Posted on 12/01/2004 8:25:22 AM PST by Tumbleweed_Connection
...President Bush and House Speaker Dennis Hastert (search) have both said the idea of a national sales tax deserves a serious look. For many, the idea of a world without the Internal Revenue Service is very seductive.
"We spend about $400 billion a year complying with the tax code. We spend $200 billion a year just filling out IRS paperwork," said Rep. John Linder (search) , R-Ga., who has proposed a bill that would create a national sales tax.
Proponents have spent millions on research and have concluded that a national sales tax can replace the income tax, payroll tax, estate tax and corporate tax. Advocates say the new tax would lower the cost of manufacturing and job creation and attract foreign investments, among other things.
"If we were to get rid of the sales or the income tax and the payroll tax and all compliance costs, we would be so ferociously competitive in a world economy that corporate America would not be competed with unless foreign corporations started building their plants in America," Linder said.
Proponents seek a 23-cent national sales tax on all retail goods, everything from groceries to clothes, cars to electronics. Everyone would pay the same rate, which critics argue is part of the problem.
"If you consume $40,000 a year and you make $50,000 a year, would you feel it is fair if a guy who made a half a million dollars a year but spent $40,000 a year paid the same tax you do? I think you wouldn't feel it's fair," said Buck Chapoton, former assistant treasury secretary.
(Excerpt) Read more at foxnews.com ...
Zon: With an income tax at 23%, for each $100,000 income earned $23,000 is income tax. Earn $100,000 then send $23,000 to the government. With the NRST at 23%, for each $100,000 spent on new retail items $23,000 is the national retail sales tax. Spend $100,000 and $23,000 of that is sent to the federal government.220
Uh huh and that's $77,000 worth of product + 29.87% tax.
It's the same under the income tax, $77,000 worth of products plus 29.87% is the $100,000. income needed to buy the products.
Under both tax schemes the percent of income tax paid on the $100,000 is 23%.
Example: Bob's income is $100,00. Under the income tax Bob has $77,000 left after paying a 23% income tax. He buys a $77,000 car. All other state income tax and state sales tax are irrelevant and to bring them into the picture would only serve to obfuscate The Point.
Because the Fair Tax strips embedded taxes out of the supply chain in the amount of roughly 23% the car would cost $59,290. In order to pay for the car Bob needs to use $77,000 of his $100,000 income to pay for the car and NRST -- 23% of the $77,000 is NRST.
Bob has a new car plus $23,000 in his pocket.
vs.
Just the car under the income tax
That's The Point.
One more thing. Because the Fair Tax eliminates the IRS, Bob doesn't have to worry about this...
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"Warning: These IRS Abuse Reports start mildly and slowly. After a while, these reports build into such a crescendo of sickening horror, criminal destructiveness, and unbearable evil that a sedative may be required to read them all:" |
Granted, raw materials may not be taxed, but brooms, paper, toilet paper, desks, chairs, pens, grease, wrenches, etc. suddenly became 30% more expensive.297
I don't believe that these purchases would be taxed under the Fair Tax since they do not meet the definition of retail sales used in the legislation.303
You're right. They won't be subject to the NRST.
Not a VAT - a TRUE Flat Tax- Look up dick Armey's words on this subject
That depends on the rate. A 10% flat tax would benefit everyone.
But of course that would force the gov't to, gasp, cut spending. ......drastically.
Tax Incidence, Tax Burden, and Tax Shifting Who Really Pays the Tax
In short, taxes on capital reduce the wages of labor; taxes on labor reduce the rates of return on capital (at least in the short run, until the capital stock shrinks); taxes on certain types of labor reduce the wages of other types of labor; taxes on certain types of capital reduce the returns on other types of capital. The repercussions of a tax on one factor of production on the income of other factors, or of a tax on one sector of the economy on other sectors, are "general equilibrium" effects. They occur outside of the immediate market for the factor or product being taxed and represent impacts that go beyond the initial economic incidence of the tax. Such effects are part of the ultimate economic burden of the tax and represent some of the shifting of the tax burden from the taxed factors or products to other factors and sectors.
***snip***
In this analysis, part of the fixed quantity of U.S. capital relocates abroad, and domestic labor suffers a loss in income and therefore bears the entire coporate tax, plus a dead weight loss. One could go two steps further in refining the analysis, however.
First, one could note the effect of the shift of U.S. capital abroad on foreign labor and world capital returns while retaining the idea of a fixed total world capital stock. This would put some of the burden of the corporate tax back on U.S. capital. If the United States were a very small economy, the shift in U.S. assets abroad would have little impact on global rates of return, and the Harberger result for the U.S. would follow. Given the size of the U.S. economy, however, there would be some effects abroad. The tax on domestic U.S. corporations would drive some investment offshore, but that investment would have to compete harder for available foreign labor. Initially, the foreign capital–labor ratio would rise, increasing returns to foreign labor but reducing returns to foreign capital, consisting of the expatriate U.S. capital and the pre-existing foreign capital. The misallocation of the fixed world capital would depress capital returns here and abroad. At least temporarily, all capital, U.S. and foreign, would suffer some loss of income due to the U.S. tax. Nonetheless, U.S. labor would bear most of the burden of the tax, which would exceed the tax revenue due to the added dead weight burden of the economic distortions.
Second, however, one really must relax the (still partial equilibrium) assumption of a fixed quantity of domestic and world capital. Capital formation has been shown to be sensitive to the after-tax return. Over time, there would be a reduction in the quantity of foreign-located capital (whether foreign- or U.S.-owned) to restore its normal after-tax return, reducing the gains to foreign workers. Foreign returns to capital would not decline significantly. The reduction in the quantity of U.S. capital would restore its original after-tax return as well. Capital would bear very little of the burden of the U.S. corporate income tax. In the long run, one should expect a general equilibrium result that the main losers would be U.S. workers.
***snip***
Of course, someone pays the corporate income tax even if the JCT cannot point out who it is. In fact, a modern view of the corporate tax in the context of an open, globally integrated economy holds that the burden of the corporate tax falls primarily on labor after all adjustments are taken into account.
***snip***
The tax biases against saving and investment and steeply graduated tax rates were introduced for the purpose of improving "social equity." In decades past, it was assumed that the added layers of tax on income used for capital formation would do relatively little economic damage, would inconvenience only the wealthy, and would provide significant income redistribution. It is becoming apparent, however, that most of the taxes that seem to fall on those who supply physical capital, intellectual capital, or special talents to the production process may actually be shifted to ordinary workers and lower-income retirees in the form of reduced pre-tax and after-tax incomes.
You can get more info at fairtax.org. Everyone would get a refund of the amount of tax paid for the basic necessities, so you would not be taxed on the total of your income, or even the total of what you spend.
YES!!!
Most of them would be exempt from paying any tax at all, after you take into consideration the refund checks they, and every citizen, would receive from the government equal to 23% of necessity spending.
Not a VAT
You want to explain the difference between a subtraction method VAT with a wage tax and the Armey proposal of a business tax with an individual wage tax, with SS/Medicare taxes still in the mix besides?
Armey's "Flat Tax" is based on the Hall/Rabushka flat tax, about the only substantive difference I can find between them is the Armey tax exempts more folks from participating in the individual side of the tax system making it more progressive.
Issue: What Is the Best Way to Collect a Value Added Tax?
A value-added tax (VAT) generally is a tax imposed and collected on the value added at every stage in the production and distribution process of a good or service. Although a VAT may be computed in any of several ways, the amount of value added generally can be thought of as the difference between the value of sales and purchases of a business. (e.g. Revenues - Costs = Taxable Business Income)
***
Subtraction-Method VAT. Under the subtraction method, value added is measured as the difference between a business's taxable sales and its purchases of taxable goods and services from other businesses. At the end of the reporting period, a rate of tax is applied to this difference in order to determine the tax liability. The subtraction method is similar to the credit-invoice method in that both methods measure value added by comparing sales to purchases that have borne the tax.
***
The subtraction method differs from the credit-invoice method principally in that the tax rate is applied to a net amount of value added (sales less purchases) rather than to gross sales with credits for tax on gross purchases. A business's tax liability under the credit-invoice method relies on the business's sales records and purchase invoices, while the tax liability under the subtraction method may rely on records that the taxpayer maintains for income tax or financial accounting purposes
now you see the proble with this 'tax inclusive' rate= it is very hard to understand.
If you tell people the tax rate is 23% they think that if they spend 100 they will ADD ON 23 cents. But it does not work that way.
You have to know the final price WITH the tax icluded to know what tax you paid. In the case of a 100 dollar item you will pay 130 total, or a 30% tax rate (the normal way)
23% 'tax inclusive' rate equals 30% the way you are normally used to thinking of sales tax.
So as long as Uncle Sam ensures that retail prices drop by 15-20% at the start of the NRST, the net effect would be that everyone will have a hell of a lot more money to spend every week.
This debate went on in the Gingrich days with Tauzin and some other Rep taking their case to the people. I like it and although "EVERYONE" will NEVER be PLEASED 100%, it is MUCH better than the Income Tax that we have today........not even close.
The part I like is that I have control over MY MONEY!!!!
If anyone reads this paper they will see that the conclusion is that labor bears the burden of the corporate income tax and that consumer's bear little, if any.
Hardly, while the example the paper proffered was predicated that way, the paper made it abundantly clear that no conclusion established on an assumption that price is totally unaffected by corporate taxation could be held valid.
| Tax Incidence, Tax Burden, and Tax Shifting Who Really Pays the Tax
Meanwhile, income taxes and other taxes on factors are assumed to be “passed backwards” to workers and owners of capital in the form of lower take-home pay and after-tax incomes from saving and investing. *** Snip *** The distribution of the corporate income tax is so uncertain that it is left out of most burden tables but is thought to be borne mainly by either shareholders (at least in the short run) or workers (in the long run, as capital adapts). These taxes are described as if workers, savers, and investors offered their labor and capital in totally inelastic supply, undiminished in quantity, when the tax cuts their compensation. It is assumed that they make no demand for an increase in compensation in response to the tax, so they swallow the entire burden of the income and other factor taxes that they pay. *** Snip *** In effect, the analysts pretend that producers can shift consumption taxes onto their customers but must absorb income taxes placed on their own earnings. Supply is infinitely elastic and infinitely inelastic at the same time. This is an inconsistent approach to tax shifting that is at odds with both economic theory and real-world experience. In addition, neither approach deals with any further adjustments that occur in the real world when taxes are imposed and resources are shifted in response from one use to another. |
Of course, any paper on tax incidence is pure speculation. Nobody knows for sure.
Obviously that is true for any study that does not attempt to establish the ecomomic parameters necessary to finding equilibrium pricing and tax incidence without an empircal basis behind its parameterization.
For the Bottomline for most studies remains as stated by CBO '98 paper in regards the corporate income tax, and can easily be seen applicable to the incidence of any tax paid by a business.
In the words of CBO's Incidence of the Corporate Income Tax,(1998):
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Golly, you found two lines in 31 pages that mentioned prices. Good job.
23% 'tax inclusive' rate equals 30% the way you are normally used to thinking of sales tax.
Barb has $130 income. She pays 23% of that in income tax, leaving her with $100 in her pocket. Barb buys four shirts at $25 each.
Under the Fair Tax Barb goes to the store with $130 in her pocket. She sees that the price of the same shirt is $19.25 because roughly 23% of hidden taxes that are embedded in the supply chain of making the shirt and brining it to market have been eliminated via the Fair Tax. Barb buys the same four shirts as above for a total cost of $100.
4 shirts X $19.25 = $77 plus $23 NRST = $100
Barb walks out of the store with four new shirts plus, has $30 dollars in her pocket. Thirty dollars she wouldn't of had if she bought the shirts under the income tax.
What is the real chance that this will come to pass in the near future?
You're quite welcome
Golly, you found two lines in 31 pages that mentioned prices. Good job.
Actually there are more than 40 lines in those 31 pages that mentioned prices.
Two, however, is all that it takes when those two lines invalidate any conclusion to be drawn from the studies that merely assumes price is not affected by a corporate tax rather than establish the necessary parameters by empirical study to resolve incidence.
The Corporate Income Tax
Initial Incidence of the Corporate Income Tax. No competent student of taxation believes that corporations pay the corporate income tax. Only people pay taxes. Things and abstractions do not pay taxes. A corporation is, in law, a legal person, but that is, in fact, a legal fiction. Therefore, corporations do not really pay the corporate income tax. Conservative Nobel Prize–winning economist Milton Friedman is well known for espousing that view, but liberal economists share it as well. The liberal Nobel economist Wassily Leontief told The New York Times 20 years ago:
Corporate income taxes fall ultimately on people. Economists have tried but have never succeeded in finding out how the weight of these taxes is ultimately distributed among income groups. There can be little doubt that elimination of corporate income taxes would simplify our tax system and limit its abuse.[35]
Ultimate Burden of the Corporate Income Tax. Tax analysts generally assume that the corporate income tax is borne, at least in the first instance, by shareholders. As the Treasury put it, because corporations are owned by shareholders, corporations have no taxpaying ability independent of their shareholders. Corporations pay taxes out of the incomes of their shareholders.[36] However, the analysis does not stop there.
Economists also recognize that corporate taxes, though initially coming out of shareholders' incomes, have further economic repercussions that shift part of the ultimate burden to others. As the Treasury report continues:
Importantly, the burden of the corporate income tax may not fall on shareholders. A corporate tax change could induce responses that would alter other forms of income as well. For example, some of the burden may be shifted to workers through lower wages, to consumers through higher prices, to owners of non-corporate capital through lower rates of return on their investments, or to landowners through lower rents. This shifting might not happen quickly, so the short-run incidence could well differ from the long-run incidence.[37]
(Note the Treasury's interchangeable use of the terms incidence and burden, for both the short-run own-market effect and the long-run general equilibrium outcome.)
In years past, the Congressional Budget Office has also suggested that the corporate tax falls about half on owners of capital and about half on the workforce, arguing that the tax depresses capital formation and therefore depresses productivity and wages, shifting at least some of the burden to labor.
More recently, the Treasury and the CBO have assumed that the corporate tax is borne by owners of all capital (corporate capital and competing non-corporate capital), and none by workers. Most economists believe that the burden of the corporate tax is borne to some extent by shareholders, workers, and consumers (who are often the same people in different roles), but they do not agree on the division of the burden. Because of the uncertainty in the profession, the JCT has stopped assigning it to anyone in the official burden tables. If the corporate income tax were raised and individual income taxes were cut by equal amounts, the burden tables would show a reduction in the tax on the population with no loss of federal revenue—an ultimate (and quite impossible) free lunch!
Of course, someone pays the corporate income tax even if the JCT cannot point out who it is. In fact, a modern view of the corporate tax in the context of an open, globally integrated economy holds that the burden of the corporate tax falls primarily on labor after all adjustments are taken into account.
Varying Views of the Corporate Tax. In 1962, Professor Arnold Harberger produced a seminal article on the incidence of the corporate income tax.[38] The article did more than analyze the corporate tax; it showed the importance of going beyond narrow partial equilibrium analysis in looking at the effects of taxation.
The early Harberger work suggested that the corporate tax was borne by the owners of all capital, not just corporate capital. Harberger assumed a closed economy with a fixed total capital stock. The capital could be allocated either to the corporate or to the non-corporate sectors, which were assumed to produce somewhat different goods and services.[39] If a corporate tax were imposed, raising the tax rate above that of the non-corporate sector, capital would migrate to the non-corporate sector. Gross returns would rise in the corporate sector and fall in the non-corporate sector to equalize after-tax yields between the sectors. Thus, a portion of the corporate tax would be shifted to non-corporate capital. There would also be an efficiency (dead weight) loss that would make the burden greater than the amount of the tax itself.
In later work, Professor Harberger changed his assumption that the economy is closed and concluded that the corporate tax is borne largely by domestic labor, at least in the case of a small open economy that has little impact on the world rate of return.
Putting a tax on the income from corporate capital would simply lead to adjustments whereby less capital would be at work in that country…. Where would the capital go? It would go abroad…. In realizing that the presence of the tax implies that significantly less capital will be combining with the same amount of total labor (in the small developing country), it should come as no surprise that the equilibrium wage has to be lower. But there is an additional and more critical reason (above and beyond simple capital labor-substitution) why labor's wage must fall: the need to compete with the ROW [rest of the world] in the production of manufactures (corporate tradables). The tax is a wedge that has been inserted into the pre-existing cost structure. The prices of corporate tradable products cannot go up because they are set in the world marketplace; the net-of-tax return to capital cannot go down (except transitorily), because capital will not be content to earn less here (in the small developing country) than abroad. Some element of cost has to be squeezed in order to fit the new tax wedge into a cost structure with a rigid product price at one end and a rigid net-of-tax rate of return to capital on the other. The only soft point in this cost structure is wages. If they do not yield, the country may simply stop producing corporate tradables. Or, if the country continues to produce such goods, then wages must have yielded—by just enough to absorb the extra taxes that have to be paid….[40]
Harberger goes on to point out that the United States is a large country, not a small one, so the exit of U.S. capital would somewhat depress the rate of return to capital in the world, which would somewhat mitigate the capital flight and reduce the share of the tax burden passed on to U.S. labor. Nonetheless, he estimates that U.S. labor would still have to bear seven-eighths of the corporate tax.[41] Harberger assumes an unchanged world capital stock, i.e., that the world stock of capital does not fall to restore after-tax returns to the levels they enjoyed before the imposition of the U.S. tax. If one instead adds the assumption that the world capital stock is elastic over time with respect to the rate of return, then even this modest offset to the impact of the U.S. corporate tax on U.S. labor would vanish.
Harberger reiterated his analysis in a recent interview in the IMF Survey conducted by Prakesh Loungani.[42]
Loungani: The effects of some economic policies are better understood thanks to your academic contributions. You did path-breaking work on whether capital or labor bears the burden of the corporate income tax.
Harberger: There are interesting developments to report on that front. In the closed-economy case that I analyzed in the 1960s, the natural result is that capital bears the burden of the tax and can easily bear more than the full burden. But my students and I have now analyzed the open-economy case, which is more applicable to today's global economy. The result in this case is that labor bears the burden and can easily bear more than the full burden.
Loungani: That's quite a flip. Why does it happen?
Harberger: Think of the so-called tradable goods sector of an open economy, the sector that produces goods that are traded on a world market. The prices of these goods are determined in the world market. And, with an open economy, the rate of return to capital is largely determined in the world market, because capital can flow from country to country in search of the highest return. Now the government gets in there and tries to impose a corporation income tax on capital. Well, who bears the burden? Capital can move across national boundaries to try to escape the tax. So it's labor, the factor of production that can't easily escape national boundaries, that ends up bearing the burden of the tax.
In this analysis, part of the fixed quantity of U.S. capital relocates abroad, and domestic labor suffers a loss in income and therefore bears the entire corporate tax, plus a dead weight loss. One could go two steps further in refining the analysis, however.
First, one could note the effect of the shift of U.S. capital abroad on foreign labor and world capital returns while retaining the idea of a fixed total world capital stock. This would put some of the burden of the corporate tax back on U.S. capital. If the United States were a very small economy, the shift in U.S. assets abroad would have little impact on global rates of return, and the Harberger result for the U.S. would follow. Given the size of the U.S. economy, however, there would be some effects abroad. The tax on domestic U.S. corporations would drive some investment offshore, but that investment would have to compete harder for available foreign labor. Initially, the foreign capital–labor ratio would rise, increasing returns to foreign labor but reducing returns to foreign capital, consisting of the expatriate U.S. capital and the pre-existing foreign capital. The misallocation of the fixed world capital would depress capital returns here and abroad. At least temporarily, all capital, U.S. and foreign, would suffer some loss of income due to the U.S. tax. Nonetheless, U.S. labor would bear most of the burden of the tax, which would exceed the tax revenue due to the added dead weight burden of the economic distortions.
Second, however, one really must relax the (still partial equilibrium) assumption of a fixed quantity of domestic and world capital. Capital formation has been shown to be sensitive to the after-tax return. Over time, there would be a reduction in the quantity of foreign-located capital (whether foreign- or U.S.-owned) to restore its normal after-tax return, reducing the gains to foreign workers. Foreign returns to capital would not decline significantly. The reduction in the quantity of U.S. capital would restore its original after-tax return as well. Capital would bear very little of the burden of the U.S. corporate income tax. In the long run, one should expect a general equilibrium result that the main losers would be U.S. workers.
Other analysts have a different view of the corporate income tax in an open, or partially open, economy. For example, Jane Gravelle and Kent Smetters construct a model in which the largest part of the corporate tax can be borne by domestic capital in spite of trade and capital flows, in effect restoring the old view of who bears the corporate tax.[43] They get this result by assuming imperfect substitution of domestic and foreign capital (people prefer the stocks and bonds of their home country governments and businesses) and imperfect substitution of domestic and foreign goods and services. They also assume a fixed total capital stock to abstract from the issue of the elasticity of saving.
In their four-sector model, they get the usual result of a corporate tax shifted mainly to domestic labor when substitution elasticities are very large: Capital moves abroad, equalizing the domestic and foreign after-tax rates of return. The capital flight depresses rates of return to foreign capital (exporting some of the tax) and raises foreign wages. Wages of domestic labor (the immobile factor) fall. But assuming lower elasticities, which the authors feel are more plausible, less capital shifts abroad (because it is assumed to be somewhat immobile too). People are willing to accept a drop in the after-tax return on capital to own domestic assets, and the tax can open a permanent differential between rates of return at home and abroad. As a result, the bulk of the corporate tax falls on domestic capital, less on domestic labor. Some capital is exported, which shifts some of the tax to foreign capital with some gains to foreign labor, but less than in the high-elasticity case.
There are several areas of concern with the Gravelle–Smetters approach:
- The assumption of a constant world capital stock is unrealistic, just as it is in the Harberger analysis, and simply throws out the bulk of the adjustment process. The quantity of capital has been seen to vary substantially to restore its after-tax rate of return to normal levels over time following a tax change. The lower worldwide return on capital post-tax would depress global capital accumulation and shift the tax back to labor.
- The assumption of a low substitutability of domestic and foreign capital appears to be at odds with observed international flows of financial and physical investment. Even if savers and investors on average display a home country preference, the capital markets act very open if even a few large savers are, at the margin, willing to move capital freely across borders. It may be that many people never buy foreign securities and many companies prefer to invest at home, reducing the average ratio of global to local assets in domestic portfolios. At the margin, however, there are many people, businesses, and institutions that freely arbitrage across borders. Multinational financial and non-financial corporations send funds and direct fixed investment all over the world. Consider that the outflow of U.S. capital has been averaging roughly $400 billion a year and foreign investment in the U.S. has been averaging over $500 billion a year for some years. The sum of the annual cross-border investment flows has been about $1 trillion—almost as large as total annual investment in the United States.
- In the cases where the corporate tax falls on domestic capital, the Gravelle–Smetters model implies that a tax increase can lower the after-tax rates of return on capital for a very long time and can lead to prolonged differences in the after-tax rates of return on domestic and foreign capital. This is disturbing on two grounds. First, in the modern world, returns on global assets of similar risk and quality do not display wide and permanent differentials. Second, taxation of capital has risen drastically over the past hundred years with the inventions of the corporate and personal national and sub-national income taxes, property taxes, and estate and inheritance taxes, yet there has been no correspondingly large change in the real, risk-adjusted after-tax yields on capital, either financial or physical. It appears that capital, by adjusting its quantity, is able to shift a large part of the taxes aimed at it onto other factors.
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