Bruce Bartlett (back to web version) |
SendPosted on 05/03/2005 3:16:24 AM PDT by RobFromGa
The national sales tax
Bruce Bartlett (back to web version) | Send
May 3, 2005
According to columnist Robert Novak, House Majority Leader Tom DeLay, R-Texas, is adamant about replacing the entire federal tax system -- payroll and income taxes -- with a 30 percent national retail sales tax (NRST) collected by the states, such as that in H.R. 25, sponsored by Rep. John Linder, R-Ga.
I have written many times before about what a dopy idea I think this is. Following is an effort to summarize the key arguments against it that appear over and over again in the scholarly literature.
-- People will still have to keep records, file income tax returns and get audited, because the states and some cities will continue to have income taxes. There is no reason whatsoever to think that the states will get rid of their income taxes if the federal income tax is abolished.
Quite the contrary, they are likely to view the federal government as co-opting their traditional tax base -- the general sales tax. Therefore, the states will just take over the tax base being given up by the federal government -- the income tax -- and abolish their state sales taxes, which would otherwise come on top of the NRST.
The only way this can be prevented is if the federal government prohibits the states from imposing income taxes at the same time it abolishes the federal income tax, which is probably impossible constitutionally. And if the states keep their sales taxes, the federal government will have to force them to conform to its tax base. Right now, no two states have exactly the same sales tax systems and none come anywhere close to taxing sales as broadly as contemplated by the NRST.
-- There is a very severe problem of taxing business inputs under a sales tax. These must be exempt from tax in order to avoid cascading -- taxes being levied on taxes -- which creates serious economic distortions. To avoid this under a NRST, every business, no matter how small, would need some sort of exemption certificate, which would create unlimited opportunities for evasion, or they will have to be extensively audited in ways at least as onerous as under the income tax.
-- Services are by their nature much more difficult to tax than goods. For this reason, no state makes any effort to tax more than a few of them. Yet the NRST would tax 100 percent of services, including medical services and government services. Every time you go to the hospital, you will have to pay 30 percent on top to the federal government. And local governments will also be taxed by the federal government on services they provide, which will sharply raise property taxes.
-- In order to offset the regressivity of the NRST, it would establish a massive new government entitlement program costing hundreds of billions of dollars that would send rebate checks to every American on a monthly basis. This system would be based on the poverty level income established by the Census Bureau. People would get 23 percent of this amount annually in 12 monthly installments based on their family status. Quite apart from the massive complexity of this proposal, it would clearly require an enormous enforcement mechanism to avoid fraud and would undoubtedly be manipulated by politicians. It would be very tempting to change the formula to aid the poor and penalize the rich, just as the current tax code does.
-- Every serious analysis has concluded that a NRST would have massive evasion. Taxing the spending of drug dealers and others not currently paying income taxes will not come close to compensating for the new evasion opportunities that will be created. Since it is not in the interest of either retailers or consumers to pay the tax, and because all of the revenue is collected at the point of final sale, it will be too easy for tax-free deals to be made with producers and wholesalers.
Although evasion of state sales taxes is relatively small, that is only because the rates are low enough that it is not worth the trouble. However, where rates are high on things like tobacco, evasion is also high. A vast amount of foreign experience indicates that retail sales taxes cannot be collected much above 10 percent without breaking down.
Under our current tax system, there is withholding of taxes on wages, which is the vast bulk of the tax base. Under a value-added tax (VAT), something similar occurs because taxes are paid at each point of the production-distribution system. Thus, if the retailer fails to collect the tax, only a small portion of the total revenue is lost, whereas with a NRST, all of it would be lost.
Primarily for this reason, every single country that has ever contemplated something like a NRST has instead chosen a VAT, which the NRST people oppose.
... AND the Child Tax Credit, which is also a refundable tax credit (i.e. negative income tax).
Many (most?) people do not realize that the $1000/child Child Tax Credit turns many would-be taxpayers into modern-day welfare recipients because their income tax "refund" is not limited to just getting back their withholdings. Some of them get back thousands of dollars on top of what was withheld from their paychecks.
"I know, as a small business owner, that my overall costs coupled with my costs of compliance are going to be as bad, if not worse, than what it costs me now."
How?
In the interest of the freedom and prosperity of my children and grandchildren, I support the FairTax.
"they say 23% tax because it sounds better than..."
No, they say 23% because it is the direct comparison to the income tax we have today, being inclusive.
but to me the flat tax with a simplified tax code is far less risky.
Far less risky, and a known path back right to where we are now.
The first income tax was a flat tax, it didn't stay that way through even one session of congress before adding on graduated brackets, exemptions and deductions at an every growing rate morphing into the complex income tax system we have today.
Even recent experience at attempts to collapse the number of brackets and tighten up the system by removing deductions, and simplifying the code back during the Reagan administration has shown that the income tax always bounce back to its ugly worst even more rapidly than it grew the first time, inspite of the best of intentions.
One thing is certain and forseen concerning any income tax, whether flat round or square:
"A hand from Washington will be stretched out and placed upon every man's business; the eye of the federal inspector will be in every man's counting house....The law will of necessity have inquisical features, it will provide penalties, it will create complicated machinery. Under it men will be hauled into courts distant from their homes. Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the tax payer. An army of federal inspectors, spies, and detectives will descend upon the state."
-- Virginian House Speaker Richard E. Byrd, 1910, predicting the consequences of an income tax.
And ultimately history will always win out:
- When there is an income tax, the just man will pay more and the unjust less on the same amount of income.
"I would rather see the whole 'prebate' (which already reminds all too much of McGovern's negative income tax) dropped from the NRST proposals. That would mean the rate could be dropped from 23%(inclusive)/30%(exclusive) to something more reasonable."
That would make the proposal regressive, which would make it politically DOA.
I am unaware that the Fair Tax exempted businesses from tax on retail goods. I've read the legislation, but I did not see that in there. Would someone kindly point me to where it says that.
Beware the tax accountants on these threads, for obvious reasons.
Part of it's appeal, in my book.
`SEC. 102. INTERMEDIATE AND EXPORT SALES.
`(a) In General- For purposes of this subtitle--
`(1) BUSINESS AND EXPORT PURPOSES- No tax shall be imposed under
section 101 on any taxable property or service purchased
for--
`(A) a business purpose in a trade or business
How?Credit card processing fees is one. Businesses pay a percentage (~2%) of the total transaction. Add taxes to the transaction and the merchant pays more to process it.
No, they say 23% because it is the direct comparison to the income tax we have today, being inclusive.LOL!
"and the fact that foriegn companies would set up tax havens here and contribute to our tax base..."
Although I agree with you that our country would attract a lot of business and manufacturing, I don't think that would add to our tax base. It would add to our economy and eventually the US customer would buy the products, but if the products are not sold here they aren't taxed here.
It is not a lie. It IS 30%. Don't try the inclusive/exclusive deception here.
No. Food would be taxed.
"Any income a foreign company ...."
I bet that would motivate them to become a US company.
"Income is not retail sales. Besides, what ever they might have sold at retail had already been taxed."
Giving the competitive advantage to US companies.
I bet that would motivate them to become a US company.I'm not sure that would help. And anytime a business does things for tax reasons it usually adds a distortion to the economy. In general, distortions in the economy prevent it from reaching it's optimum level.
Giving the competitive advantage to US companies.I think US companies can compete without the interference of the government. Don't you?
I don't agree. The prices will be reduced in most commodities, therefore the net effect to CC cost to businesses should be break even.
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