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?"
Outsourcing isn't part of the labor supply. Labor supply is domestic labor. Particularly in the model I was commenting on, the "Rest of the World" is completely separate from labor. Saying labor supply, in economic terms, includes foreign labor is the "ridiculous, unfounded assertion.""Do you think that a study that has the labor supply increasing 30% in one year should be thought of as accurate?"As previously posted, with outsourcing, the labor supply is not a limiting factor.
Ohelix, watch this exchange and tell me that YN isn't disengenuous. Also, you credited him for making a mistake earlier on this thread and then admitting it. Want to bet that he sticks with his ridiculous unfounded assertion that "outsourcing isn't part of the labor supply"?
When you ask him for a link to the proposal that he favors, he insultingly says there are many studies out there on the generic tax forms that he favors.All the studies I've seen of a NRST are generic.
He criticizes the economic studies which have been done on the FairTax, but offers none in support of his preferred alternative.I've also ask you where I can get any study of the FairTax. I've never seen one.
140 million = # of individuals plus businesses? 20 million = # of large business retail outlets plus small corporations (one storefront) plus Subchapter S one-man businesses?
You realize that the Subchapter S businesses will grow dramatically?
Very well said Badray.....
I agree in entirety. The Fair Tax is the only proposal which severs the right of the government to confiscate private property in the form of paycheck withholding and / or lien and levy of personalty and realty. It unshackles this and future generations and would allow us to leave a legacy of increased liberty to our children. You have correctly observed that WE owe that to the previous generations who fought and died to preserve liberty.
The concept of which you speak is known in economic circles as "opportunity cost." It is far more difficult to quantify and project than nominal dollar costs. The opportunity cost associated with losing dollars today to FICA and Medicare taxation (a full 15.3%, not the 7.65% gobbermint would have you believe) is significant. Whereas you can take a stab at projecting the nest egg you could build if you had those dollars to work with, it does require some assumptions specific to the individual. Sounds as if Biker is a good manager and that the dollars would definitely be better in his hands that the gobbermints gruby mitts. I would use the most favorable assumptions in his instance.
It is far more difficult, but potentially far more important, to estimate the opportunity cost associated with inhospitable business environment created by the US tax code, but it is something that should be considered. (Title 26 of the US Code, available at: http://www.gpoaccess.gov/uscode/index.html Just looked up that web address....find that they are only current through year 2000. This will do you little good with respect to our tax law. I confess I usually use a commercial database to do my research.)
Economists far more degreed and pedigreed than I am have estimated that we would see approximately a 13% growth in GDP as a result of the removal of the Title 26 millstone and the concurrent imposition of a sales tax. That's the ball to watch.....investments would perform quite well in that environment and IMHO would far offset any nominal dollar tax that was later imposed when the proceeds of the investment accounts were spent.
Badray, you speak so highly of me that you set me up for the fall..../blushing/....I am not worthy of your high praise, but I thank you for the kind words nonetheless.
1) What rate will they start at?
2) Who is to stop them from raising each year?
So, You sooner or later end up at today's rates and NONE of the deductions!
Flat tax is a shell game as far as I am concerned.
If I am self-employed, I send the government the entire 12.4%. Under the NRST, I keep the 12.4% and can give myself a 6.2% raise? (The 6.2% deducted from each paycheck would be returned, plus the company contribution of 6.2% is returned to the company to do with at it sees fit?)
Now, how does this work if I am employed by a major corporation? Do I get the entire 12.4%?
"You realize that the Subchapter S businesses will grow dramatically?"
Subchapter S is named after the section of the Internal Revenue Code that establishes them. When the Internal Revenue Code is repealed, there won't be any such thing as a Subchapter S corporation.
I thought I read that total U.S. payroll is around $25 trillion? If so, then the federal government can live on 10% across the board, no exceptions, no deductions, everyone pays (you earn $1000/yr., pony up $100.), constitutional amendment to that effect.
"Subchapter S is named after the section of the Internal Revenue Code that establishes them. When the Internal Revenue Code is repealed, there won't be any such thing as a Subchapter S corporation."
Irrespective of the above answer, which is technically correct, the larger point is that there is an opportunity for fraud and abuse with respect to personal consumption items being channeled through companies as tax exempt purchases. This is something that will have to be monitored. It is certainly fair to say that a sales tax will present a different set of compliance challenges than an income tax has.
However, it is not at all accurate to say that compliance will be more difficult than with the current system. When you consider just the fact that illegals will be paying taxes at a disproportionate rate to the rest of us, that will go a long way toward improving the overall allocation of the burden. A recent study by Bear Stearns indicated that the underground economy, expecially illegal immigrants, may be twice as much as previous estimates.
The designation "Subchapter S" may go away, but the function doesn't. These one-man "corporations" will increase dramatically to get the tax-exempt status.
(Send an auditor to prove that I didn't purchase 3000 gallons of gas last year for business purposes -- thereby saving around $2000 in taxes.)
"....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.
Maybe I'm dense, but why wouldn't his gross wage fall? Why would his falling gross wage be a bad thing?
Whether as an employee or as an independent contractor, the lower cost of making deliveries to the retailer will help lower prices, right? Am I missing something?..."
I've not read the entire portion of this thread, so forgive me if I state the obvious, but I think I see the fallacy here........
Taxes which are truly incident on the delivery man ARE NOT embedded in the price of the good or service. The fallacy here is the notion that a tax can be incident on two individuals / entities simultaneously. In gross total, entity level taxation can be borne by more than one entity, but the total of the tax cannot be multiplied in the process.
If the delivery man bears the incidence of the employer portion of FICA, it can't be also embedded in the price of the good. If the delivery man bears any incidence of the corporate tax, that portion which he bears as a lower wage is not embedded in the price of the good. If the investors in the corporation bear the incidence of the corporate tax, it can't also be embedded in the price of the good.
Estimates in price reductions based on the idea that consumers bear 100% of the incidence are misguided. I think it's far more accurate to speak in terms of 'total purchasing power' remaining unchanged as a result of improved Return on Investment, price reductions and increased wages.
Some goods, like bread which cannot be imported and the demand for same is relatively inelastic, probably bear the full incidence. Other goods, which can be imported and there are ready substitutions in the market and or demand for same is elastic, probably bear little of the ultimate incidence of the corporate tax. Looking at a total market basket of goods purchased by the average American, and making blanket statements about price reductions is a difficult task. The reality is that NO ONE can accurately say where the ultimate incidence of the tax reposes until we look at changes in prices after the FairTax is enacted. What we can say with certainty is that the FairTax is calculated to be revenue neutral in year one, and that means that in gross total, we should be in roughly the same position we were in before the Fair Tax was enacted.
What am I missing here?
For a discussion of the shifting sands of the incidence of the corporate tax, please see ftp://ftp.iret.org/pub/BLTN-88.PDF
If I am self-employed, I send the government the entire 12.4%. Under the NRST, I keep the 12.4% and can give myself a 6.2% raise? (The 6.2% deducted from each paycheck would be returned, plus the company contribution of 6.2% is returned to the company to do with at it sees fit?)No, not unless you renegotiate with your boss (and I wouldn't be surprised if labor unions do this). The general consensus on the incidence (who really "pays" for it, not who sends in the check) of the employer portion of the payroll tax is that workers pay for it through lower wages. Remove the payroll tax and you would expect to see upward pressure on wages.
Now, how does this work if I am employed by a major corporation? Do I get the entire 12.4%?
If you are self-employed, then you would receive the benefit of the Self-Employment tax being eliminated asa well as your income tax. The only way that would not be the case is if your clients refused to keep paying you the same rate.
Wow, I know you might not take it for much coming from me, but great post. You've put it clearer than I have been able to (and I've been trying).
"I'm still waiting for someone to give me a reasonable explanation of how prices can stay the same with the 30% sales tax while we are taking home what use to be withheld from our paychecks and getting $500 a month from the government. They don't call it the FairytaleTax for nothing."
How about the matching contributions made by our employers, yet not reflected anywhere on a paycheck. Add to that the reduction in compliance cost throughout an entire supply chain and intuitively a reduction would occur in the cost to produce a product or provide a service.
"Flat tax or VAT."
Please explain to me the advantages of a VAT over the NRST, or for that matter over the current boondogle we have today? If you truly support a VAT, then your motivations are clear to anyone with any understanding of economics. If this was an error, then disregard that statement.
Why do you prefer to keep the cost of government hidden?
What prevents both a sales tax and income tax today?
"Then you thought wrong. Economically, a credit-invoice VAT is no different than a NRST."
Except that one is clearly visible to every citizen and the other is hidden.
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