National Retail Sales Tax - You gotta be kidding!

GOPNATION.COM ^ | January 31, 2005 | Steve Pudlo

[groanup]

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.

Thanks for the post. Revenue neutral means revenue still has to come from somewhere. In theory, AFT says the revenue will come from sales taxes on items who's gross prices will decline due to the disappearance of imbedded taxes. I think we are beginning to see that the only possible source of this is corporate taxes and I think we can debate who actually pays those taxes. I'm going back through the AFT website.

[Your Nightmare]

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.

You assume the employer's portion of payroll taxes has caused prices to go up by an equal amount, you can't make that assumption (see post #1133). But even if they were, you are only talking about ~$300 billion, which is a very small percentage of retail prices.

[CSM]

"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."

Except the law of exponentiality (sp?) proves that to be wrong.

[Your Nightmare]

Except that one is clearly visible to every citizen and the other is hidden.

You are mistaken. A credit-invoice VAT is not hidden. It would appear to a customer just like a NRST, the pretax price and the tax collected would be the same. Only the collection method is different.

Example:

	Price	20% VAT	Gross Payment	VAT Credit	Net Tax Paid (Tax - Credit)
Raw Materials	$10	$2	$12	$ 0	$2
Manufacturer	$ 35	$7	$42	$2	$5
Wholesaler	$55	$11	$66	$7	$4
Distributor	$70	$14	$84	$11	$3
Retailer	$100	$20	$120	$14	$6
TOTAL TAX PAID					$ 20

$20 tax charged on a $100 item sold at retail, just like a 20% NRST.

[OHelix]

Except that one is clearly visible to every citizen and the other is hidden.

Not necessarily. There are many types of VAT implementations, and the one YN seems to favor would be just as visible as a NRST. If we were to do a VAT, I would prefer the credit invoice type YN favors. However, I think the FairTax is cheaper in terms of compliance and enforcement, and less intrusive, and does, at least a little bit, move power out of DC and puts it into the state and the people.

[CSM]

What your post describes is actually a reduction in costs of the goods. If the cost is reduced, then either the profit margin is increased or the price is decreased (profit remains constant). Generally, in free, competitive markets the price will fall to gain market share. I can imagine some monopolistic industries where the prices would not fall, but most business is subject to competition that will force prices down.

[CSM]

"It would appear to a customer just like a NRST,"

Please definie "customer". Are you actually stating that the average citizen will see the portion of the price that accounted for the taxation? I'm doubtful that will occur.

[CSM]

OK, I took another look at your table and it is a bit clearer to me now. As you present the scenario in that table, what is the difference between the VAT you support and the NRST? The only difference I see is the added comlexity in your VAT. The retail customer still pays the cost of the tax.

Why do you support adding complexity?

[CSM]

"That would be the result. We can tax imports and get the same result without an NRST.

Either way the consumer loses, but you get your result."

Except by only adding a tarrif, you are talking about additional taxes vs. the NRST which is revenue nuetral. Under the current system the taxes are hidden, under the NRST the taxes are in plain view and the base is larger.

[CSM]

The disparity between the cost of a product from China, India, or any LCC (Low Cost Country) is driven by all the elements you site, however the portion of the disparity attributable to labor is very small and often offset by logistics costs, many times the dunnage alone offsets the labor cost. The regulation (includes taxation) is the largest and by addressing this the US good could become total cost competitive very quickly.

[groanup]

What your post describes is actually a reduction in costs of the goods.

Actually the question is how can that reduction in the costs of goods be caused by elimination of income taxes? I'm beginning to believe that prices will not fall much when embedded income taxes are removed from the pipeline of goods and services.

Which leaves me reading tea leaves again. If prices don't fall the immediate effect will be a 30% increase in prices of every thing except used goods. First year there will be a huge tendency to buy used goods over and above the first 15-20 thousand of the pre-bate. A sudden sharp decrease in consumer spending could be temporarily disastrous. Also, it would create a huge deficit at treasury. Of course, all of this can be dealt with by phase in or other means.

I still think the long term benefits of a NRST outweigh the negatives.

[Conservative Goddess]

Thanks. Most people want the cliff-notes version of what happens to taxes paid at the entity level. VERY FEW PEOPLE have the inclination to fully understand the "shifting sands" of incidence. And what is true today with respect to the ultimate incidence of a tax is NOT NECESSARILY true tomorrow.

Analogizing to shifting sands is therefore appropriate and helpful to most.

The ball to watch here is the TOTAL purchasing power of individuals and their ability to obtain the same basket of goods that they are able to obtain today.

[Conservative Goddess]

"...I think we are beginning to see that the only possible source of this is corporate taxes and I think we can debate who actually pays those taxes...."


I think that is an accurate statement of the issue. I find the explanations from the Institute for the Research of the Economics of Taxation (www.iret.org ) to be quite helpful.

When the FairTax was written, I think it was probably accurate to say that the full value of corporate taxation is passed on to consumers. With the "Wal-Mart" effect keeping a lid on prices everywhere, the ultimate incidence of the corporate tax may be falling on the working stiff, which I believe is the conclusion reached by Steven Entin of IRET.

In any event, wherever the ultimate incidence falls, we'll be infinately better off once Title 26 is repealed and the FairTax is enacted.

My best to all....Goddess (allow me my fantasy!)

[Conservative Goddess]

"...I'm beginning to believe that prices will not fall much when embedded income taxes are removed from the pipeline of goods and services...."

That is probably correct, HOWEVER, once the cost of entity level taxation is removed, THE BENEFIT MUST ACCRUE TO SOMEONE....inversely to the group that now bears the true or ultimate incidence of the corporate tax.

Again, the ball to watch here is TOTAL PURCHASING POWER.

If prices drop a little, wages increase a little and your investments perform a bit better, you'll likely be able to purchase the same basket of goods based on the combined effect of the changes. Whereas that is a more accurate statement of the net effect, MOST, in fact very few will probably take the time or have the inclination to understand how the incidence of taxation is really allocated. I'm not so sure that it is worth spending the time to explain at this level of detail. The diehards still posting to this thread are up to the challenge.

[CSM]

You really have 3 areas that are eliminated.
1) Personal withholding (matched by employer)
2) Corporate compliance cost
3) Corporate income tax

By eliminating the withholding, your take home pay increases. By eliminating employer matching either your pay increases or the employer's cost decreases. By eliminating compliance costs, the cost decreases. By eliminating corporate income tax, cost decreases.

I suspect you might have forgotten the 3rd element. Either way, the decrease in cost can either be used to increase profits or to decrease price. Given a free, competitive market, the price will fall.

The actual percentage of cost reduction can be debated and has been debated. However, it is clear that a cost reduction will occur.

[robertpaulsen]

To me, removing a tax from U.S. made products and applying it to imports is not my idea of the best way to level the playing field. I think it hurts consumers to benefit local manufacturing.

Remove government taxes. Remove regulations. Institute tort reform. Encourage non-union shops.

Do it right.

[Your Nightmare]

OK, I took another look at your table and it is a bit clearer to me now. As you present the scenario in that table, what is the difference between the VAT you support and the NRST? The only difference I see is the added comlexity in your VAT. The retail customer still pays the cost of the tax.

The added complexity is not as much as many think. We are talking about basic cash flow accounting that any business would do in it's normal course of business. In the end it's a simple as:

VAT invoiced - VAT credits = VAT remitted

It removes the most complex accounting elements of the current system; like depreciation and foreign-sourced income. Both of these are extremely complex and are not part of the normal accounting of a business, thus the compliance costs.

Another issue that isn't brought up much is that a VAT is more "neutral" than a NRST. A tax is neutral when it does not distort the allocation of resources. By taxing retail businesses and not other businesses a NRST, the government creates a bias (however large or small) toward non-retail businesses. This bias causes a misallocation of resources and creates a drag on the economy (again, however large or small).

But the main issue is enforcement. There is no doubt that a VAT is easier to enforce than a NRST. By distributing the collection point throughout the production chain you greatly reduce the opportunity and incentive to evade taxation. And if someone does evade, they have paid the VAT on their inputs so the amount of lost revenue to the government would be greatly reduce.

Some may ask "do we want a tax that is easy to enforce?" Of course we do. Evasion means a higher rate is required to generate the same revenue. A higher rate creates more of a distortion in honest people's decisions about how to best allocate their resources therefore creating more of a drag on the economy.

In the end, I am convinced that if we see anything resembling a NRST in this country, it will be an credit-invoice VAT. It's less of a risk than the NRST with virtually all of the benefits. And when it comes to making drastic changes to our system of taxation, I think our representatives will want to minimize the risk as much as possible. If they screw this up things could get real bad, real quick and a lot of people in DC would have to answer for their decisions.

[OHelix]

The elimination of witholdings from wages (PERSONAL income taxes and SS tax) will not reduce product costs provided the gross wage stays the same. However, CORPORATE income tax, and Payroll taxes (the employer' matching payment of SS tax) would reduce the cost.

For any given company, the total amount of tax paid under the old system, divided by the total amount of reciepts, is the rate at which reduced taxes (Corporate & Payroll) would allow said company to lower their prices and still keep everything else the same.

HOWEVER, because all the busniesses that compose that companies non-wage expenses would experience similarly, there would be a cascading effect that would also reduce his other costs. In your example earlier, I demonstrated that presuming your 15% margin company whose payroll was half of his costs, represented the average busniess, it's savings in taxation (including cascading savings from it's suppliers) would experience a savings of nearly 17%. It was a hypothetical example, but demonstrates the effect of cascading taxes under the current system, and how cascading the discount into the other costs, your predicted 9.75% was increased to nearly 17%.

If the national average of tax savings, including cascading cost benefits from tax and compliance costs eliminations, are less than 23%, then the argument that prices would have to rise are valid. If they are 23% or above, then the argument is incorrect... I think. :o)

Keep in mind there would be no sales tax to offset the direct reduction in cost until it was at the retail level. So there is no reason whatsoever to claim non-retail prices could not fall. The issue is if the sum of all reductions throughout the entire production tree, would allow for 23% price reduction at the Retail level.

There is currently an estimated 60% non-compliance with the current tax code, which presumably would be argely remedied, especially in the case of foreign visitors(legal and illeagal). So there is room for the broadening of the tax base to compensate for what might look like a misallocation of SS & income tax to the wage earner's buying power. I think the broadening of the tax base should at least partly compensate. Further, the price of imports will go up, and presumably yield marketshare to American made products, allowing their price to come down.

[CSM]

"To me, removing a tax from U.S. made products and applying it to imports is not my idea of the best way to level the playing field. I think it hurts consumers to benefit local manufacturing."

I think you are approaching it from the wrong angle. As the situation exists today, the tax burden is placed on US companies, not on foriegn companies. What this proposal would do is equally burden the products or services by both the US company and the foriegn company, therefore removing artificial efficiencies.

[robertpaulsen]

"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."

I think that's going to be offset by the taxes you will be paying where you never paid them before. Services, for example. Your lawyer, accountant, plumber, barber, the kid who cuts your lawn, and, the biggie, healthcare.

I predict that very soon after the NRST is implementd, we'll switch to a cashless society. We'll have to. The fraud in the service industry will be outrageous. Also, bartering will make a comeback with that 30% incentive (Fix my sink and I'll write your Will for you -- Uncle Sam loses twice).

And the NRST will, of couse, have to increase to compensate.