

Third, the necessary corollary of the tax collection point being concentrated at retail establishments, rather than with individuals or other businesses, is that there are fewer points where revenue agents must concentrate their enforcement efforts. The collection points in the FairTax system would be perhaps 10 percent of those under the current income tax system or other alternative tax systems.[21] Because the number of collection points is so much lower, if enforcement funding is held equal then the audit rate for potential evaders would increase considerably, and the likelihood of them being apprehended is correspondingly higher. In other words, the risk of detection would increase and risk-adjusted cost of evasion would increase. Increased evasion due to the greater concentration of small businesses in the retail sector would be outweighed by greater compliance due to greater simplicity and perceived legitimacy of the tax system, from reduced temptation due to lower marginal tax rates, and from higher risk of detection due to a smaller taxpayer population. Fourth, some small business owners evade taxes because they feel the present system is unfair or overly complex and burdensome, or that they have been wronged by the system.  They are much less likely to feel that way about the FairTax. Fifth, and perhaps most importantly, the marginal benefit from evasion will decline under the FairTax since the marginal tax will decline. Thus, the incentive to cheat will decline markedly.

Any one of the 118 million income tax filers can cheat the income tax system today, and a great many do so. Under the FairTax, however, only retailers (about 14 million-tax filers altogether) would be in a position to cheat In addition, the vast majority of retail sales, 90 percent, are made by large firms that are less likely or find it more difficult to cheat. A retailer who cheats under the income tax system has very similar, if not the same financial gain, as a retailer who cheats under the FairTax system. If a retailer under the FairTax system, failed to report taxable sales, the government would lose and the evader would gain by an amount equal to the sales tax on the good or service purchased. In an income tax system, the government loses and the evader gains by an amount equal to the marginal income tax rate times the amount not reported. An income tax evader will see his taxable income go down dollar for dollar, for every dollar of income not reported. Typically, failing to report a small fraction of a business' gross income will be sufficient to drive its reported profit to zero.

Even if, however, we were to make the unlikely assumption that evasion rates would be higher under the FairTax system than under an income tax system, they would have to be much higher to justify the income tax's huge compliance costs (estimated to be over $225 billion in 1996), many of which are incurred by businesses and are deductible as a business expense. Moreover, if compliance proved to be a problem, information reporting along the lines of present law (1099's) could be implemented to facilitate cross-checking by government auditors. These 1099s would reflect the quantity of product sold to retailers. An auditor could then ensure that the retailer's books either reflected a sale of these products or that the products were in inventory. The FairTax requires all businesses (including non-retailers) to keep business records kept in the ordinary course of business that would aid cross checking by government auditors.[22]

Conclusion
Tax evasion will undoubtedly be a problem under any tax system. It is a major and growing problem under the current tax system, despite very substantial efforts and increasingly harsh treatment of the taxpaying public. Almost 40 percent of the public, according to the IRS, is out of compliance with the present tax system, mostly unintentionally due to the enormous complexity of the present system. This breeds disrespect for the tax system and the law, and makes a system based on taxpayer self-assessment less and less viable.

The FairTax is likely to reduce rather than exacerbate the problem of tax evasion. The increased fairness, transparency, and legitimacy of the system will induce more compliance. The roughly 85 to 90 percent reduction in filers will enable tax administrators to address instances of noncompliance more effectively, and increase the likelihood that tax evasion will be discovered. The relative simplicity of the FairTax will promote compliance. Businesses will need to answer one question to determine the tax due: how much was sold to consumers? Finally, the dramatic reduction in marginal tax rates will reduce the gains from tax evasion. If the cost of noncompliance remains comparable (or even increases due to the increased likelihood of getting caught caused by the much smaller number of filers), then both the expected profit from and frequency of tax evasion will decline.

---

[14] Source: Income Tax Compliance Research, IRS Publication 1415. Gross Tax Gap Estimates by Source of Tax Gap for Tax Years 1981 and 1992, in 1992 Dollars, reprinted in GAO Supra.

[15] For 2000, the 28 percent marginal rate is effective on taxable incomes of $43,850 for joint filers and $26,250 for single persons. The top federal tax rate, of course, is 39.6 percent.

[16] The USA Tax has a top marginal tax rate of 40 percent (actually an effective rate of 32.35 once the payroll tax credit is considered) that takes effect at relatively low taxable income levels. Even a relatively low flat tax rate of 17 percent, plus the 15.3 percent payroll tax, yields a marginal tax rate of 32.3 percent until the Social Security wage base is reached and 19.9 percent thereafter (including the 2.9 percent Medicare tax). At a 20 percent flat tax rate (the beginning rate under the Armey plan), the lowest marginal tax rate is 22.9 percent and 35.3 percent for most middle class wage-earners.

[17] For a particular taxpayer, the marginal benefit from failing to report a given amount of gross receipts under an income tax and a given amount of gross receipts under the FairTax are the same. Under an income tax, the taxpayer will reduce his taxable income one for each dollar not reported. In the FairTax, failing to report sales receipts would also reduce taxable receipts dollar for dollar. Although the problem of falsifying deductions or deducting personal items as a business expense does not arise in the FairTax, the corresponding problem in the FairTax is using a business to attempt to purchase personal goods and services on a tax-exempt basis.

[18] See, e.g. "Estimating the Underground Economy: A Critical Evaluation of the Monetary Approach", Peter S. Spiro, 42 Canadian Tax Journal 1059–1081 (1994); "The Underground Economy in the United States: Annual Estimates, 1930-80", Vito Tanzi, 30 International Monetary Fund Staff Papers 283–305 (June 1983).

[19] IRS Statistics of Income, reported in "Impact on Small Business of Replacing the Federal Income Tax," Joint Committee on Taxation, April 23, 1996, JCS-3-96, pp. 109–127.

[20] Ibid.

[21] See note 3, supra.

[22] State governments, particularly with respect to tax due on out-of-state purchases by businesses, currently use this method.  State sales taxes are, unfortunately, often applied to business inputs.

[H.Akston]

A tax is a 5th Amendment taking that requires "just compensation".

We should strive for a "user pays" world. Buyers, not sellers, are users. This is therefore not just an interesting idea, but a "just" one.

[kevkrom]

why do you think the blackmarket for cigarettes is greated that the blackmarket for candybars?

Because the taxes on the two items are unequal. If the taxes were equal on both items, then you'd probably see blackmarkets for both proportional to their respective legal sales.

Thanks for making the argument in favor of a single-rate system.

[Your Nightmare]

But again you contradict yourself. You say that the NRST would dramatically increase evasion, but then you turn around and say that the states, whose own bottom line would be severely impacted by any kind of "off the books" transaction or fake business expense, wouldn't re-assess the need for enforcement? Make up your mind -- either the evasion won't be as bad as you're saying, or the states are going to have incentive to increase their enforcement efforts. You can't have it both ways.

That's really what I meant by a slight increase in incentive. But doing some searches, I'm not sure the states are putting any money into enforcing "business use purchases for personal use" evasion. I couldn't find a single incidence of a state enforcing this rule (maybe you can find one). They probably have realized they get a greater ROI by going after businesses that don't remit sales taxes they've collect.

[Your Nightmare]

Because the taxes on the two items are unequal. If the taxes were equal on both items, then you'd probably see blackmarkets for both proportional to their respective legal sales.

So if we raised the sales tax on candy bars there would be an increase in the candy bar blackmarket.

Thanks for making the argument in favor of a single-rate system.

Thanks for making the argument that a high sales tax leads to larger black markets.

[Your Nightmare]

Under the FairTax, however, only retailers (about 14 million-tax filers altogether) would be in a position to cheat

This just isn't true. Any business would be in a position to cheat.

I do freelance work on the side and have to make purchases for this business. I personally would have the opportunity to cheat and I'm not a retailer.

[Protagoras]

Hard to imagine a politician saying any proposal is not worthy of consideration during an election year.

[kevkrom]

Your point? You're bringing up another non-sequiteur.

Enforcement priorities are proportional to amount and severity of evasion. Right now, I'd agree that states probably aren't enforcing asset conversion very heavily. This would be for two reasons, 1) as you mentioned, the return for the effort invested is low, but more importantly 2) the IRS does make this type of activity a priority, because it is a commonly-used evasion trick. The state can always swoop down on the corpse once the IRS is done with it.

With an NRST, however, both of those points are moot. If there is a higher incentive to cheat, there will be a higher incentive to catch the cheaters. Also, without the IRS, the states are going to have to take on more responsibility themselves.

Personally, I'd keep a close eye on any sole proprietorships that are created right around the time the NRST is enacted -- they're probably the most likely place to witness this sort of evasion. Bust a few people and make a public display of it (pour encourager les autres), and the appeal of evasion should go away enough to keep cheating down to manageable levels.

[kevkrom]

Thanks for making the argument that a high sales tax leads to larger black markets.

Have I ever pretended otherwise? Sales/excise taxes for revenue are self-limiting precisely because they encourage evasion at higher rates. The only point I've made about evasion is that it is very unlikely to be worse than what we see under the income tax system.

[ancient_geezer]

We should strive for a "user pays" world. Buyers, not sellers, are users.

Buyers pay the HR25 NRST, the seller merely collects the tax and is compensated to do so under the system.

From Thomas Hobbes, 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.

 

H.R.25

Fair Tax Act of 2003 (Introduced in House)
http://thomas.loc.gov/cgi-bin/query/z?c108:H.R.25:

---

 

SEC. 101. IMPOSITION OF SALES TAX.

`(a) IN GENERAL- There is hereby imposed a tax on the use or consumption in the United States of taxable property or services.

*** snip ***

`(d) Liability for Tax-

`(1) IN GENERAL- The person using or consuming taxable property or services in the United States is liable for the tax imposed by this section, except as provided in paragraph (2) of this subsection.

`(2) EXCEPTION WHERE TAX PAID TO SELLER- A person using or consuming a taxable property or service in the United States is not liable for the tax imposed by this section if the person pays the tax to a person selling the taxable property or service and receives from such person a purchaser's receipt within the meaning of section 510.

---

 

[phil_will1]

"Just what types of consumer products do you think will be sold in mass on the black market - houses, cars, groceries, furniture?"

"Sure. Whatever can be evaded, will be to some degree."

I'll take your answer to mean yes to all of the above. Apparently, you believe a black market in real estate will develop. As if you will be able to buy real estate with no audit trail and no means of enforcement. And you think that you will be able to buy NEW autos (which are, after all, the only ones would be taxable) on the corner, right? And other black marketers will be setting up kiosks out in the shopping center parking lots to sell groceries?

Even for you, this represents a stretch in logic that is incredible. You apparently completely missed the point that the overwhelming proportion of retail sales occurs at the level of the mass retailers, whose risk/reward ration wouldn't make collusion when it comes to this evasion smart.

Are you sure you don't want to change your position?

[phil_will1]

"The only point I've made about evasion is that it is very unlikely to be worse than what we see under the income tax system."

That's the point that Lewis Lynn/balrog666/YourNightmare et al keeps missing.

Will there be a different set of compliance and enforcement issues than we see now under the current system? Absolutely.

Will these issues be more difficult to address than under the current system? Of course not.

Is compliance likely to be higher or lower under the FairTax than the current system? Higher.

Case closed.

[ancient_geezer]

I do freelance work on the side and have to make purchases for this business. I personally would have the opportunity to cheat and I'm not a retailer.

Seeing that in order to make purchases tax free you must be a certified business, you can be certain that as a small business ( known to be the primary group prone to evasion and tax cheating) you stand in a position to be more closely monitored. Purchases by businesses are tracked in any enforcible retail sales tax system.

So go ahead if you figure the risk in your "on the side" freelance purchases are worth a possible prosecution for wrongful conversion of assets. It's your patriotic duty ;O)

Federalist #21:

"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."

***

"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."

[Your Nightmare]

The only point I've made about evasion is that it is very unlikely to be worse than what we see under the income tax system.

The main problem with that is that income tax evasion is factored into our rates. The FairTax rate assumes no increase in evasion/avoidance even though the base and rate charged are much larger (increased opportunity and incentive).

[kevkrom]

The main problem with that is that income tax evasion is factored into our rates. The FairTax rate assumes no increase in evasion/avoidance even though the base and rate charged are much larger (increased opportunity and incentive).

Evasion is priced into the FairTax rates. It assumes similar evasion to the income tax. If you want to argue that evasion will be higher under the NRST, that's your prerogative (I think you'll have a hard time making that case), but please don't try to insinuate that evasion is not factored into the NRST rates.

[Your Nightmare]

Apparently, you believe a black market in real estate will develop.

This is probably the least likely of your list (I figured that was bait). But still possible. A person could save $60,000 in sales taxes on a $200,000 home. Get a shady developer, pay him $5,000 to say you bought the home as a rental. The state only makes $150 on the $60,000 tax bill (my state doesn't tax home purchases) so what do they care.

And you think that you will be able to buy NEW autos (which are, after all, the only ones would be taxable) on the corner, right?

Autos are difficult, but not impossible.

And other black marketers will be setting up kiosks out in the shopping center parking lots to sell groceries?

I don't know about where you live but we have vegetable stands and people selling produce off of trucks all over here. Most of them don't pay any sales tax currently and, again, there is little incentive for the states to do more than cursory collection efforts.

You apparently completely missed the point that the overwhelming proportion of retail sales occurs at the level of the mass retailers, whose risk/reward ration wouldn't make collusion when it comes to this evasion smart.

Yes. But I don't doubt that there would be more people buying from smaller businesses with "remarkably low prices" than there is today. People shop on the internet now just to save 5-8% state sales tax, add 30% on top of that. Of course you picked the most unlikely products for evasion. There are a lot of things that would be very easy to evade taxes on.

Are you sure you don't want to change your position?

Why. I strongly believe the FairTax supporters are grossly underestimating the evasion/avoidance problem such a high rate sales tax will bring. Especially with the state's low incentive to go after evaders of NRST only taxes.

[Your Nightmare]

I specifically said that the rate assumes no increase in evasion or avoidance. If you know otherwise, show me.

I said this because I know it is a matter of contention (at least in my mind) if the rate assumes any evasion or avoidance in it. I, frankly, haven't been show conclusively that it does.

Evasion is priced into the FairTax rates. It assumes similar evasion to the income tax.

How do you figure that?

If you want to argue that evasion will be higher under the NRST, that's your prerogative (I think you'll have a hard time making that case),

Why? It seems pretty obvious that if you increase the sales tax rate you increase the incentive to avoid sales taxes. This is so basic I don't think I need to make any case at all. I think you need to make the case that evasion wouldn't increase.