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?"
Hence the view some economists have that wages would have to drop if prices drop.
How do you figure that? As I understand it, the over all average of embedded taxes is going to approach the average tax rate for income, adjusted down a little by the payroll tax. The reason being is the profit portion, is taxed at the corporate tax rate. The payroll is obviously taxed at the payroll rate... but the thing that's easy to miss, is that the rest of the expenses are the sum of companies with similar breakdowns. Prices they are charged by everyone they pay out to, which would all have a similar breakdown in tax base. So even if a company's margin is very low, his expenses should have the same amount of tax burden as the average tax burden of all companies.
I would like anyone who understnds this better than me correct me if I am mistaken. But I believe that the amount of cumulative tax paid along the entire tree of production, would tend to approach the average income tax rate, adjusted down a little by the payroll rate.
Hence the view some economists have that wages would have to drop if prices drop.There is also the employer share of the payroll tax. Virtually every economist believes this is borne by labor through lower wages, but if we assume for the sake of discussion that they in prices:
FairTax Base: $7,904 billion Exports: + $1,034 billion ================================== TOTAL: $8,937 billion Corp Inc Tax: $ 151 billion Corp Payroll Tax: $ 253 billion ================================== TOTAL $ 403 billion 403 / 8,937 = 4.5%
How do you figure that? As I understand it, the over all average of embedded taxes is going to approach the average tax rate for income, adjusted down a little by the payroll tax.But the total embedded taxes can't equal more than the taxes collected. I used the total corporate income taxes collected from all sources and divided it just by the FairTax base + exports. If I had divided it by the larger base the percentage would have been lower.
If you take all taxes coorporate income taxes collected, plus all payroll taxes collected, and divide it by all the FairTax sales price and all the export salesprices, then I am misunderstnading something.
This is where I'm having a problem and I admit that YN's latest data tend to support him. You can't have more embedded taxes than there are taxes paid.
What is the toal of SE, and income tax, et al, paid that should not be embedded? Do they come out to 23%?
"...But I think that would also increase the rate significantly...."
I'm not so sure. If we acknowledge that the rate is going to remain fixed for year one, and look at this as a newly forming entity would "organizational costs," then we can amortize the debt incurred to fund this outlay over some period of time. I wouldn't advocate paying this 'expense' off in year one. I'd amortize it over several years and that should have minimal effect on the rate.
My concern is that IF the price of goods drop as some think they will (precipitously), then adding to the prebate unnecessarily would be an inflationary policy. It's hard to quantify how much new capital will flow into the US as a result of removing the corporate tax. I think the danger of increasing the prebate in combination with an influx of new capital is that we'll significantly fan the flames of inflation. This is tricky business.....
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.
Some interesting comparisons of VAT compliance costs NewZealand, and United Kingdom comes from this analysis of the effects of exempting products from a VAT (as politicians inevitably turn to doing).
Overall cost compliance in UK is 3.7% of revenue collected on a 15% VAT and in NZ 7.3% on a 12.5% VAT, the main difference between the two is more small businesses(where fixed costs overwhealm economies of scale) are required to register for the VAT in NZ.
The table on page 5 display costs as a function of business sales (i.e. turnover) is especially graphic and underscores the problems that plague the VAT generally where small businesses opt out and turn to the cash underground economy to evade its highly regulated environment and startup costs.
The problem with small business participation in a VAT system are so great that places like Norway for example simply give up and start looking at black markets with its household production as a blessing keeping their economy turning over and turns to raising the theshold where registration for the VAT is required concentrating the VAT onto ever larger businesses more able to fold the regulatory costs into its operations through economies of scale and vertical mergers limited the number of transactions to which the VAT applies.
The cost of a VAT to government and the business is quite high in relation to the number of taxpayers in a VAT system as a consequence of government trying to realise the false promises of better enforcement characteristics.
"The VAT is not a cheap tax to administer. The revenue raised should be equivalent to an RST at an identical tax rate, but more taxpayers must be registered and more tax returns made. Much money is collected only to be returned. Much fraud is possible through suppression of sales figures, barter transactions, understated debtors, false invoices, misdescriptions, multiple claims, customs fraud, and fictitious businesses. The costs of VAT administration vary widely depending on the exemptions, thresholds, zero-rating, number of tax rates, frequency of audit, and role played by other collection agencies (e.g., customs). In the EC, the ratio of staff to taxpayers varies from 1.123 in Belgium to 1.726 in Italy. A 1993 U.S. study reckoned that with a registration threshold of US$25,000, an annual audit rate of 10.6 percent, and an average audit length of 12 hours (more or less the norms for the United Kingdom and New Zealand), 18,850 staff years would be needed for 12 million taxpayers (1.637). If the threshold is set at US$100,000, the ratio drops to 1.529.
The United States has debated the possibility of adopting a VAT on numerous occasions. It has been seen as a way to reduce the budget deficit, finance Social Security, replace the corporate and personal income tax, and finance a health scheme or defense. In the United States, a 5 percent VAT, if education, financial services, and all medical care are zerorated, would yield about US$98 billion in 1998 (about 6.3% of revenues) (Congressional Budget Office 1995: 393). This yield is much lower than is common in Europe, and it suggests that to make the administrative costs worthwhile (US$1 billion for government and US$6-10 billion compliance costs for business) the rate might have to move toward the typical worldwide rates of VAT (10 to 20%). "
In fact as far as government administrative costs are concerned, A VAT's adminstative costs to government as a percentage of revenue collected have been measured to be double that of retail sales taxes or even corporate income tax collection, and only 33% less than personal income tax administration. Page 8.
http://unpan1.un.org/intradoc/groups/public/documents/nispacee/unpan004338.pdf
The more I look, the more I find on the subject that indicates all is not at all well where the VAT and its costs are concerned especially as it regards small businesses and small business startups:
Google Search australia value added tax overhead costs OR compliance costs
That would be those of us who oppose adding a National Sales Tax to the list.
Cheap shot. No one in favor of the NRST is in favor of it unless the IRS is abolished along with a repeal of the 16th amendment.
It also explicitly puts limits on interpretation:
You can't have more embedded taxes than there are taxes paid.
You can however have a greater embedded tax burden comprised of both overhead costs and tax. With repeal of taxes costs are reduced as well.
A lowering of prices received by producers is enabled by more than just savings in tax revenues remitted per-se.
| http://www.taxfoundation.org/compliance2002.html |
Overhead Compliance Costs The complexity generated by the growth and constant change of the tax code creates two general types of economic cost: overhead and opportunity cost. Overhead can be divided into three principal activities: the economically sterile exercises of tax planning, compliance, and litigation, all of which act like tax surcharges on taxpayers. *** snip ***
The Burden of Compliance Costs As shown in , and , the Tax Foundation estimates that in 2002 individuals, businesses and non-profits spent over 5.7 billion hours complying with the federal income tax. Using an hourly cost of $29.98 for individuals and $37.26 for businesses and non-profits, the estimated cost of compliance in 2002 is $194 billion (See Methodology section for details about how the hours and wages were determined)—Individuals bear a cost of $86.1 billion, businesses bear a cost of $102.5 billion and non-profits bear a cost of $5.4 billion. Therefore, the overall compliance cost surcharge alone amounts to nearly 20.4 cents for every $1 collected by the federal income tax. |
Taken altogether, the total tax burden impressed upon us all through higher prices and loss of productivity exceeds the mere revenue collected by the governments by substantially more even than the $593 billion estimate of James Payne in 1995:
Town Crier Staff Writer
Clyde Noel : http://www.losaltosonline.com/latc/arch/9528/"In a book titled "Costly Returns," economist James Payne estimates the nation's bill for tax record-keeping, audits, filing tax attorneys and accountants totals an astonishing $593 billion. To put it another way, that's more than twice as much as last year's entire defense budget and $240 billion more than all 1996 Social Security outlays."
or the broader estimates for example like that of Daniel Pilla:
Killing the IRS, By Daniel J. Pilla, Reason Magazine July 1995
"There is little about a flat-tax system that will trim the staggering cost of tax law compliance. At present, this burden is estimated at $700 billion annually. Much of the cost is associated with recordkeeping and tax law enforcement, neither of which is reduced by a flat tax. A flat tax certainly involves a simpler tax return, but return preparation is the smallest component of tax law compliance.
The solution to our tax problem is to adopt a national retail sales tax in place of the personal and corporate income tax. Only a sales tax can eliminate the invasiveness of the IRS, since one's income and lifestyle are irrelevant."
Not to mention the even greater losses on the economy that result from depressed sales(deadweight losses) as a consequence of the systemic cost of the tax system prices much of which would be relieved by removing the more direct tax related business costs accounted for above.
http://www.heritage.org/Research/Taxes/hl565.cfm
An American Economic Review study found that every dollar of taxes could impose as much as $4 of lost output on the economy, with the probable harm ranging between $1.32 and $1.47
Edgar K. Browning, "On the Marginal Welfare Cost of Taxation," American Economic Review, Vol. 77, No. 1 (March 1987), pp. 11-23."Another study in the Journal of Political Economy estimated that the corporate income tax costs more in lost output than it raises for the government."
Jane G. Gravelle and Laurence J. Kotlikoff, "The Incidence and Efficiency Costs of Corporate Taxation When Corporate and Noncorporate Firms Produce the Same Good," Journal of Political Economy, Vol. 97, No. 4 (1989), pp. 749-780.
Chief Executive, The New directions in tax reform -
May 1995.Tax expert Ernest Christian Jr., a partner with Washington's Patton, Boggs & Blow, reckons these are low estimates or at best incomplete. Citing a U.S. Treasury study which indicates that 6 billion man-hours are consumed each year just in the record keeping for income and payroll tax returns alone, Christian says the true burden on the U.S. economy is probably closer to $1 trillion. For example, Jane Gravelle of the Congressional Research Service estimates that economic loss from the corporate income tax is equal to about 97 percent of the corporate tax revenue collected.
STATEMENT OF REPRESENTATIVE DICK ARMEY
HEARING ON THE IMPACT ON
INDIVIDUALS AND FAMILIES OF REPLACING THE FEDERAL INCOME TAX
Committee on Ways and Means, Full Committee, 4-15-97 Testimony
Hinders Economic Opportunity
According to a study by Jane Gravelle, an economist with the Congressional Research Service, and Larry Kotlikoff, an economist at Boston University, the corporate income tax costs the economy more in lost production than it raises in revenue for the Treasury. Dale Jorgenson, the chairman of the Economics Department at Harvard University, found that each extra dollar the government raises in revenue through the current system costs the economy $1.39.
Economic Burden of Taxation
William A. Niskanen
Presented October 2003
Friedman Conference
Federal Reserve Bank Dallas page 6.
www.dallasfed.org/news/research/2003/03ftc_niskanen.pdf"Given that the elasticity c implicit in recent U.S. fiscal conditions is about 0.8 and the average tax rate is about 0.3, the marginal cost of government spending and taxes in the United States may be about $2.75 per additional dollar of tax revenue. One wonders whether there are any government programs for which the marginal value is that high. Given the estimate of the long-term elasticity c from the U.S. time-series data, the marginal cost of government spending and taxes may be as high as $4.50 at the current average tax rate. "
Thanks.
I bet that you don't find many real ones, do you? The so called conservatives -- convenient. I like that. -- reveal themselves rather easily with good questions like that.
Do as I say, not as I do, conservatives.
Not all business will be subject to the FairTax as they deal strictly with business which are tax exempt. They will have their card to cover their purchases, but will not be collecting taxes.
You realize that the Subchapter S businesses will grow dramatically?"
How? There will be NO "S" corps because the IRS and the code that created "S" corps will be gone.
Only guessing, but with increased economic activity that is expected and (I think) intuitive, higher sales, even at lower prices, will generate the needed revenue. We need to remember that sales will not be static but will enjoy a very dynamic change upward.
Do you not see a value in ridding the IRS from our lives? Why do you want the IRS to live?
Indeed you can and we certainly DO with this current monstrosity!
The fact is that for every dollar actually collected in taxes under the current system there is another $.65 in costs associated with dealing with the system. Unfunded mandates so to speak.
Nice theory, except for the part that I did answer the question already.
I don't need validation, I already know the meaning of the words.
In other words, you can't find anyone. As I expected.
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