Top 10 Secrets of a National Retail Sales Tax1. The 23% sales tax rate turns 35%. A retailer who sells an item for $100 must charge his customer an additional $30 for federal sales tax. Most people familiar with state sales tax call this a 30% tax, since the tax is 30% of the seller's price. The NRST folks call this a 23% tax, since $30 is 23% of the final price ($130 including tax), which they call the 'tax-inclusive' rate. Neither way is technically incorrect, it is just important to understand what is really being discussed. Remember this 30% tax-exclusive rate is only the federal portion of the tax, state sales tax will also be added in. Currently, 47 states have sales tax ranging from 3% to 7%, with the most common rate being 5%. The NRST taxes services and food, so the tax base is roughly doubled and the state rate could be cut in half, or about 2.5% to obtain the same revenue. Next, the 42 states that collect an income tax leveraging off the IRS reporting must now convert this to a sales tax. This will add on average another 2.5% to the sales tax rate. Thus on average, the tax-exclusive rate that you will see at the cash register on all goods and services will be 35%.
2. 35% goes higher. One amazing fact when the NRST calculates their rate is that they assume 100% compliance. The current income tax system has about a 15% non-compliance rate. Conservatively, we could assume that the sales tax will have a similar compliance rate which will force the rate over 40%. And this is a very conservative assumption, see secret #5. Brookings Institute economist Bill Gale (National Tax Journal, September 1999) calculated that about a 50 percent sales tax would be required to be revenue neutral, more then double the 23 the NRST folks claim.
3. Hidden Taxes still exist. While the NRST does eliminate some of the 'hidden taxes' that resulted from federal payroll taxes and excise taxes, it does not eliminate the 'hidden taxes' that state and local governments imposes such as hotel taxes, cigarette taxes, gasoline taxes, property taxes, etc. So the NRST claim that there are no hidden taxes isn't true.
4. Millions must file. The NRST supporters would have you believe that only retailers need to file under the Sales Tax. That simply is not true. In order to offer the 'low' 23% rate, the NRST must tax services too. 'In 1993, 12,778,000 taxpayers filed individual returns with business income or losses, and another 1,919,000 filed farm returns. In addition, in 1992 the IRS received returns for 17,292,286 non-farm sole proprietorship businesses, 1,484,752 partnerships, and 3,868,004 corporations-all of which probably produced goods or services on which the sales tax would be levied. Thus the supposed simplicity of the sales tax turns out to be a mirage.' (Brookings Institution Policy Brief #31-March 1998) Thus over 35 million filers will still be subjected to reporting and audits, most of these are individuals. This doesn't even consider the 100 million of people who will still have their wages reported to the SSA. Also, all households must register every year with the 'sales tax administering authority' in order to receive your monthly tax rebate. Hardly the zero tax filings for individuals as the NRST supporters claim.
5. Tax Evasion will skyrocket. 20 countries have tried a national sales tax, and 20 have switched to a value-added tax. These countries have gone on record and have flat out stated a retail tax of more then 12% is unworkable. People will avoid it, especially with the internet which makes it very easy for the common citizen to purchase goods from foreign sources. The fact that businesses to business sales are not taxed, makes it very tempting to buy personal stuff under a business name. It will take a mighty powerful and intrusive taxing authority to audit all business expensive to make sure. The sales tax rates we are talking about have never been successfully implemented in the history of the world, but it hasn't been for a lack of trying. 6. Big Government gets Bigger. In the 20 countries where the national sales tax has been implemented, and in each case replaced by necessity by a Value-Added Tax, the amount of federal taxes quickly grew from about 20% of GDP, as currently in the US, to 40% and above of their GDP. Not a promising precedent.
7. Underground Economy still not taxed. The NRST advocates falsely claim that the underground economy now will be taxed. Nothing could be further then the truth. Sure, when the money re-enters the legal economy the money is taxed, but that is true today. But will the drug dealers and prostitutes remit sales tax for their goods and services under the NRST? Absolutely not, this portion of the economy is still invisible to the tax collector and therefore not taxed. According to Bruce Bartlett, 'thus whatever revenue is gained when drug dealers spend their ill-gotten gains will be lost because no tax was collected on their drug sales.' (Bruce R. Bartlett, senior fellow, National Center for Policy, Analysis, November 5, 1997)
8. Lower and Middle Income pay more. Steven Sheffrin of UC Davis in a 1996 CPS brief says that a revue-neutral consumption tax even with a generous personal exemption shifts the tax burden to the lower to middle income households. A 1992 Congressional Budget Office study of consumption based tax concluded the consumption tax would decrease the tax on the wealthiest 20% by five percent, while hitting all other groups with a higher tax burden. The poorest quintile being hit the hardest with a 20% increase in tax and the 20-40% income quintile being hit with 9.3% increase in their effective tax rate. This is because the poorest spend a much higher percentage of their income each year and in many cases are even forced to borrow to keep up with their expenses. These numbers are much worst today as the federal tax liability for the bottom 20% has been greatly reduced through expansion of the earned income tax credit.
9. Elderly assets are unfairly burdened. The elderly, who have already worked and saved under the income tax system, will now be faced with paying additional high consumption taxes. This group of especially hard hit people, will not have the opportunity to earn tax-free wages, so all their already taxed wealth will be taxed again when they spend it.
10. Marriage Penalty Still Exists. The proponents of NRST boldly state there is no marriage penalty under the NRST. Looking at their rebate scheme establishes this as untrue. A typical family of four qualifies for an annual rebate of $5088 under the current NRST proposal. If this same family of four divorced, they would qualify for two annual rebates of $3790 each, or $7580. This $2492 marriage penalty is larger then the marriage penalty under the current code for this typical family.
I put this together simply because every time you try to debate the NRST worshipers you are called names such as commie, NAZI, IRS-lover, liar, and disrupter. So let the name-calling began. I don't accept many of the outlandish claims made by the NRST 'experts'. This utopia promised by the NRST faithful is no different then the disasters promised by the fear-mongering global warmers. It's all based on unrealistic assumptions and faulty computer modeling.
I would hope that none of the NRST posters on this forum are part of the $20 million effort to sell the public on the national retail sales tax. If they are, they have a long way to go. So far the public isn't buying. A recent FoxNews poll shows by a 2 to -1 margin, the public favors a flat tax against a national sales tax, and a Harris poll showed 57% oppose a national sales tax. At least the NRST followers have a lot of work on 'educating' people.
Top 10 Secrets of a National Retail Sales Tax Debunked1. The 23% sales tax rate turns 35%.
The example is fallacious. The cost of the item under today's tax code is $100 -- but that does not imply that the cost will remain the same under a sales tax. The average business will save appx. 30% on taxes and complaince costs -- if only 20% savings is passed onto customers, the cost (including federal sales tax) of the item becomes $104, not $130. (At a 30% passed-to-consumer savings, the cost turns into $91.) The reason this is true is that current products have such a high hidden tax built into them. The NRST just makes the tax visible.
2. 35% goes higher.
No tax plan can assume 100% compliance -- I see an assertion that the NRST does assume this, but I have yet to see anyone post evidence proving that assertion. In fact just the opposite is true as the NRST tax rate is determined from NIPA consumption data, from which transactions related to tax evasion is missing. Tax evaders do not report either their income no sales to the government for tracking, same is true of illegal sales, and underground cash transactions generally. As a consequence the tax rate computed for the NRST on the basis of NIPA (23%) actually more than compensates for evasion and underground economy activity arising not only from avoiding the income/payroll tax system but from all other reasons as well.
3. Hidden Taxes still exist.
NRST makes its claim only in regards to the federal tax system, you want to change state taxes you will have to deal with that level directly.
The NRST is a federal program -- local taxes are a local program -- the federal program (rightly) does not require the states to change their own tax policies.
4. Millions must file. The NRST supporters would have you believe that only retailers need to file under the Sales Tax. That simply is not true.
Of course it taxes retail services to, it does not however tax services provided to businesses (non-retail) purchased (i.e. outsourced) in the conduct of business.
Retail trade is not goods only, it encompasses all consumption trade including services to final consumers.
Wage reporting for SS benefits will be done by employers -- this is nowhere near as intrusive as the current system.
All retailers must file, but wholesalers do not. Brooking's numbers are way off in that regard. I would like to see the wage reporting go away, but that will require a major overhaul of the SSA (let's cross one chasm at a time, eh?). The rebate filing is as simple as voter registration, hardly a burden.
5. Tax Evasion will skyrocket. 20 countries have tried a national sales tax, and 20 have switched to a value-added tax.
Not because of any National Retail Sales Taxes, they have switched to a value added tax because it is a requirement of European Union membership. In fact the first VAT was created by France as a consequence of problems of cascading of their original business turnover taxes that casaded multiplying throughout their economy and burdening their production to a standstill.
The Creation and implementation of VATs in Europe had nothing to do with RETAIL taxes at all.
6. Big Government gets Bigger. .
There is no Country in which a National Retail Sales Tax has been implimented.
The reason that VAT countrys expand their taxes with virtual impunity is that VATS are inherently invisible to the electorate. The burden imposed by government is blamed on business.
As a consequence government grows without bound.
7. Underground Economy still not taxed.
LOL, whenever any one spends their income, however aquired, in a legitimate business, they will pay the NRST or not receive the goods or services. The tax is collected by the seller from the purchaser of legitamate goods under the NRST.
AFFT does not claim there can be no underground economy, only that it will be no greater than it is today, as the marginal tax rates of the federal income/payroll tax system that creates such a large incentive to cheat will fall to 23% decreasing the profitability of evasion. Since the enforcement effort of an NRST is more focused, retail businesses only vs all businesses & individuals the potential for discovery is much higher and risks greater for cheating.
8. Lower and Middle Income pay more.
After the rebate, "low" income families pay nothing
A family of four, for example, could spend $24,980 per year free of tax because they will have received over the course of the year a demogrant totaling $5,745. $5,745 is the amount of sales tax paid on $24,980 in expenditures. That family spending double the "poverty level" or $49,960per year will effectively pay tax on only half of their spending and, therefore, have an effective tax rate of 11 ½ percent or half the FairTax rate.
The beauty of the FairTax is that you can control how much you pay in taxes. If you happen to save, invest or spend a portion on used [previously taxed] items, you can get your effective tax rate below 9%.
To illustrate examine the tax burden that a family of four will have at various annual expenditure levels as compared to that same family under the current system:
H.R.25 "The FairTax Act
Not only does every family receive a FCA based on family size, not income, but they will also receive 100% of their paycheck:
9. Elderly assets are unfairly burdened.
See #1 -- the effective cost of goods and services will be roughly the same. The elderly are already paying hidden taxes on these services.
10. Marriage Penalty Still Exists.
How often does a divorced couple split up and each have one of two children? Two adults living together have the same rebate combined as two adults living apart. That is what the "marriage penalty" refers to. There is no marriage penalty under the FairTax as both adults receive precisely the same benefit and pay precisely the same tax as regards their consumption.