Greenspan Touts Idea of a Consumption Tax

ABC News/AP ^ | March 3, 2005 | JEANNINE AVERSA

[FairOpinion]

WASHINGTON Mar 3, 2005 — Federal Reserve Chairman Alan Greenspan on Thursday embraced the notion of overhauling the nation's tax system and said that some form of a consumption tax such as a national sales tax could spur greater economic growth.

"As you know, many economists believe that a consumption tax would be best from the perspective of promoting economic growth particularly if one were designing a tax system from scratch because a consumption tax is likely to encourage saving and capital formation," Greenspan said.

[dcnd9]

We need to get the word out everywhere....MSM won't!

[Your Nightmare]

Those cost you so cavalierly toss away as a separate issue are the issue and always have been, that with tax repeal, make up the full potential for decline in prices received by thge producer

No. The problem discussing this issue with you is that you say the income tax causes $XX in dead weight loss so that would be taken out of prices. First, dead weight loss can affect prices, but not nearly the full amount of dead weight loss like you try to do. Second, you don't account for any dead weight loss due to the FairTax! As if applying a 30% sales tax won't affect the demand curve at all.

As usual, you look at the negatives of the current system and ignore them for the FairTax. It doesn't make for a very honest debate.

[Principled]

It sure made me question why I voted twice for the guy.

Perhaps he should be made aware of the popular support for fundamental tax reform...

Tell him!

[Badray]

Much more likely outcome: HR 25 -- POOF! Gone.

Is that the outcome that you want?

If not, why not become part of the solution instead of being part of the problem.

[expatpat]

These cost come to 20-30% of existing prices, depending on which research you examine.

You are not reading this research correctly. That 20+% is due to the extra money that employers have to pay their labor in order to get the workers' take-home pay to what they expect/'need'. It is NOT from compliance costs. There are compliance costs, but these are small compared with the labor component I've just described.

To claim that "employees' gross pay stays the same, and gross prices stay the same" is ridiculous: The Feds get their money, the employee gains because he gets his gross salary instead of his net salary, and prices stay the same!

You guys are either proposing not only Perpetual Motion, but energy from nowhere. to me, it sounds like snake-oil to drum up support.

[ancient_geezer]

Or, from the other point of view, the business can't reduce prices by the amount of the sales tax if his labor costs don't go down.

Oh boy, that's where you supporters of the FairTax are way off base. See #274.

 

Certainly they can. Just replacing the federal income tax alone with a NRST, is sufficient to intiate the fall in producer prices for the overhead costs savings on just that side of the federal tax system, with consequent reduction in price to consumer including NRST:

 

http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf

Revised April 12, 1999.
THE ECONOMIC IMPACT OF FUNDAMENTAL TAX REFORM
by
Dale W. Jorgenson Harvard University
and
Peter J. Wilcoxen University of Texas, Austin

This paper was prepared for presentation at the
Baker Institute Conference
on Tax Policy Reform
Rice University Houston,
Texas November 6, 1998

---

 

We have simulated the impact of implementing two different versions of a consumption tax at the beginning of 1996. The first is the Armey-Shelby Flat Tax. The Armey-Shelby proposal levies taxes on the difference between business receipts and the sum of business purchases and business payrolls. Labor income is taxed at the individual level. An important feature of the proposal is the system of personal exemptions at the individual level that we have described.

The second proposal we have considered is the National Retail Sales Tax. The tax base is the same as in our simulations of the Flat Tax. However, the method of tax collection is different. The Arrney-Shelby Flat Tax preserves the existing structures of the corporate and individual income taxes, but alters the tax base. The National Retail Sales Tax eliminates corporate and individual income taxes; retail establishments would collect the taxes. This would require a broad definition of these establishments to include real estate developers and providers of services, such as medical, legal, and personal services. Most important, no personal exemptions are provided.

---

PDF page 25-27:

2. Figure 4 compares the consumption tax rates for revenue-neutral substitution of the Armey-Shelby Flat Tax (FT) and the National Retail Sales Tax (ST) for existing income taxes. The Flat Tax rate is 25.1 percent in the year 1996 and remains virtually constant through the year 2020. The National Retail Sales Tax rate rises from only 15.7 percent in 1996 to 21.4 percent in the year 2020. Only the Flat Tax includes a system of personal exemptions, so that the tax rate is considerably higher, especially at the initiation of the tax reform. Second, the consumption tax base for the Flat Tax grows at nearly the same rate as government expenditures, while the tax base for the Sales Tax grows more slowly, reflecting the increased importance of investment.

3. Figure 5 compares the impacts of the Flat Tax and the Sales Tax on GDP. Under the Flat Tax the GDP is only 0.6 percent higher than the Base Case in 1996; the impact of this tax reform on GDP gradually rises, reaching 1.3 percent in 2020. Under the Sales Tax the GDP jumps by 13.2 percent in 1996, but the impact gradually diminishes over time, falling to 9.0 percent in the year 2020. The short-run differences between these two tax reforms are due mainly to the impacts on labor supply, while the long run differences also reflect the impacts on capital accumulation.

4. Figure 6 compares the impacts of the two tax reform proposals on consumption. The impact of the Flat Tax in 1996 is to increase consumption by 3.5 percent, relative to the Base Case. This impact gradually diminishes over time, falling to 1.3 percent by 2020. While it may seem paradoxical that consumption increases with a rise in the consumption tax, the marginal tax rate for low-income taxpayers is reduced to zero, stimulating consumption. By contrast the Sales Tax curtails consumption sharply in 1996, resulting in a decline of 5.6 percent, relative to the Base Case. However, the level of consumption overtakes the Base Case level in 1998 and rises to 5.5 percent above the Base Case in 2020.

5. Figure 7 compares the impact of the two tax reform proposals on investment. The impact of the Flat Tax in 1996 is to depress investment by 8.6 percent, relative to the Base Case. Investment recovers over time, eventually reaching a level that is only 1.7 percent below the Base Case in the year 2020. Substitution of the Sales Tax for existing income taxes generates a dramatic investment boom. The impact in 1996 is a whopping 78.5 percent increase in the level of investment that gradually gives way by the year 2000 to a substantial increase of 16.5 percent, relative to the Base Case.

---

6. Figure 8 compares the impacts of the tax reforms on exports, while Figure 9 compares the impacts on imports. It is important to keep in mind that net foreign investment, the difference between exports and imports in nominal terms, is exogenous in our simulations, while the exchange rate is endogenous. The Flat Tax results in a very modest decline in exports of 0.5 percent in 1996, relative to the Base Case, but exports recover rapidly and exceed Base Case levels in 1997, rising eventually to 4.6 percent above these levels in 2020. Imports initially rise by 2.0 percent, relative to the Base Case, in 1996, but this impact declines to only 0.3 percent by 2020. The Sales Tax generates a substantial export boom; the level jumps to 29.2 percent about the Base Case level in 1996, but declines by 2020, reaching 18.9 percent of this level. Imports in 1996 exceed the Base Case level by 2.5 percent, but fall to 1.3 percent below this level in 2020.

---

7. The inter-temporal price system provides the mechanism for re-allocations of resources in our simulations. Figures 10 and 11 give the impacts of the tax reforms on the prices of investment goods and consumption goods and services. Under the Flat Tax the price of investment goods drops by more that 6.8 per cent in 1996 and the price decline continues, falling only modestly to a little over six percent by 2020. The Sales Tax produces a reduction in investment goods prices exceeding twenty percent in 1996, rising gradually to between twenty-five and thirty percent over the period 2000-2020. Under the Flat Tax prices of consumption goods and services decline by more that 4: 5 percent in 1996, but this price reduction falls over time to around three percent in 2020. The Sales Tax reduces the price of consumption by a little over three percent in 1996, but this price decline increases to more than ten percent by 2020.

8. The implied subsidy to leisure time is equal to the marginal tax rate on labor income and would drop to zero when the individual income tax is abolished. Individuals sharply curtail consumption of both goods and leisure under the Sales Tax. Figure 12 shows that labor supply (and demand) jumps initially by thirty percent in 1996. This labor supply response recedes to a level of around fifeen percent by 2020. By contrast the Flat Tax generates an increase in both consumption and labor supply. The labor supply response is only two percent in 1996, but gradually rises to more than five percent by 2020.

9. Since producers would no longer pay taxes on profits or other forms of income from capital and workers would would no longer pay taxes on wages, prices received by producers under the Sales Tax, shown in Figure 13, would fall by an average of twenty percent in 1996. Figure 14 shows that prices received by producers would fall by an average of twenty-five percent by 2020. The impact of the Flat Tax on prices received by producers is much less dramatic. Prices decline in the range of six to eight percent for most industries in 1996 and five to seven percent by 2020.

 

Of course it helps to know the definition in an equilibrium model that economists are speaking about when discussing "producer price"; that it is the consumer price discounted for taxes and subsidies. Producer price is the price received by the supplier (i.e. for the market considered) sans tax and subsidies as opposed to the total amount including tax and subsidies that is actually paid by the consumer to purchase a product.

 

Algebraic Solution of Linear Supply and Demand Models
R. Wigle
Director Masters Program in Business Economics
Wilfrid Laurier University
May 9, 2001

http://info.wlu.ca/~wwwsbe/faculty/rwigle/ec238/ref/pe-algebra.pdf

1 Market Equilibrium

In a market equilibrium with no taxes or subsidies, two things are true. First the producer price is the same as the consumer price, and the quantities supplied and demanded are the same. ***

2 Taxes and Subsidies

Now suppose that instead of the market equilibrium we are looking at a case with a tax or subsidy. In these cases, we can again solve for an equilibrium. In this case things are a bit trickier. ***

2.1 Tax

When a tax is present, there is a difference between the price the consumer pays and the price that the producer receives. In simple terms, the consumer pays the producer price plus the tax. ***

2.2 Subsidy

When a subsidy is present, there is once a again a difference between the price the consumer pays and the price that the producer receives. In this case the producer gets what the consumer pays plus the subsidy. ***

[Principled]

That 20+% is due to the extra money that employers have to pay their labor in order to get the workers' take-home pay to what they expect/'need'

There is no extra money needed to pay labor. They still pay a worker his contracted price. No longer will the employee have any federal taxes withheld though. No longer will the employee have to pay employer's "contribution" to FICA.

What indicates to you that any change is needed to keep workers at their contracted earnings???

[Bigun]

ROTFLMAO!! Those cost you so cavalierly toss away as a separate issue are the issue and always have been, that with tax repeal, make up the full potential for decline in prices received by the producer(i.e. before NRST prices!!!)

Absolutely correct! Well said! Well said indeed!

Obtuse as ever I note!!!

LOL! Of course he is! He has NO choice as that is the only arrow left in his quiver!

[ancient_geezer]

You are not reading this research correctly. That 20+% is due to the extra money that employers have to pay their labor in order to get the workers' take-home pay to what they expect/'need'. It is NOT from compliance costs. There are compliance costs, but these are small compared with the labor component I've just described.

ROTFLMAO!!

 

 

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.

• The first type of overhead is tax planning, which in this context refers to all the economic decisions that individuals and firms make to maximize their benefits in the tax code.

• The second type of overhead, tax compliance, refers here to the basic actions required to file the federal income tax, including record keeping, education, form preparation and packaging/sending.

• The third type of overhead is tax audits and litigation, referring to the cost of the IRS and the Tax Court, as well as all the legal costs that taxpayers incur while dealing with these two government institutions.

Of these three costs, the second, tax compliance, is the only one estimated in this report. It is for this reason that the data presented here should be viewed as extremely cautious estimates of the federal income tax compliance burden 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.

 

The same figure that Dr. Williams uses.

Dr. Walter E. Williams, March 2000:
http://www.freerepublic.com/forum/a39b6487a1fb0.htm

The average taxpayer now pays more than $8,000 a year, working from January 1 to May 8 to pay federal, state, and local taxes. In addation to the out-of-pocket cost, Americans spend 5.4 billion hours each year complying with the federal tax code-roughly the equivalent of 3 million people working full time. If it were employed in productive activity, the labor now devoted to tax compliance would be worth $232 billion annually. The federal cost of hiring 93,000 IRS employees is $6 billion. If these Americans weren't fooling around with the tax code, they could produce the entire annual output of the aircraft, trucking, auto, and food processing industries combined..." Emphasis added

But only the beginning of the costs that are impinge businesses throughout the production chain due to the income tax system.

Taken altogether, the true tax burden impressed upon us all through higher prices and loss of productivity exceeds the mere revenue collected by the govenment 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."

 

---

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 depessed sales(deadweight losses) as a concequence of tax system inflated prices much of which would be relieved by removing the more direct tax related business costs accounted for above.

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. "

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.

[expatpat]

The Sales Tax reduces the price of consumption by a little over three percent in 1996

This is a reduction in the price before sales-tax. When the sales tax is added, the gross price is much higher than it was before the NST was instituted.

[Your Nightmare]

THE ECONOMIC IMPACT OF FUNDAMENTAL TAX REFORM

And Jorgenson's model allows for wages to drop. So what's your point?

[Principled]

To claim that "employees' gross pay stays the same, and gross prices stay the same" is ridiculous:

Glad you're getting a kick!

Why not refute the experts' opinions? Calling them ridiculous tells us you disagree - but without any reasons.

Please, do share.

The removal of the costs of the income tax system are about the same as the cost of the nrst. Why is that ridiculous?

[Your Nightmare]

Absolutely correct! Well said! Well said indeed!

You guys crack me up. I bet you have a "No IRS!" t-shirt.

Crank.

LOL! Of course he is! He has NO choice as that is the only arrow left in his quiver!

Just keep marginalizing.

[Principled]

When the sales tax is added, the gross price is much higher than it was before the NST was instituted.

Accoring to the experts (PhDs in economics and LLMs in taxation), prices will be stable. How about some reasons?

We agree that employees will expect and receive their contracted wages still.

Our disagreement is in whether pre-nrst prices will fall to the extent that after-nrst prices are the same as today.

Everyone agrees that there will be significant pretax price reductions. Even the anti-reformers will agree to 10-15%. Nobody thinks that prices will rise by the amount of the nrst!

[Principled]

Thanks for your thoughtful discussion. I gotta go. Hope to be back this weekend.

[Your Nightmare]

Why not refute the experts' opinions? Calling them ridiculous tells us you disagree - but without any reasons.

Show me one, one, that says tax exclusive prices will drop dramatically while nominal wages stay the same. Just one.

The removal of the costs of the income tax system are about the same as the cost of the nrst. Why is that ridiculous?

Because the employer is still paying employees money that went to the payroll/income tax. You are saying they can still keep paying that money and the employer can also get the savings from the employee not having to pay those taxes. But he can't get those savings unless he reduces the employee's nominal wages. You are trying to have it both ways and it doesn't work out.

[Sarastro]

Regarding my speculation that HR 25 will not pass in anything like its present form:

• The vast majority of bills introduced never go anywhere; they are not even reported out of committee.

• The bills that do go somewhere are those supported by the President or the Congressional leadership; the only leader on HR 25 is Delay, but his star is somewhat in decline (regrettably).

• The President has appointed a bipartisan task force to come up with recommendations; whatever comes out of this effort has a better chance of passage than HR 25.

• Even though the President's 2001 tax reform phased out the death tax by 2010, it comes back intact in 2011; I see little chance that Bush can get a filibuster-proof majority to make it permanent, therefore see little hope for that aspect of HR 25.

I favor tax reform, especially reform that motivates greater investment and economic growth, but I am just trying to be realistic about HR 25's chances.

[Principled]

Perhaps you should be aware that both employees and employers must pay equal amounts to FICA.

The worker gets his contracted amount in his check - no federal deductions. This is no change to the employer. The worker just pays his taxes when he spends, not when he earns.

From employer's POV, there is a savings of 7.65% of wages. That amount was never seen by the worker and was not part of the contracted wages. It was simply a tax on business that is being repealed. The business won't have to pay that tax anymore. It will remain in the hands of the business. The business keeps that amount.

The broadening of the tax base allows reductions in rate. No longer will the wage base support SS. The consumption base does. Bigger base means a lower rate can collect the same amounts.

[ancient_geezer]

This is a reduction in the price before sales-tax. When the sales tax is added, the gross price is much higher than it was before the NST was instituted.

You still miss the point, NRST is a replacement, not an additional tax.

As a consequence the gross price with NRST actually declines as costs on business are reduced as well as the income and payroll taxes being repealed per-se.

 

". The Sales Tax produces a reduction in investment goods prices exceeding twenty percent in 1996, rising gradually to between twenty-five and thirty percent over the period 2000-2020. Under the Flat Tax prices of consumption goods and services decline by more that 4: 5 percent in 1996, but this price reduction falls over time to around three percent in 2020. The Sales Tax reduces the price of consumption by a little over three percent in 1996, but this price decline increases to more than ten percent by 2020."

Jorgenson '99

 

Algebraic Solution of Linear Supply and Demand Models
R. Wigle
Director Masters Program in Business Economics
Wilfrid Laurier University
May 9, 2001

http://info.wlu.ca/~wwwsbe/faculty/rwigle/ec238/ref/pe-algebra.pdf

1 Market Equilibrium

In a market equilibrium with no taxes or subsidies, two things are true. First the producer price is the same as the consumer price, and the quantities supplied and demanded are the same. ***

2 Taxes and Subsidies

Now suppose that instead of the market equilibrium we are looking at a case with a tax or subsidy. In these cases, we can again solve for an equilibrium. In this case things are a bit trickier. ***

2.1 Tax

When a tax is present, there is a difference between the price the consumer pays and the price that the producer receives. In simple terms, the consumer pays the producer price plus the tax. ***

2.2 Subsidy

When a subsidy is present, there is once a again a difference between the price the consumer pays and the price that the producer receives. In this case the producer gets what the consumer pays plus the subsidy. ***

[expatpat]

It is for this reason that the data presented here should be viewed as extremely cautious estimates of the federal income tax compliance burden on taxpayers.

ROTFLMAO! Damn right it's extremely rough!

First of all, the estimated cost to individuals is (a) not a true cost at all, but only an opportunity cost (if the individual had used his spare time working a second-job instead of doing his taxes). By this measure, television watching costs the nation Trillions! (b) not a cost to business, anyway.

Secondly, the cost to business is outrageously over-estimated. I ran a $25M business and not even my accounting dept. spent 20% of its time on taxes, and they were only a fraction of my total labor and plant costs. Pure bullsh*t!