National Retail Sales Tax - You gotta be kidding!

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?

"what is your agenda? your real motivation? you get fired up, rabid against the fair tax but give no clear reasons why

you have made it clear that you hate the fair tax but don't say why....what are you not saying?"

That question keeps popping up on all the tax reform threads. YN steadfastly refuses to answer, sometimes giving a flippant "I've looked all around my place and haven't found any agendas" answer. It is very obvious that his motives aren't what he claims.

Even more black market stuff!

So far your only substantive argument for a VAT is it theoretical enforceability, actual experience with real VAT implementations show the fallacy of such arguments, in fact according to those studies the degree of complexity and red tape that induces the entrepreneur and small business to evade and go to cash underground is of at least equal if not greater importance the rate of the VAT.

As far as the US is concerned you entirely over look the fact that there is no infra-structure in place to support a VAT which would necessitate the cost of creating the infra-structure with a new Federal level of enforcement over and above the current state systems, as well as the overhead and administrative costs imposed on intermediate level business that are not present with an NRST.

All in all, the VAT not only does not meet the expectations of enforceability you claim for it (it actually increases black market activity even at low(<10%) rates when replacing single stage sales taxes) in real practice, it imposes unnecessary economic and regulatory burdens on business creating high entry barriers for small businesses and drives established one out of the market.

A VAT, by clear experience in the EU and around the world, demonstrates the proclivity of central governments to lay ever heavier burdens on business in the form of complex regulatory and exclusionary rules via the VAT actually exacerbating and evolving into tax systems worse than the tangled mess of the US corporate income tax.

The clear evidence of the VAT operating in reality demonstrates the best place for it is in academia and think tanks not in the real world affecting real economies and real people.

see 1073...

I do not believe that adding a tax at every stage of production is a good idea. A tax every single time "value" is added to an item.....yikes.
A VAT would be the least efficient consumption tax and it would create more opportunities to evade. If you are looking to create more bureaucrats, each specializing in a particular level of production taxation, then it would seem that a VAT is the way to go. More layers for the government...just what we don't need IMO.

I would agree that VAT (the credit invoice variety) compliance is easier to AUDIT, but that does not necessarily equate to easier to enforce. VAT enforcement would have vastly more entities to enforce than the FairTax making a cheater less likely to be audited, would of necessity be handled by a federal IRS type agency, would have to monitor every transaction made at every level of production, rather than just the retail point of sale, would still give the federal government justification to demand to know every entity's income and expenses, and would burden industry with a greater cost of compliance than the FairTax.

Provided the VAT plan had all of the other features of the FairTax (such as the rebate), I can't think of much where it would differ from the FairTax.

Can you suggest any advantages/disadvantages I have not thought of? I'm very interested in this since it seems odd to me that you seem so opposed to the FairTax, yet have expressed favor for a VAT.

I don't see a single advantage for the VAT except for the ability to cross reference one entity's audit, with everyone that that entity has done business with... which brings to my mind images of tax audits moving from company to company like a computer virus spreads from pc to pc. This would surely result in the cost of audits being imposed upon entities simply because they did business with someone else who is being audited.

I'll concede to being wrong when I've been proven wrong

You're welcome to provide a link. Regardless, by my observation, you've consistently proven yourself to be either unbelievably obtuse or intentionally disruptive, and I presume you are an intelligent person. If I am wrong concerning your intelligence, then please accept my sincere apology for the harshness of this post.

Provided the VAT plan had all of the other features of the FairTax (such as the rebate), I can't think of much where it would differ from the FairTax.

Other than the overhead, administrative, and regulatory costs a VAT imposes on businesses at all levels and the cost of implementing an infra-structure capable of enforcing a credit voucher system that does not exist in the US today.

Refer:

A Value-Added Tax Contrasted
With a National Sales Tax
Cogressional Service Issue Brief #IB92069
Updated September 30, 2004

I don't see a single advantage for the VAT except for the ability to cross reference one entity's audit, with everyone that that entity has done business with... which brings to my mind images of tax audits moving from company to company like a computer virus spreads from pc to pc. This would surely result in the cost of audits being imposed upon entities simply because they did business with someone else who is being audited.

According to the descriptions in the literature, while such systems are envisioned in theory, their existence and effectiveness fall far short of the theory, for the precise reason you cite(indiced often by reporting errors in the system as often as not, as well as inability of actually tracking the multitude of business transactions that actually occur.

Another problem is the red-tape drives the little guy out of the formal economy to the underground cash economy where there is no monitor possible, nor tax collected. The little guy just says stuff it and goes his own way operating out of home manufacture & service type businesses free of the VAT systems.

See the hyperlinked papers on blackmarket & homeproduction in #1073

I do not believe that adding a tax at every stage of production is a good idea. A tax every single time "value" is added to an item.....yikes.

Yes, and add up all the "value added's" and what do you get? The retail price. The VAT's base is exactly the same as a NRST.

A VAT would be the least efficient consumption tax and it would create more opportunities to evade.

I don't beleive you are correct on this point.

If you are looking to create more bureaucrats, each specializing in a particular level of production taxation, then it would seem that a VAT is the way to go.

A VAT could probably be collected with fewer people that the FairTax due to the fact it would have one collection agency instead of 50.

Another problem is the red-tape drives the little guy out of the formal economy to the underground cash economy where there is no monitor possible, nor tax collected. The little guy just says stuff it and goes his own way operating out of home manufacture & service type businesses free of the VAT systems.

And he's paying the VAT on all his costs. Another business wouldn't want to deal with him because they wouldn't get the credits on their inputs. With a NRST this guy could be totally lost to the system. This is a good example of why a VAT is more effective than a NRST. Thanks, AG.

Can you suggest any advantages/disadvantages I have not thought of?

More on the secondary effects of VAT related red-tape in many areas of the EU that are not mentioned in the glowing reports selling the advantages of a VAT:

Underdevelopment Trap
Carillo & Pugno
University of Trento
Economics Department
January 2002

socialismisinsidious asked:

what is your agenda? your real motivation? you get fired up, rabid against the fair tax but give no clear reasons why

you have made it clear that you hate the fair tax but don't say why....what are you not saying?

____________________________________

Basically, IMO, it a bad plan being sold with lies and half-truths. There are much better plans.

1,035 Your Nightmare

That question keeps popping up on all the tax reform threads.
YN steadfastly refuses to answer, sometimes giving a flippant "I've looked all around my place and haven't found any agendas" answer. It is very obvious that his motives aren't what he claims.
1,081 Phil

Your Nightmare wrote:

I have answered it many time.

Do you really want to get into a di$cu$$ion of people'$ motivation$?

Commenting that "it's a bad plan"
is not an answer, its just another generalized evasion.

If you get into details of what makes it "bad" no one would have to "get into a di$cu$$ion of people'$ motivation$", would they?

Let's think about one of YN's posts where an economist suggested that wages would have to fall in order for prices to fall with the FT. Imbedded taxes include the taxes paid by a deliveryman who delivers to Wal-Mart. His imbedded taxes could have no effect on the system unless his wage falls. Do we all agree? I can see no way that removing his embedded taxes will allow prices to fall unless his wage falls.

The goods he is delivering are next. How will the removal of embedded taxes on those items allow prices to fall? Does my above example prove that the removal of individual income taxes does nothing to help prices fall without a corresponding decrease in wages? Help me out here. I am moving toward the conclusion that the removal of imbedded individual income taxes would do nothing to lower the price of goods and services without lowering wages of the producers of those goods and services.

So I am coming to the conclusion that the only effect would be the removal of corporate income taxes which is currently 35% of the net profit of profitable corporations. Is this the only benefit we can assume from the FT upon price levels?

I'm beginning to agree with the economist YN cited. I know it is heresy. I still think the FT would be better than the current fiasco but what would really be the net effect on price levels?

With a NRST this guy could be totally lost to the system.

Hate to tell you but under the VAT red tape there are more of them and they don't deal with businesses. They operate out of home and are generally barter, service and home manufacture/grown produce oriented.

OTOH, under the NRST the small guy can sell his services and home production to businesses without tax ramifications or redtape. That provides legal avenues to avoid the tax system at the production level, which is what is intended, and brings production to retail market nevertheless assuring a higher compliance rate for the NRST.

Under the NRST with less red tape, there are fewer blackmarket folks, and when they purchase that which they cannot manufacture, they pay the same NRST as everyone.

All the VAT does is ensure there are more folks treated like criminals and everyone pays a higher price for the costs induced by the high regulatory environment that all legal businesses must operate under with a VAT.

So I am coming to the conclusion that the only effect would be the removal of corporate income taxes which is currently 35% of the net profit of profitable corporations. Is this the only benefit we can assume from the FT upon price levels?

No, because there is more in the mix that the corporate income tax per-se. The overhead costs associated with the tax system remain whether or not a particular business pays one penny of corporate income tax, as well the employer's SS/Medicare excise taxes on payrolls paid are repealed releasing those taxes and costs associated with them. Along with the removal of those costs are the economic effects impeding business sales(reduced demand) as a consequence of having to cover tax related costs in product pricing.

All taken together accounts for a substantial differential in producer pricing of goods and services when income and payroll taxes are repealed.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.