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?

You chose to call it a "sales" tax, not me. You chose to use the figure of 23%, not me.

You tell the American people that this is a "23% sales tax" and what are they supposed to think?

Now you come along with this condescending, "Oh, that 23% is really a tax conclusive, amortized debenture income tax comparison" bull$hit.

Who's playing "gotcha" games here? If you cannot be straight with the American people with something as simple as the goddamn rate, what else are you hiding?.

The NRST may indeed be the best thing since sliced bread. But we'll never know, because I and many Americans simply don't trust you and will never vote for it.

You have a common misunderstanding of the dynamics involved with the FairTax, and it has been addressed already on this thread:

You percieve that the FairTax switches from the system where you already paid taxes and replaces it with a sales tax which would essentially tax your already taxed savings. What you miss is that the existing system ALREADY is going to tax your savings again, in the form of all of the corporate, income, ss, etc taxes embedded into the price of goods you buy.

The FiarTax does not swap what you've already paid for a sales tax, it swaps the system that embeds those prices with a more visible sales tax.

So even though it appears it has ADDED a very visible tax, it has also REMOVED a very invisible tax. The FairTax does NOT reduce the value of your savings by 23% as is commonly asserted on these threads.

There will certainly be some products, especially in the short term, whose prices will not correct immediately. However in the long run there should be no significant difference in the value of your savings. Considering the positive effects on American industry, the ability to purchase used items tax-free, and the visible nature of the tax likely resulting in popular demand to reduce the tax rate, I expect the value of your savings will go up significantly under the FiarTax.

Further, there are many other benefits to the FairTax, such as the elimination of inheritance taxes, no tax on additional savings or investments, no caps on how much you can save tax free, no tax on income from investments...

I believe as you become more familiar with the FairTax, you will begin to realize how you will benefit greatly from the FairTax, and that the concept that you are going to get slammed with an additional tax that wasn't there before, is misleading.

Thank you for your answer. It was very helpful and makes a lot of sense. I was involved in this thread early on, but now it has balloned to over 900 replies and there's no way I'll be able to catch up on all of them.

Another question I had (and it may also have already been answered) had to do with the economic impact of the changeover. I understand that the decreased cost of tax compliance will have a positive economic impact. Over time, this will generate wealth and have an ultimately positive effect on the economy.

In the short term it seems to me that much of the impact will be felt rather harshly. In other words, the positive effects of the change will filter down over time, but the negative effects of the change will be felt immediately. Am I incorrect in this?

We should be able to agree on the actual tax rate proposed on a $100 purchase. Is it 23% ? Or -- 29.86% ?

Both, it depends on your point of reference.
In terms of a sales tax as you are used to paying, it is 29.87%. In terms of an income tax you're used to paying, it's 23%. The two tax systems use different mechanisms (tax-exclusive for state sales taxes, tax-inclusive for income and payroll taxes).

The example is easier to understand on a $100 total bill, after taxes. The pre-tax item price is $77, the tax is $23. Under the state sales tax model, the tax rate is 23/77 = .2987 -- under the income tax model, the tax is 23/100 = .23 .

The example is easier to understand on a $130 total bill, after taxes. The pre-tax item price is $100, the tax is $30. Under the state sales tax model, the tax rate is 30/100 = .30 .
-- Under the "income tax model", you can say the tax is 23/100 = .23 , but it makes no sense to do so, seeing that the actual tax is 30% .

It is mind boggling that Fair Tax supporters are trying to promote the Act by using a BS "model" to misquote the actual taxes paid .

The Fair Tax idea sells itself without playing games over percentages .
As I see it, the actual tax percentage paid would have to be printed on all sales receipts in any case.
That percentage would be 30%, -- correct?

anyone who reads the bill will see that the definition of "gross payments" is the price of the item plus taxes imposed

`(1) FOR 2005- In the calendar year 2005, the rate of tax is 23 percent of the gross payments for the taxable property or service.
`(5) GROSS PAYMENTS- The term `gross payments' means payments for taxable property or services, including Federal taxes imposed by this title.

Nope, the word price isn't there. the word price isn't there because their clear intent is to tax "the gross payment" not the price...

`(1) IN GENERAL- On or before the 15th day of each month, each person who is--
`(A) liable to collect and remit the tax imposed by this subtitle by reason of section 103(a), or
`(B) liable to pay tax imposed by this subtitle which is not collected pursuant to section 103(a),
shall submit to the appropriate sales tax administering authority (in a form prescribed by the Secretary) a report relating to the previous calendar month.
`(2) CONTENTS OF REPORT- The report required under paragraph (1) shall set forth--
`(A) the gross payments referred to in section 101,
`(B) the tax collected under chapter 4 in connection with such payments,

Get it yet?

Touche -- that's what I get for going from memory.

So why would anyone want to compare the sales tax rate to the income tax rate after the income tax is gone?

There are other issues with using the tax inclusive rate. Let's say we have a 20% tax inclusive NRST rate. Some politician says he is going to increase the rate 5% to 21%. The people say "OK, a 5% increase in taxes is alright, but no more!" Well, a 5% increase in the rate is more than a 5% increase in taxes collected. It's a 6.33% increase.

There are other reason the tax inclusive rate is simply the wrong way to express a sales tax.

The NRST may indeed be the best thing since sliced bread. But we'll never know, because I and many Americans simply don't trust you and will never vote for it.

Bing! If they could just be straight we could discuss the merits but too often we are correcting "misleading" statements and pie-in-the-sky projections presented as fact.

Reason is not an option with these guys.

Get it yet?

I've "gotten it" for a long time, but you're still stuck in fantasy land. I challenge you to show me where the NRST bill authorizes a tax on state or local sales taxes, because the sections you quoted support my point, that " `gross payments' means payments for taxable property or services, including Federal taxes imposed by this title" -- note that state/local sales taxes are not included in this definition. Also comapre to the principles of interpretation in the bill (I can't quote directly because thomas.loc.gov doesn't have this session's version on-line yet, and I don't have a copy of last session's bill), which state that administrators and judges should interpret the law to avoid multiple or cascading taxes.

Again, I am all in favor of a federal sales tax if implemented in two ways:

1. The income tax would be repealed, requiring a constitutional ammendment to re-instate it.

2. It was absolutely flat. No refunds, no reason for the federal government to even concern themselves with how much income you collected.

I am not interested in replacing one beauracracy with another one, full of exceptions and loopholes. I want this tax SIMPLE and COMPLETE. I want the taxpayer to see just how much tax they are paying. No hidden taxes. I also want the ability to control my taxes in ways other than reducing my income.

I'm all for the change. But I firmly side with Greenspan that it isn't going to happen. As I used to say when I was in high school (1972), the US is like the proverbial farmer with his arm caught in a piece of machinery. If he does not pull out his pocket knife and cut his arm off, his whole body is going to be drug in and he will be killed.

Nobody has the political will to unsheath the blade. The farmer is going to die.

"thank you for posting this.The national sales tax will be a boondoggle not seen since the income tax if it is passed. The example of the washing machine is a good start but doesnt go far enough.If the national sales taxe gets passed that 500 dollar washing machine wont cost 700 like the article states it will cost more like 1200. becasue the steel company that sells the steel to maytag will be selling it for the cost of thesteel plus a sales tax on the steeel.The same thing will happen to the people that sells the washtubs and engines and knobs to maytag to be turned into a washing machine.Maytag will then add the tax into the cost of the washing machine who will sell it to sears who will have to pay a national sales tax on it.Sears will then add the cost of th e tax it pays to the price of the washine mashine who will then sell it to the costumer who will then pay a national sales tax on the washing machine."

You've probably heard this many times, but go read the actual legislation being proposed. What you describe is a VAT, not the fairtax. There is an astronomical difference and I don't know any fairtax supporters that have not stated they emphatically reject a VAT.

If people are saving, they aren't spending. If spending drops, a recession can follow. If the economy is not "on the edge" this is not a problem. A man with a rainy day savings account of one years wages suddenly loses his job, no problem. If a guy with no savings and nagging phone calls from his creditors suddenly loses his job, things could work out a little differently.

I guess it depends on how much of a "non-spending" hit one thinks our economy can withstand.

It is mind boggling that Fair Tax supporters are trying to promote the Act by using a BS "model" to misquote the actual taxes paid . The Fair Tax idea sells itself without playing games over percentages . As I see it, the actual tax percentage paid would have to be printed on all sales receipts in any case.

I have no problem using either form of the rate, nor have I ever tried to mislead or hide what the rates mean. The sole reason the bill is written in tax-inclusive terms is for comparable debate within Congress. I would actually be in favor of a modification ot the bill so that the tax-exclusive rate is used on receipts and publicly printed rates, because that would make for easier implementation. (Since the NRST does not tax state sales taxes, and one woul assume vice-versa [up to the states to define], tax-exclusive forms are much easier to work with because the individual rates can simply be added together to determine the total combined rate -- that can't be done with a tax-inclusive form.)

But I'm willing to wait on that change until after various tax plans are compared in Congress, so that the form the rate is expressed in does not artifically make the NRST look worse compared to other plans being presented.

In plain english, the Fair Tax rate would be 29.86% .. And be printed as such on a sales receipt. Correct?

In plain english the FairTax rate is 29.87% and no, that is not what would be printed on a sales receipt. By law, the sales receipt would have 23% printed on it.

Weird. -- You claim that a $100 receipt would show a 23% tax as $30 ???

I agree that it is mind boggling that Fair Tax supporters are trying to promote the Act by using a BS "model" to misquote the actual taxes paid.
The Fair Tax idea sells itself without playing games over percentages.
As I see it, the actual tax percentage paid would have to be printed on all sales receipts in any case.
That percentage would be 30%, -- dispite what you imagine.

I would expect so. I certainly don't have my mind wrapped around the macroeconomic dynamics as well as some here do, but I think it's pretty reasonable to expect a period of adjustment.

From what I understand, the primary issue involved in that adjustment is when a company who was accustomed to paying 15% of their gross receipts in corporate and payroll taxes, suddenly has that tax burden eliminated, how will they respond? Will they lower their prices by 15% or will they try to keep the prices the same and boost profits or increase wages?

I think the general consensus is that market pressures will eventually tend to force prices down. I think common sense would suggest most things would go down quickly (the things they sell as Wal-Mart, Home Depot, and grocery stores) because that portion of retail is so competitive and generally run on business models that attempt charge the lowest price possible and still achieve their profit goals.

The low-competition sectors will be more likely to convert the loss of the existing tax burden into more profit or higher wages rather than lower prices.

Retailers will have a harder time reducing their prices than their vendors, because they will also have to collect the tax. This is where Your Nightmare, I think, says that it would not be possible without wages being reduced. I expect Wal-Mart will be pretty influential in making sure it's vendors suck it up, and don't try to profit from the adjustment so it can keep it's prices as low as possible.

It's even worse than that.

Yes, the politician says 5%. But when you look at your receipt, your $100. purchase ($80. plus $20 NRST) is now $101. ($80. plus $21 NRST).

To the consumer, this looks like a 1% increase, not 5%. Very easy to "hide" a large tax increase.

(In a $13 trillion economy, that 5% increase just generated $650 billion in additional government revenue.)

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