Posted on 01/31/2005 7:12:16 AM PST by bmweezer
For quite some time now there has been an organization pushing for a National Retail Sales Tax (NRST) to replace the current income tax in the US of A. The proponents thereof call it a "fair tax", and even have a web site www.fairtax.org. These folks claim that the current income tax structure is a crumbling mess, and that the NRST, a "voluntary" tax is the most equitable solution. For what it's worth, I agree wholeheartedly upon the first premise, but disagree vehemently on the second.
The NRST would be no more voluntary that the current system. What are you gonna do? Buy something and tell the cashier not to add the federal tax? Or not buy anything? (multiply that by every taxpayer and imagine the effect on the economy). And if you believe the proponents claim that they can put enough safeguards in place to make their system painless and equitable, then I have a bridge in New York that you can buy cheap.
The NRST would, by definition be a highly regressive system that would hurt the middle class far more than the wealthy, and if it ain't complicated enough in the planning stage, just wait a few years. Tax accountants wouldn't' be in any real jeopardy under the NRST, they would just have to learn a few new rules. Since the nature of any government program is to increase in complexity, watch for tax changes to increase this or decrease that, then try to factor in the cost of compliance with all this going on - guess who's gonna pay?
The premise that spending is a taxable activity is silly on the face of it. I remember my ex-wife complaining after I spent my last dime on a badly needed item "If you have $50 for that, then I can spend $50 on what I want". The proponents seem to believe that if I have 500 to spend on a badly needed washing machine, that I can also pony up another 40% or so for their agenda. This is ludicrous and insulting to the intelligence of the voting public. Just because I have 500 dollars, doesn't mean that I have 700. Just like my ex refused to believe that if I had 50 dollars for one item that I couldn't magically conjure up another 50 dollars for her. Fifty dollars is fifty dollars. It isn't an indication, hint, or promise that there's a matching fifty dollars lying around for everybody else's ideal. And under the NRST proposal, if I don't have the 700, then I can't buy the 500 washing machine. So since I don't have the 700 bucks, I don't buy the appliance. The seller doesn't make the sale, the manufacturer doesn't' get to make another one to replace it on the shelf, the deliverer doesn't get to deliver it. Everybody loses.
But wait! The NRST proponents cheerfully remind me that "large purchases" such as major appliances and automobiles would be exempt from the NRST. Ah! The first major complication. What is and what is not covered. So maybe a set of dishes would be covered. Would we care to look into what this little statement would mean? In a very few years we will inevitably see merchandise gerrymandering as to what would be taxable and what wouldn't. And someone would have to keep track of all this. I remember in Connecticut where a 75-cent milkshake was taxed six cents for a nickel's worth of malt, but the same sized milk was untaxed. Food was taxed but only if it cost one dollar or more. Clothing was taxed unless it was for a child under ten years of age. One customer buying a jacket had to pay the tax, but another didn't have to because of the age of the child. Can you keep track of this? Multiply this by the political agendas of congresscritters all over the country,. And you can see what I mean by merchandise gerrymandering.
Quite simply, it would mean that the increasing tax burden would be spread to more items of lesser value, therefore having a greater impact upon the final purchase price. So the government would have to get more from less. So the "Fair tax" might end up making that $40 set of dishes cost $80 or more. So what would be the result? Fewer people buy dishes. People who make and sell dishes would do less business, and therefore they would be hurt. The customer would be hurt by the loss of the use of the new dishes, the whole economy would take such a hit that it would take years, if not decades to recover. Discretionary purchasing could evaporate overnight.
Would there be exemptions for lower income people so that each person pays a tax burden more in line with their ability to pay? Would certain people be able to carry a tax avoidance card to not have to pay taxes due to their economic status? How would you protect the poor - who also need to buy things like dishes every now and again?
Let's look at this another way. Perhaps a person like me must spend 80 to 90 percent of their income on living expenses. Much of that would be subject to the NRST. So more of my money, as a percentage of income, would be taxed. Now let us look at someone like Bill Gates, or Ted Kennedy. Since they have vast incomes compared to me, they can afford to shelter more of their income into other areas. If the NRST is the major tax vehicle, then they would only be taxed upon the much smaller percentage of their incomes that they spend on living expenses. Because they can afford to sock away lots more money than I do, that money would not be taxed as it isn't "spent"! Yes, I know that Gates and Kennedy spend more than I do, but as a percentage of their total income, it is less. So the NRST favors the rich at the expense of the middle class!
But the NRST folks won't tell you that. In fact, they'll flatly deny it hoping that you don't notice the vast amounts of income that the very rich sock away into investments, etc. that wouldn't be taxed (unless they want yet another complication in their system), and focus our attention upon their SUV's. The net gain for the rich would have to be made up for by the rest of us - resulting in a higher tax rate for the middle class and for the poor. The poor subsidizing the rich - reverse Robin Hood!
Let's go back now to the concept that people spend a predictable portion of their income. Every person has basic needs - food, housing, clothing, etc. that must be met. These needs are similar for everyone across the income spectrum. To the extent that these items will be subject to the NRST, everybody pays the same flat fee. If your income is above the minimum, then you can spend a little more, which would be taxable, and perhaps sock a little away. That would not be taxable, apparently, so you gain an incentive not to spend, not to buy. That amounts to putting a damper on the economy in the area of discretional spending. Maybe I don't need those new dishes after all. Multiplied by the number of people who would be affected by the NRST, you have a serious downturn in the economy, resulting in loss of jobs, wages, resulting in severe economic hardships for just about all of the middle class. Of course, the rich wouldn't be affected as much.
So let's look again. The more you make, the less a percentage of your income you need to meet your basic needs. That means that you don't have to spend so much of your money to live. You can shelter more from the government, an option not available to the lower income brackets who often lead hand-to-mouth existences. They'd be the ones hit the hardest. This is the definition of regressive taxation. The social consequences are considerable, and beyond what I am prepared to discuss at this point, but there are historical precedents that are not good.
But wouldn't you benefit from an immediate pay raise by the amount you would normally pay in income taxes? Certainly, and I would welcome that. However, since the entire tax burden on the whole country would remain constant (which means ever-increasing), and since the rich would be paying less overall taxes (the richest 5% pay 85% of income taxes, or something like that), that loss of governmental income would have to be made up by people like me, so logically, there cannot be anything but a net loss for me - I'd end up subsidizing the likes of Kennedy and Gates!
And let us not forget that complication in that some things would be taxed while others would not be taxed. This would be a boon to the politicians - in that they can reap huge amounts of revenue simply by adding an item to the "Taxable" column, it would have a huge negative impact upon those who would be doing the collecting. Oh yeah - remember those? That burden would fall upon business owners and establishments that sell taxable items to the public. The reasoning of the NRST crowd seems to be that if they can collect income taxes for the state, they can collect for the feds. No prob. What they overlook is the increased cost to these businesses, many of them barely breaking even, to collect the deferral taxes. Not only must they follow the whims of state politicians, but they would have to attune themselves to the federal politicians as well! They'd have to absorb the costs of the paperwork required, increased bookkeeping, reprogramming computers, etc.. But you and I know full well that these costs would have to be passed on to us customers. So again, we will pay more for less. OR at least the middle class will. And presumably the poor - unless the poor become exempt, in which a whole new level of beauracracy would be needed - and we know who will have to pay those costs!
Let me give you an example. Support toothpaste isn't taxable. Then some politician figures out that the taxes on a three dollar tube of toothpaste can pay for the next congressional pay raise. It's only a buck or so, so the average guy won't get too upset, but that dollar turns into more than one dollar when you factor in the costs of reprogramming grocery store computers all over the country to reflect that this item is now taxable. So the price increase is closer to a buck fifty. Then some other politician wants to be reelected, so he proposes eliminating the tax on laundry detergent. Here we go again. That one - dollar price decrease translates into a mere 50 cents by the time compliance expense is factored in.
And nowhere would there be any addressing the real problem of federal taxation - the spending glut. The feds are simply spending too much money. The more they get, the more they spend, the government simply cannot exercise any fiscal restraint. The federal government has never had a revenue problem they've always had a spending problem. They spend too much. Where would be the incentive for them to spend less if we give them new pockets to pick?
The solution to the tax problem isn't a misnomer - a "fair tax" in name only, it will have to be a system in which everybody bears a share of the burden commensurate to their ability to pay, not their need to spend. It has been said that if everybody had to pay a fair share of the total tax burden, that people would demand reduced federal spending. THAT is the solution to the problem. Or at least, create a viable environment for the kind of fiscal triage that has been sore lacking in all levels of government.
First of all, I would propose to classify all monies coming into an individual as income. Investments, capital gains, interest, wages, compensation - anything coming IN will be classified as income. All incoming monies are income, all income is treated the same. That income would be taxed at a flat percentage, and that percentage would be the same for everybody. If Ted Kennedy pays the same percentage of income that I do, he still pays a lot more, whether he spends more than I do or not. If someone who makes less than I do has to pay the same percentage, they pay less, more fitting to their abilities.
Nothing would affect people's ability to buy dishes, cars, or anything else because purchasing would be relatively independent of taxation. If you don't' tax it, you don't stand in the way of people who want it. You don't collapse the whole economy for the sake of a political agenda. Purchasing would be minimally affected.
If people don't want to pay their fair share (I would even tax welfare because everybody should be stakeholders), then they can get after their representatives to cut spending. I predict a huge groundswell, and things like beekeeper subsidies and research in to the sex lives of insects would be subject to a lot more scrutiny, and spending would go down. That solves the problem.
The "fair tax" is highly unfair. It hurts far more than the middle class. It only helps the rich - those with the highest proportion of discretionary income. The NRST cannot help but hurt the working classes, the welfare classes, small businesses, and the national economy. The proponents of the NRST dangle the tax deductions in your paycheck like a carrot before your eyes, so that you don't see the huge stick that you're gonna get whacked with if this goes through. I predict that if the NRST gets passed, that within two years there will be a depression that would be far worse and longer lasting than the "Great depression" of the 20's.
Oh! And finally - they claim that they will get rid of the IRS. Really? Who's gonna police the collectors to make sure they collect the right taxes from the right goods?
Can you say "we're being hoodwinked?"
"In the short term it seems to me that much of the impact will be felt rather harshly. In other words, the positive effects of the change will filter down over time, but the negative effects of the change will be felt immediately. Am I incorrect in this?"
Quite the contrary. The most extensive economic study was done by Dr. Dale Jorgenson, former chairman of Harvard University's economics dept. His economic model shows that GDP growth would be over 10% in the first year, declining slightly each year after that. That first year, consumption would show a net decline. That decline, however, would consist of a significant decrease in the consumption of imports, partially offset by an increase in the consumption of US produced goods. The big increase in economic growth is primarily a function of two factors:
1. Price shifts which would make US produced goods more competitive in our own market, as well as foreign markets, and
2. enormous savings in unproductive compliance costs.
Consumption growth after year 1 would be faster than under a continuation of the current system because of faster economic growth. Total consumption would catch up to where it would have been under a continuation of the current system by about year 4, would be higher from that point forward and would be much more heavily skewed toward the consumption of US produced goods.
You've heard of the EU right? VAT hasn't exactly been a good thing there....Says who?
No offense but I thought that no one with half a brain would want a VAT.....Then you thought wrong. Economically, a credit-invoice VAT is no different than a NRST. And because it loses less revenue to evasion, can be implemented with a lower rate, increasing the economic benefits.
Is it that you believe that there are no embedded taxes or that you don't believe in the free market/competition (in terms of the price reduction)Any "embedded taxes" in prices is nowhere near 20-30% of prices unless you include the employee's payroll and income taxes.
The US of A would become the largest tax haven in the worldA little known fact about the FairTax, foreign corporations pay the tax on "gross income from sources within the United States." So it's a corporate income tax for foreign corporations doing business in the US.
"You honestly take these economists predictions seriously? How long have you been following the accuracy of their statements?"
Any forecast, economic or otherwise, has to be taken with a grain of salt. However, when the forecaster has credibility and the forecast seems to hang together logically, it is worthy of consideration IMHO.
The alternative, it seems to me, is to reject the President's call for a more "pro-growth" tax system. After all, if no forecasts can be relied upon, how does one know in advance that any proposal is "pro-growth"? I happen to agree with him that this is something that we need to address. We as a nation made this mess of a tax system and we as a nation can fix it.
I doubt that any forecast is going to be accurate to the tenth of a percent. That is why I expressed GDP growth as "above 10%". However, there is no doubt in my mind that the FairTax would unleash the real potential of this economy in a way that will surprise most Americans. I will leave it to others more learned in economics than I to quantify that development.
"Nobody has the political will to unsheath the blade. The farmer is going to die."
“I discussed the importance of abolishing the income tax because of its tendency to form a habit of servility in the souls of a people that accept it. Servility of soul is bad not only in itself, it is also an open door through which will soon walk the abuses of ambitious government power. Leaders who find themselves with governmental power over a servile people will be quick to conclude that such a people exist to serve them.”
Alan Keyes “The Power of the Purse”, WorldNet Daily, August 27,1999
"If people are saving, they aren't spending. If spending drops, a recession can follow."
Does it really have to be all or nothing? Can Americans save only or consume only and not have a mixture? A recession when we make US produced goods much more competitive in an increasingly global economy is pretty far-fetched to me. That is what I meant, in part, when someone asked me if I really believed the FairTax's economic forecast. It makes sense that we could invigorate our economy by taxing consumption, which is really the only was to stop this insane disadvantage that we place on US producers.
"Correct me if I'm wrong, but imports will not be reduced by 30%."
Correct. The bias in our current system in favor of foreign producers will be eliminated.
"Services (like healthcare, a $3 trillion market) will now be taxed."
Correct. Services will be taxed as they are now. The FairTax will not introduce a bias in favor of services over the production of goods.
"Those who are working will have 30% larger paychecks to pay for these increases -- but my savings are now reduced by 30% to pay for this."
Incorrect. To the extent that your savings are invested in equities of US companies, your savings will increase substantially in value.
"What else did I miss?"
Quite a bit, apparently.
It's even worse than that.
"Yes, the politician says 5%. But when you look at your receipt, your $100. purchase ($80. plus $20 NRST) is now $101. ($80. plus $21 NRST).
To the consumer, this looks like a 1% increase, not 5%. Very easy to "hide" a large tax increase.
(In a $13 trillion economy, that 5% increase just generated $650 billion in additional government revenue.)"
"It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, 'in political arithmetic, two and two do not always make four.' If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them."
Alexander Hamilton in Federalist #21
I think that he jumped without thinking that his argument would be so blatantly wrong and conceded when everyone called him on it. His first reaction was to jump, not to think.
You may be right, but when someone loses credibility with me, it's takes a lot for me to ever trust them again. I will keep him and everything that he says at arm's length until he shows me something worth trusting.
You've heard of the EU right? VAT hasn't exactly been a good thing there....
Says who?
I never seen that pic of all the animals with a pancake on their heads, it's great :)
I was bracing for a little ridicule when I asked. :o)
"Why do these threads degenerate into a 30% vs 23% argument? Can't we discuss the relative merits or downside of this proposal?"
That isn't an accident, Scaleman. The guardians of the status quo LOVE to avoid more substantive discussion, for obvious reasons.
How a Value Added Tax Would Harm the U.S. EconomyThis one is a joke. Did you read it? The basic argument is that countries with a VAT have a higher level of taxation. So? There was no cause and effect established.
Australia - Cash economy continues to growThe problems with Australia's GST and the black market are a warning for both the VAT and the NRST. Does this story sound familiar?
When the Prime Minister and the Treasurer were making the case for the introduction of the GST in the lead up to the 1998 federal election, and during the period up to July 2000, it was claimed, amongst other things, that the GST would wipe out the cash economy. They argued that the GST would increase the tax base and revenue raised would be used to fund the growing demand for public goods and services. Many experts at the time doubted the Government’s claims as there was no empirical evidence anywhere in the world that the introduction of a GST or VAT had achieved any such outcome. In countries where similar attempts were made to reform the tax system the outcomes have been less than favourable.
The chickens have now come home to roost. The Government’s claim has been shown for the illusion that it always was. The recent study by Christopher Bajada of the University of Technology in Sydney has shown quite conclusively that the black economy is significant and growing. According to the study, the black economy is estimated to be up to 15% of GDP. Based on the 2002/03 federal budget that was presented by the Treasurer in May this year, GDP is approximately $740 billion. That means that the extent of the black economy is as high as $110 billion.
Tax distortions, household production and black-market workMore black market stuff?
THE NATURE OF THE UNDERGROUND ECONOMY. SOME EVIDENCE FROM OECD COUNTRIESEven more black market stuff! How exactly do you expect the NRST to avoid this same problem? In fact, it would be worse with a NRST. If this is your only complaint against a VAT you have a pretty weak argument.
Who Pays The VAT ?This is just a incidence study of the VAT, not a study of how it effects the economy. I wouldn't expect the incidence of a VAT to be much different than a NRST so what's your point?
You can't/won't answer which part is the gross payment for fear of exposing the idiocy of your interpretation.
Find me two people who agree with your interpretation...
I don't need validation, I already know the meaning of the words.
Except that simply calling someone a liar doesn't make them wrong...I'll concede to being wrong when I've been proven wrong..not just accused of it, you moron.
"Dr. Jorgenson has calculated rates for both a flat tax and a VAT. But the IGEM model he uses is flawed so what do I care what he has to say?"
Oh, ok. So who did the rate calculation for the proposal that you support?
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