Posted on 01/31/2005 7:12:16 AM PST by bmweezer
You replied to the wrong person. But to address your point, what is wrong with the situation you describe? Doesn't that just prove that the cost of government is higher than society will accept? Doesn't it show the unfairness in today's system with half of society carrying a burden that all of society would deem unacceptable if they could plainly see it?
What better way can you propose to drive spending reductions?
$20 tax charged on a $100 item sold at retail, just like a 20% NRST.
Only in in your simplistic rendition divorced from reality, you assume no implementation nor overhead costs associated with the VAT which adds substantially to the burden over the costs of implemeting a single stage tax such as the NRST. If you assume total price remains constant in your calculation then you must also assume that wages, return on capital must fall in a VAT relative to an NRST and consequent lower revenues to government for loss of demand out of a decline in individual purchasing power.
OTOH, if you assume that the price of the product rises to compensate for the increased cost under the VAT, then you must compensate for reduction in demand for the product.
This is especially true where government's proclivity to monkey in the internals of a VAT to achieve social parity and other "good" things are taken into account which gives rise to all the problems that have been experienced in the VAT implementations of the EU, Australia and Canada.
Australia is especially an interesting study as their GST was a "revenue neutral" replacement of a single stage sales tax with a VAT, the consequences are readily apparent in their problems with rising underground cash economy
and inflation
as well as burdening the economy with such a higher tax burden that the Australian government tends to actually try to hide it's VAT impositions from the view of its electorate by taking it out of general revenue reports to understate revenue burden with respect to their GDP.
To encourage the Aussie government's growth and social spending. Seems more revenues to government tends to just increase a governments tendancy to grow even faster rather than look to reduce it burden on the nation's economy and the people.
Money machine indeed which historically ends in a moribund economy riddle with inflation and ultimately declining government revenues as the VAT's effects wind to its progressions the political shennanigans it fosters:
How a Value Added Tax Would Harm the U.S. Economy Sweden’s Welfare State A Paradise Lost Why do Europeans Work so Little?
It proves that the NRST will not work since it has no safeguards. Without safeguards, the rate will rise to compensate.
Payroll tax withholding is a good example of such a safeguard. Ask yourself if the federal government would collect the same amount if people payed their taxes like they do their mortgage.
Only in in your simplistic rendition divorced from reality, you assume no implementation nor overhead costs associated with the VAT which adds substantially to the burden over the costs of implemeting a single stage tax such as the NRST.You say it would add substantially, I don't agree. It would add some, but not substantially.If you are worried about it, pay the businesses 0.5% of what they remit for their compliance costs. That's what the FairTax would pay for collection and would more than cover any compliance costs.
"It proves that the NRST will not work since it has no safeguards. Without safeguards, the rate will rise to compensate."
What do you mean when you use the word "work"? In my opinion it would work just fine at forcing government reduction in spending and it would work just fine in educating people as to the cost of government and it would work just fine at proving that when everyone has to carry the burden, then demands are made to lighten the burden.
"Payroll tax withholding is a good example of such a safeguard. Ask yourself if the federal government would collect the same amount if people payed their taxes like they do their mortgage."
Just a few posts ago you supported a reduction in taxes, now you're arguing against NRST on the basis of the government not being able to collect the same amount. Which side of this are you on?
I don't disagree that some price reduction will occur. I just don't see any beyond a portion of corporate income taxes (not all of them) the employer's share of FICA and the elimination of compliance costs. The latter two don't represent but a tiny part of the final product's price. The former comprises the larger part. IMO, any significant decrease in prices can only come from lowered wages and that can't jhappen in some cases (union shops).
Now OHelix gave an example earlier which included the cascade effect. Let me put my spin on it: Bike Company buys it pedals from company A, it's tires from company B, its frames from company C and its seats from company D and all have been profitable companies in the past and are paying a 35% corp tax rate. With the flat tax they each retain an extra 10% of their profit now. They choose to lower their prices each by 10%. Now we have Bike Company's cost of goods, which represents 50% of its production cost, lower by 10%. Also: Bike Company now pays no income taxes, thereby saving itself another 10% a year. Am I missing something or did Bike Company just come up with a way to lower its prices by 15%. Am I on the right page OH?
What is the bill number for your proposed VAT system? How many sponsors and co-sponsors are on board? What is the likelyhood of it beign passed? How does it address the IRS and the 16th?
"...It proves that the NRST will not work since it has no safeguards. Without safeguards, the rate will rise to compensate...."
From Federalist Paper No. 21, http://federalistpatriot.us/fedpapers/fed_21.html
"...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."
Founding Fathers were prescient and brilliant men.
You say it would add substantially, I don't agree. It would add some, but not substantially.If you are worried about it, pay the businesses 0.5% of what they remit for their compliance costs
Experience in real VAT systems say otherwise:
Don't forget that the pedal company has 3 suppliers who have suppliers who have suppliers who have suppliers, etc. all the way to oil drilling for the petrol to create the resin.
Same idea for the tire company, the frame company, the handle bar company, the seat company, the assembly fixture company, the toilet paper company, the xerox machine company, the reflector company, the display rack company, the promotional sign company, and on and on and on.
While the FairTax does have an advantage in that regard (being in bill form and having many representatives' support), I'm pleased that YN is making comparisons to other plans, even if they are in general and not to a specific bill.
We can discuss the merits of a NRST over an income tax withtout discussiong the specifics of a particular bill or our particular system.
"...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 think you are correct, and this concern has lead me to question the prudence of doubling or tripling the "prebate" for some period of time, and gradually reducing it during a phase in period. I think this approach would allow the embedded costs to be wrung from the supply chain while allowing consumers the same, or perhaps greater ability to purchase for some time. It would involve a short term deficit, but I think it may be necessary to combat the initial sticker shock. ....just thinking outloud here.....
A real life, current example of this is the constant increase in tobacco taxation. The dems keep raising the tax and the revenues decline, they can't figure out why the black market is growing.
The point is that society will be able to decide the level of government they will accept and they will have the effective control to ensure limitation. To argue that collection of the current revenue is to difficult with the proposed system, is to say that you accept that level of government is required even though society will not accept it.
Robert,
Which side are you on? (I know, I need to give you time to answer my other post....)
Actually, I am curious, has the version of the VAT he discussed been proposed in legislative form?
I have thought about that. It seems to me that the only direct benefit is from an immediate supplier. Distant third step suppliers would seem to have no effect. Only the direct effect on the cost of goods portion of the balance sheet which is only affected by the immediate supplier. I don't see how the oil well would have any effect at all except on the refiner.
Also, throughtout the pipeline you will have both: unprofitable companies and companies who resist lowering prices.
It's better for income earners, but it's much worse for people who've saved money for retirement, who paid taxes up to 50% on their income in the first place and now have to get it taxed yet again.
The NRST will not simply replace the income tax. That will be the promise, of course, after an initial period of parallel operation, also of course. In fact, politicians will almost certainly just end up charging us higher taxes. The income tax is too important a mechanism for control to be given up.
The real purpose of the NRST is to keep our nearly bankrupt government rolling - now by raiding the savings of the elderly.
I have thought about that. It seems to me that the only direct benefit is from an immediate supplier. Distant third step suppliers would seem to have no effect. Only the direct effect on the cost of goods portion of the balance sheet which is only affected by the immediate supplier. I don't see how the oil well would have any effect at all except on the refiner.This also assumes that the businesses down through the chain are "price makers" (that they can set a price). The more competitive a market is the more the businesses in it are "price takers" and have to take what the market will give them and aren't able to "embed" their taxes by raising prices. If a business is a "price maker," they won't care if their costs go down, they do make the price.
With the NRST, if the federal government collects less (due to fraud), they'll simply raise the NRST.
You're talking about a "sales" tax that is 30% when it first appears on the American scene. Add to that a 7% state sales tax, local sales taxes, city sales taxes, you're around 40%. Abuse is not going to force a reduction. This is the minimum starting point.
People will accept 7%, 10%. You want more, you better steal it before they get their hands on it, is all I'm saying.
I like the concept of the NRST, but I am against it as proposed. I do not believe, nor trust, the 23% rate. I believe that fraud will overtake the system, leading to more government control (cashless society, keeping of receipts, proving innocence, rather than they proving guilt). You're still visible to the government (If you want that $500./month -- the rich can afford to hide). It's very easy and painless for the government to raise additional revenue (I've demonstrated that raising the retail price from $100 to $101 - an apparent 1% increase - will raise $520 billion).
Plus, I"d feel more comfortable changing the tax system when we're not running deficits and are not carrying such a debt. My gut tells me that the switch to an NRST is to hide the fact that I'll be paying more to eliminate the deficit and lower the debt.
Let's cut spending first, clean up the financial mess, then take another look at the tax code.
Close, but I think there is a mathematical error. 10% increase in PROFITS does not necessarily mean you can drop your PRICES by the same rate. For instance:
Cost = 90$
Sell for $100
Profit = $10
Profit increase of 10% from reduced costs yields:
Cost = $89
Price = $100
Profit = $11
Reducing price by 10% yields:
Cost = $89
Price = $90
Profit = $1
It's easier to keep track of everything if everything is represented as a percentage of total receipts. Then the percentages can be compared with one another with less risk of confusion.
If the bike company, as you said, has half of it's production costs, presumably the other costs are wages, we would still need to know their margin or their percentage of taxes paid to figure out what a reduction in the 35% rate would benefit them in terms of reduction of cost.
But whatever the amount that the TAX savings would afford company, that amount could be used to reduce prices. But there would also be an additional reduction in it's costs, as it's suppliers would experience similar reduction in taxes, as well as reduction of costs from their's suppliers, and their suppliers, etc. However, at each stage you go back, the cascaded effect on the final company gets exponentially smaller. Using calculus, the limit of the effect can be determined and treated as the actual amount.
For instance. If I open an account with $2.00, and each day I add half what I added the day before, I will never be able to achieve a balance of $4.00, but I will get exponentially closer to $4.00 each day. Each day I close the gap by half, but never actually arive. The same dynamic works in my earlier example.
IN the earlier example, the ACTUAL savings would be more than the initial estimate of 9.75% savings from TAXES ALONE. Assuming all the other companies in it's production tree were in the same financial parameters, you can calculate the over all savings, including the cascading effect, to be ~17%.
If anyone knows who has a Mathmatics or engineering ping list, ping them here and they can probably yield a lot of insight to this discussion. Maybe they can take me to school and show me an error I've made. :o)
I had had pretty much the same thought. But I think that would also increase the rate significantly.
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