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?"
I may be mistaken, but I think he is speaking generally about a specific type of VAT, not about any specific bill. So he's still safe criticizing details of the FairTax without opening his own favored plan up to scrutiny. ;o)
You should check out the effect of oil prices on plastic resins, then you can easily translate that into the price of plastic goods, i.e. instrument panel in cars, and you could put together a better idea of the cost build up in products.
Remember, all companies must be able to pass on their cost to the buying entity (customer) or they will eventually die. Regardless of their margin, their costs must be passed on. As a result you have a tiering effect of all costs and if these costs include tax, then the burden related to tax can accumulate and exponentially grow throughout the supply chain.
Of course, but the tax effect is what is being debated here.
As a result you have a tiering effect of all costs and if these costs include tax, then the burden related to tax can accumulate and exponentially grow throughout the supply chain.
That's where I'm losing you. The tax effect doesn't appear to be very accumulative nor does it appear much larger than somewhere between my example of 10% or OHelix's example of 17%. And of course these aren't even real world examples. My original point was that I have come to believe that you can't have a large drop in prices with the NRST without a drop in wages. Some drop, yes but I don't think it is reasonable to use the drop as any sort of offset of the over-the-couter outlay on goods and services with the NRST.
You are right-that is the one and only big disadvantage. I would support a phase in of the NRST beside a phase out of the income tax but ONLY if a constitutional amendment was passed that said that after the year that was the last year of the phase-out that the income tax would be unlawful.
How do you propose getting support to cut spending when the burden is carried by half or less of the population? When you borrow from Peter to pay Paul, you will always have Paul's support.....
Which one?
"Of course, but the tax effect is what is being debated here."
Regardless of the name of the cost, the effect is the same. If a cost element is removed, the cost will decrease.
"That's where I'm losing you. The tax effect doesn't appear to be very accumulative nor does it appear much larger than somewhere between my example of 10% or OHelix's example of 17%."
I don't think anyone has the complete data, but intuitively, if the corporate income tax rate is 10% and you have 30 tiers in a supply chain, logic can prevail that it doesn't take very long to get to a significant cost that gets passed to each customer and ultimately falls to the retail consumer.
I have to go for now, but I will try to follow up with actual numbers and formulas for you at another time.
And that's what they don't like about it......can't be fair.
CG gave a very good response to this issue. There are many other good explanations on this thread as well. But the concept that you will lose 23% of your savings when the FairTax is implemented is based on a misunderstanding of the dynamics.the value if your savings under the FairTax is not likely going to be true. I think if you become more familiar with how the FairTax operates, and what it accomplishes, I think you will find that seniors with large after tax savings will fair better under the FairTax than under our current system.
http://www.freerepublic.com/focus/f-news/1332583/replies?c=484
Your NRST monthly rebate doesn't help the situation. When they reach 51% watch out.
I support a flat tax of 10% across the board, no deductions, no exceptions. You earn $1000 for the year, you pay $100. to the government.
"My original point was that I have come to believe that you can't have a large drop in prices with the NRST without a drop in wages"
Sure you can.
LEVEL 1
Price 115
Cost 100
Pre-tax Profit 17 14.8%
Tax (30%) 5.1
After Tax Profit 11.9 10.35%
Tax (Cum) 5.1 4.43%
LEVEL 2
Price 135.5
Cost 115
Pre-tax Profit 20.5 15.1%
Tax (30%) 6.15
After Tax Profit 14.35 10.59%
Tax (Cum) 11.25 8.30%
LEVEL 3
Price 159.5
Cost 135.5
Pre-tax Profit 24 15.0%
Tax (30%) 7.2
After Tax Profit 16.8 10.53%
Tax (Cum) 18.45 11.57%
That is 11 1/2% based on corporate income taxes alone going only 3 levels deep in the supply chain. Many manufactured products go much deeper than 3 levels. This does not even count compliance costs, which under the current system are staggering, nor the employers portion of payroll taxes.
Sorry I couldn't get the columns to line up.
Good example, but what if you took it the other way? Examine the cumulative savings of tax on the final purchaser of a bicycle perhaps?
LEVEL 1
Price 115
Cost 100
Pre-tax Profit 17 14.8%
Sorry about the math error. If the price were changed to 117, the pre-tax profit margin would be 14.5%.
"Good example, but what if you took it the other way? Examine the cumulative savings of tax on the final purchaser of a bicycle perhaps?"
You can use any product that you want. The way the model works, the primary variables are (1) how many levels in the supply chain you assume and (2) what pre-tax profit margins you assume. The tax rate is also an assumption, but I tend to think that the results aren't that sensitive to it.
"phil_will1, if your theory and math are correct, then corporate income taxes would be a large percentage of prices. Guess what? In 2001 they were less than 2% of the FairTax base + exports ($189 billion in corporate income taxes). So there is obviously something wrong with either your theory or your math or both."
Other than the error that I corrected in the post above, the math seems to be working. On another thread, another poster questioned my assumption of 15% pre-tax profit margin, but in my experience that is what successful companies pull down.
I don't know where your numbers come from, so I can't really comment on that.
I don't think there is anything wrong with my math or theory, except that it's a hypothetical example for the purpose of demonstrating how taxes can cascade and produce a savings under the FairTax significantly greater than just the tax savings at the Retail level alone. The dynamics would be the same if it were applied to real rather than hypothetical values. If I am mistaken, I would be pleased for anyone to point out and explain to me my error.
However, you may be making a logical error in comparing my example to statistics of the FairTax base. The current corporate tax system is much much broader than the FairTax base. The cascading effect take place throughout the entire production tree up and including the FairTax base, not just in the FairTax base alone. A correct comparison would consider not only the direct tax savings on the FairTax base, but also the cascading effect of all the other industry as well.
I've stated what I believe what validate or invalidate "wages must come down" theory. I think the statistic you've presented neither validates nor invalidates the theory in question, unless I'm misunderstanding something, in which case, please explain my error. I'm not necessarily taking the position that you're wrong. I'm just trying to find a way to reasonably and confidently verify.
I don't know where your numbers come from, so I can't really comment on that.Sorry, those were from 2003 and were my own calculations. Since I know you won't trust them, so let's use 2001 numbers.
FairTax Base: $7,904 billion Exports: + $1,034 billion =============================== TOTAL: $8,937 billion Corp Inc Tax: $ 151 billion 151 / 8,937 = 1.69%
That post was addressed to phil_will1, I just copied you.
However, you may be making a logical error in comparing my example to statistics of the FairTax base. The current corporate tax system is much much broader than the FairTax base.I know it's broader, I used the FairTax base so there wouldn't be any questions about the "prices" we were talking about. The broader base would actually reduce the percentage that corporate taxes could possibly be in prices.
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