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?

$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

Australia - Cash economy continues to grow

and inflation

AusStats 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.

Taxpayers Australia - 2004-05 Budget overview

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:

NCPA - Daily Policy Digest - Value-Added Tax Revenue and Inflation In Mexico

How a Value Added Tax Would Harm the U.S. Economy
Sweden’s Welfare State A Paradise Lost
Why do Europeans Work so Little?

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.

Either way, any excess compliance costs would more than be made up for by greater compliance allowing for a lower rate than a NRST. The consumer would pay the same or less with a VAT than a NRST. So I can redo my simple (not simplistic) rendition to account for the higher compliance costs of a VAT and the higher rate required for a NRST. Or we could keep it ceteris paribus.

"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?

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

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?

"...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.

"...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....)

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.

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.

The NRST is a hell of a lot more fair than the income tax.

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.

As Conservative Goddess pointed out, our markets have become more and more competitive in recent year making more of our businesses price takers.

With the Tobacco Tax, if they collect less they collect less.

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)

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