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?"
The threshold for folks to attain and continue the use of that certification is actual sales for which the NRST is being collected and remitted by the business.No it's not. It's any business. Robertpaulsen's "one-man 'consulting' firm" consults for other businesses. He has no retail sales.
Too little NRST flowing from a "business" with large claims of input purchases is one big red flag for an audit to assure the integrity of those claims.But how would you know his inputs unless every business, not just retail businesses filed paperwork showing their sales.
If one want to avoid paying the NRST on something like a computer it would be far less risk involved to just go buy a used one with no NRST in the first place, same is true of many such items that are targets for abuse.A used computer? Geez, you really are ancient. Robertpausen is smart enough to buy a new "white box" PC from a "wholesaler," (his cousin who only sells to family).
When all is said and done, I see no reason to believe there will be any increase of such evasions beyond what already exists and is accounted for in the NRST rate.It ain't called the FairytaleTax for nuthin'!
"Do you agree that one-man "corporations" will increase dramatically beyong the number of "S" corps that exist today to take advantage of the tax exempt status?"
"I understand your point, however, I also realize that this dynamic is present in our own system. The people who work the system now come up with ways to account as much of their spending as possible as business expenses, including the cars they drive, justifying a vacation as being a busniess trip, etc. I don't see how the FairTax will increase or decrease that practice. It'll be the same game we have now... 'How can I make this purchase a business expense?'"
OHelix makes a good point, as usual, but I would add that the resources being freed up to enforce compliance would be enormous. If you accept the number of pages as a rough proxy for the complexity of the system, we are talking about something like a 98% reduction in complexity of the tax system and about a 90% reduction in the number of points of collection/enforcement. That means that even with a dramatic reduction in the resources committed to enforcement, we could do a much better job of policing the system than we do now.
There will certainly have to be some monitoring of corporations buying "stuff" for personal consumption. There are certainly ways to do this with far fewer resources than we now allocate and still get significantly better coverage.
The assumption that there will be a proliferation of corporations popping up to funnel personal consumption items through and avoid paying the sales tax is founded on the belief that the risk-reward ratio will encourage that behavior. I am of the opinion that if we do the job properly and evaluate the new risks carefully in terms of allocating enforcement resources, the risk-reward ratio will say to American consumers: This just isn't worth it.
Does a sales tax present compliance challenges which are different than an income tax? Absolutely.
Are these challenges so great that we should abandon the idea of stimulating our economy and freeing up our citizens from this horrid system? Certainly not. If we can figure out how to bring democracy to the middle east, we can certainly figure out how to enforce a sales tax - and with fewer resources and less intrusion than we have in the current system.
I'm in! that way all those folks who dont pay taxes because they work for cash (pimps, prostitutes, illegal aliens, drug dealers, gamblers, etc.) all have to pay tax. In the end it would cost us all much less than what we pay the IRS now! Let's do it!
People on both sides are afraid of liberty. Just because I don't like a private consensual activity of yours, it doesn't give me the right to force you to stop any more than you have a right to compel me to adopt it.
As somewhat of an aside, In over 50 years on this orb, I've never met a drug 'pusher'. I've met plenty of willing drug buyers and available dealers, but I've never been approached by anyone trying to sell me drugs or give them to me for free.
No. You posed a question and I answered.
Do you agree that one-man "corporations" will increase dramatically beyong the number of "S" corps that exist today to take advantage of the tax exempt status?
No. Some may, but I don't think that people will be lining up to file false papers with the government. Do you?
How much fraud is built into that 23%? Any?
I don't have a clue. I don't even particularly care about how this watch was built. I just think that it's time has come. Nothing. Repeat NOTHING can be as bad as what we have now. I'm going to get hit and I'm willing to pay because I believe that the current system is destroying the country and our liberty.
The FairTax changes the whole dynamic and removes the chains from the people and the economy.
There is no question that the law will have be written to define who is exempt and who is not. The IRS has always been very good (and sometimes even fair) at determining what is a taxable event and what is not. I should think the new entity would be able to the same. For instance, RP's assertion that everyone would set up a corporation to avoid sales taxes wouldn't be too hard to prevent. If those corp's were subject to audit it would mean that all of the former tax CPA's would have a new market. It would also mean that if you set up a corp to buy gas at the net price you also would have to keep a set of books, etc. If the law defines what is and what isn't exempt I'm sure at some point someone will have enough incentive to try to buck the system. Will it be worth it? I don't know.
"...The compliance costs of a NRST would be much lower than the current system. How much is the question...."
I agree wholeheartedly. And I suspect that total costs, including the administration of the prebate, will in fact be much lower than the total costs we incur today....although precise measurement will prove elusive.
In addition to the nominal dollar benefits, we should see rapid growth resulting directly from removal of entity level taxation. Moreover, IMHO, the liberty enhancing benefits of this system of taxation cannot be overstated, but it is impossible to value liberty in dollars.....some would say it's priceless.
In your example at a 15% tax rate, I expect it would be more incentive under the FairTax. However, it would not be as much as you presented in your example, because you compared the 15% income tax rate with the 30% Fairtax rate. The acurate comparison would be the 23% rate.
If I understand the estimates concerning the effects of the tax rebates being made permanent, the appropriate rate to compare with may be lower than 18%.
Ah, there is the great unknown. One could make the case that if we are free to pay our taxes when and as much as we want to the result would be phenomenal. What are the penalties of starting your own company? Regulations are probably the first on the list. Taxes have to be the second. Why in the world have we gotten to a point that payroll is so complicated that a huge industry has grown up around it? I have a strong feeling that those who have a vested interest in one of the thousands of payroll companies in America would bitterly oppose the NRST.
Robertpaulsen's "one-man 'consulting' firm" consults for other businesses. He has no retail sales.---
--- how would you know his inputs unless every business, not just retail businesses filed paperwork showing their sales.
Learn to read the cites quoted:
"The FairTax requires all businesses (including non-retailers) to keep business records kept in the ordinary course of business that would aid cross checking by government auditors.[22]
Conclusion
Tax evasion will undoubtedly be a problem under any tax system. It is a major and growing problem under the current tax system, despite very substantial efforts and increasingly harsh treatment of the taxpaying public. Almost 40 percent of the public, according to the IRS, is out of compliance with the present tax system, mostly unintentionally due to the enormous complexity of the present system.
This breeds disrespect for the tax system and the law, and makes a system based on taxpayer self-assessment less and less viable.
The FairTax is likely to reduce rather than exacerbate the problem of tax evasion. The increased fairness, transparency, and legitimacy of the system will induce more compliance. The roughly 85 to 90 percent reduction in filers will enable tax administrators to address instances of noncompliance more effectively, and increase the likelihood that tax evasion will be discovered.
The relative simplicity of the FairTax will promote compliance.
Businesses will need to answer one question to determine the tax due: how much was sold to consumers? Finally, the dramatic reduction in marginal tax rates will reduce the gains from tax evasion. If the cost of noncompliance remains comparable (or even increases due to the increased likelihood of getting caught caused by the much smaller number of filers), then both the expected profit from and frequency of tax evasion will decline."
It ain't called the FairytaleTax for nuthin'!
Yet for you two, the 'fairytale tax' is a nightmare... Why is that?
Ricebowl problems, I'd bet..
Uh, those would be the state administrators? Those being paid .25% of revenue they collect for the Feds?
And how much revenue is being generated by the thousands of new "consultants" who manage to expense every revenue dollar in gasoline, family room office furniture, computers, dinners with the wife clients, phone bills, etc.
Yes, yes. They can do that today. BUT, today, that is maybe worth 15% (to offset corporate taxes).
After the NRST, those "business" expenses are worth 30% plus state sales taxes (9% in Chicago).
I'm saying that's a big temptation to existing small companies, plus it encourages the formation of new one-man "consulting firms" to take advantage of the savings, legal or otherwise.
"The FairTax requires all businesses (including non-retailers) to keep business records kept in the ordinary course of business that would aid cross checking by government auditors.[22]How would the government even know to audit a non-retail business?
Thanks, I've been off this thread for a while. (I do have a real job, and, uh, golf.)
You're right. But what a huge conflict of interest. Removing the contingent/deferred tax liability from all those cash values and annuities would be a monumental boon to all of the policy holders yet it would be fought tooth and nail by the companies because it would affect the way they do business.
Which brings up another point that hasn't been discussed here. The power of compounding. Life insurance companies sell those fee generating machines called variable annuities. When stock market returns inside those things compound without taxation it makes regular mutual funds look like penny ante poker. Imagine the wealth creation that can take place with the fair tax.
"...Life insurance companies sell those fee generating machines called variable annuities...."
There's also that wonder called a variable universal life policy. When handled correctly, it can escape ALL Taxation......even on the death of the insured. That's a powerful sales tool that the industry will not give up without a fight.
Things are heating up in the tax return prep business....so I won't be posting as much as I have been.
Agreed. The reason most people have such large life insurance policies is to offset the possible/probably death taxes. No death taxes, the need for life insurance will go down.
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