Posted on 06/10/2005 11:13:37 AM PDT by Always Right
1. The 23% sales tax rate turns 37%. A retailer who sells an item for $100 must charge his customer an additional $30 for federal sales tax. Most people familiar with state sales tax call this a 30% tax, since the tax is 30% of the seller's price. The Sales Tax folks call this a 23% tax, since $30 is 23% of the final price ($130 including tax), which they call the 'tax-inclusive' rate. Neither way is technically incorrect, it is just important to understand what is really being discussed. Remember this 30% tax-exclusive rate is only the federal portion of the tax, state sales tax will also be added in. With the elimination of federal reporting, states will have to replace their personal and corporate income receipts, with a sales tax. States collected nearly $500 Billion in 2003 through income tax and sales tax. With Personal Consumption at $7.76 Trillion in 2003, that is 6.4% in tax inclusive terms, which will add another 6.8% to the tax-exclusive rate. So if you buy $100 worth of goods, you will end of paying nearly $137 once State and Federal Sales tax.
2. Even 37% is not enough. One amazing fact when sales tax calculates their rate is that they assume 100% compliance. Everyone will cheerfully report every sale. There will be no under the table or black market sales. Also, no one will try to buy goods overseas to avoid this tax. This is pure fantasy. No one could believe any tax system will have perfect compliance and zero avoidance. The current income tax system has about a 15% tax-evasion rate. Conservatively, we could assume that the sales tax will have a similar tax evasion rate of 15% and a tax avoidance (like spending overseas) rate of 5%. With these more realistic assumptions, the tax rate would have to be bumped up to 44% to be revenue neutral. And these are very conservative assumption. Brookings Institute economist William Gale (National Retail Sales Tax, September, 2004) calculated that about a 60 percent sales tax would be required to be revenue neutral.
3. Fraudulent Calculations. Besides using ridiculous assumptions like 100% compliance, the sales tax economists create money out of thin air. Their paid for economists routinely double-count savings of their plan. The biggest one is being the $1.3 Trillion that individuals pay in taxes. Under the 30% Sales Tax bill, that money would end up in the pocket of individuals, and the proponents correctly tell you that take home pay will go up. But then the Sales Tax proponents go on to tell you that prices will go 25-33% to offset their 30% sales tax. Well if individuals are pocketing 67% of the taxes that are eliminated, how are businesses going to reduce prices very much? The sales tax eliminates about $650 Billion in taxes to businesses. Considering Americans consumers spend $8 Trillion on goods and services, that only allows for businesses to lower their costs by 8%. Once the 30% sales tax is added, the final end cost to the consumer will be 20% higher if the calculation were done honestly. Even allowing for a reasonable amount of savings in compliance costs to businesses under the sales tax system, prices would still shoot up 18-19%.
4. Millions must file. The Sales Tax supporters would have you believe that only retailers need to file under the Sales Tax. That simply is not true. In order to offer the 'low' 30% rate, the Sales Tax must tax services too. 'In 1993, 12,778,000 taxpayers filed individual returns with business income or losses, and another 1,919,000 filed farm returns. In addition, in 1992 the IRS received returns for 17,292,286 non-farm sole proprietorship businesses, 1,484,752 partnerships, and 3,868,004 corporations-all of which probably produced goods or services on which the sales tax would be levied. Thus the supposed simplicity of the sales tax turns out to be a mirage.' (Brookings Institution Policy Brief #31-March 1998) Thus over 35 million filers will still be subjected to reporting and audits, most of these are individuals. This doesn't even consider the 100 million of people who will still have their wages reported to the SSA. Also, all households must register every year with the 'sales tax administering authority' in order to receive your monthly tax rebate. Furthermore, individuals that buy things without sales tax, like overseas purchases, must submit monthly forms and payments to the government. Hardly the zero tax filings for individuals as the sales tax supporters claim.
5. Tax Evasion will skyrocket. 20 countries have tried a national sales tax, and 20 have switched to a value-added tax. These countries have gone on record and have flat out stated a retail tax of more then 12% is unworkable. People will avoid it, especially with the internet which makes it very easy for the common citizen to purchase goods from foreign sources. The fact that businesses to business sales are not taxed, makes it very tempting to buy personal stuff under a business name. It will take a mighty powerful and intrusive taxing authority to audit all business expensive to make sure. The sales tax rates we are talking about have never been successfully implemented in the history of the world, but it hasn't been for a lack of trying. "Many people would masquerade as businesses" to avoid the tax, says Robert Hall, an economist at the Hoover Institution. Gale reckons that evasion would be far higher than today 's estimated 15%.
6. Big Government gets Bigger. In the 20 countries where the national sales tax has been implemented, and in each case replaced by necessity by a Value-Added Tax, the amount of federal taxes quickly grew from about 20% of GDP, as currently in the US, to 40% and above of their GDP. Not a promising precedent.
7. Underground Economy still not taxed. The NRST advocates falsely claim that the underground economy now will be taxed. Nothing could be further then the truth. Sure, when the money re-enters the legal economy the money is taxed, but that is true today. But will the drug dealers and prostitutes remit sales tax for their goods and services under the NRST? Absolutely not, this portion of the economy is still invisible to the tax collector and therefore not taxed. According to Bruce Bartlett, 'thus whatever revenue is gained when drug dealers spend their ill-gotten gains will be lost because no tax was collected on their drug sales.' (Bruce R. Bartlett, senior fellow, National Center for Policy, Analysis, November 5, 1997).
8. Lower and Middle Income pay more. Steven Sheffrin of UC Davis in a 1996 CPS brief says that a revue-neutral consumption tax even with a generous personal exemption shifts the tax burden to the lower to middle income households. A 1992 Congressional Budget Office study of consumption based tax concluded the consumption tax would decrease the tax on the wealthiest 20% by five percent, while hitting all other groups with a higher tax burden. The poorest quintile being hit the hardest with a 20% increase in tax and the 20-40% income quintile being hit with 9.3% increase in their effective tax rate. This is because the poorest spend a much higher percentage of their income each year and in many cases are even forced to borrow to keep up with their expenses. These numbers are much worst today as the federal tax liability for the bottom 20% has been greatly reduced through expansion of the earned income tax credit.
9. Elderly assets are unfairly burdened. While people currently working will get to keep more of their paycheck, people on fixed incomes will stay the same. Elderly, who have already worked and saved under the income tax system, will now be faced with paying additional high consumption taxes. This group of especially hard hit people, will not have the opportunity to earn tax-free wages, so all their already taxed wealth will be taxed again when they spend it. Come January 1, 2007, if someone's rent was $1000, they will owe an additional $300 in federal tax alone, and many without any additional source of income.
10. Government Taxes Itself. One amazing thing is under the Sale Tax is that government somehow raises money by taxing itself. Whereas this is an interesting way to reduce government, it is typical of the smoke and mirrors the fraudulent analysis of the so-called fair taxers use. Under the plan, the government is considered the consumer and most of it's purchases and employee salaries are taxable. So if the state of Alabama pays its clerk $30,000 in salary, it would be liable to pay the federal sales tax of $9000. The same applies to the federal government, but it pays itself. An interesting way to raise revenue, but it more fraud on their part. If government could truely tax itself, why not just put 100% sales tax on government and then no one else would have to pay taxes.
11. Auto and Housing Industry Hit Hard. As the luxury taxes have proven in the past, adding a large sales tax on item deters people from buying. In 1991, after the Democrats snuckered Bush Sr. into signing the Luxury Tax, Yacht retailers reported a 77 percent drop in sales that year, while boat builders estimated layoffs at 25,000. And that was only for a 10% tax! With new homes and autos having to compete against existing homes and used cars, paying the additional 30% sales tax will be hard to swallow for most consumers.
My assertion is that that scenario is at least as likely as the FT fantasy scenario that businesses will fall over themselves to immediately give every bit of any savings they get to consumers.
I'm afraid the meaning of that long sentence eludes me.
Of course he does - but he has ulterior motives for sinking tax reform.
Let's note here that the returns that are done under the nrst are only by business (there are no personal/individual returns) - and the returns are nothing more than gross sales and a check for 23% of it.
Also note here that business will be paid for their efforts in reporting gross sales and remitting 23% of it - they'll earn 1/4% for their trouble - that's 1/4% more than they get now for doing horrendous, time consuming, expensive reporting (compliance which, BTW costs the US economy $250 Billion in non productive expenses).
I disagree - it is the case today that things sold for $100 only let the retailer keep about $70. That's due to the income taxes of every link in the production chain being in the price of the good. That's because the employer payroll taxes of every link in the production chain are in the price of the good. That's because the compliance costs of every link in the production chain are in the price of the good.
When the item gets to be sold at retail, the production costs of the good are 20-25% less than the price - as the price is inflated by the fed tax costs. When those tax costs are eliminated, the retailer can charge that much less and still make the same profit.
So I disagree with your assertion - I say the retailers will be able to make the same profit while they sell for less - due to the elimination of tax costs which are currently hidden in prices.
Talk about disingenuously comparing apples and oranges. Sheesh.What do you mean? unPrincipled was making an ignorant claim that "It's increased market share that leads to growing profits." I provided an illustration that showed that that's not the case (it happened again last year - GM had more market share, Ford had more profits). Often the market share leader has no profits.
Really? That's very interesting...
That alone should tell that the idea is worthy of support -- that lawmakers are against it for not being in their self interest. Remember, they are supposed to be there to serve us.
I assumed Gail was correct because there were no factors in the calculation for evasion, but if NIPA numbers don't include any of the evasion economy, your tax base has effectively been reduced by the current tax evasion rate.The NIPA personal expenditures numbers (the base for the FairTax) factor in current sales tax evasion/avoidance. The income numbers (the base for the current system) have the current income/payroll tax evasion/avoidance. It doesn't take a brain surgeon to realize that if the sales tax rate goes from ~7% to ~37% that sales tax avoidance/evasion will increase from the current level.
You made a faulty assumption. I was not discussing a product that is $100 today selling for $100 tomorrow and the retailer only keeping $70. And I actually made a mistake, they would keep $77.
The use of $100 was for ease of math.
Though under the FairTax it is very likely that a $100 product today will cost $100 after tax under the plan.
The flat INCOME tax does little to solve the problems we have with the tax code. Very little. In fact, it only does one thing: flattens the rate.That statement shows gross ignorance of what the Flat Tax really is. The most important feature of the Flat Tax isn't the flat rate, it's that, by taxing consumption, it removes the bias against savings inherent in our current system.
Have it your way, I'm tired of arguing this point with the FT kool-aid drinkers. I'll leave you to the FT fantasy world where businesses prefer to indulge in price wars to see who can go bankrupt first, instead of taking a 20% margin improvement over 10% more business.
The context was keeping the profit margin the same - but you always are the one who takes things out of context.
Now we agree. They have become pampered fools and forgotten that. I sometimes think that the Congress critters should have to remain in their districts, stay out of Washington, meet with constituents every day, and do their voting with tele- or Internet conferencing.
expatpat:"My assertion is that that scenario is at least as likely as the FT fantasy scenario that businesses will fall over themselves to immediately give every bit of any savings they get to consumers."
OK, where do consumers get this 30% more income to spend when prices are raised by the "EviL NRST"™ ?
Things that have already been taxed are not taxed again. The working definition of "used" in this context is "already been taxed".
Take a look here for a few minutes.
Oh, the FT fans tell me that employees will keep their gross salaries. Therefore, their take-home pay will be higher, because they won't lose IT withholding dollars.
(BTW, I don't assert that gross prices will be 30% higher, just that the FT dream that they won't go up at all is just a dream. My guess is 10-15%, but who knows)
THat is the one good feature of the flat tax.
However, it retains the rest of the evils of the income tax.
it retains withholding income taxes
it retains withholding employee payroll taxes
it retains employer payroll taxes
it retains tax costs hidden in prices
it retains the tax component in US exports, continuing the stupid practice of making US goods less competitive in the world market
it retains the assumption that individual taxpayers are guilty until proven innocent
it retains the feds ability to audit individuals arbitrarily
.....
Tax reform proponents aren't ingorant of the one good thing about the flat income tax, but income tax kooks are ignorant of the downside of the flat income tax- ie everything about our graduated income tax save some bias against saving.
If anyone leaves their heirs a billion dollars or even fifty thousand, are you saying that they haven't earned it and it should be confiscated? I just want to be sure that i understand you correctly. Is that what you are saying?
I laugh at your attempt at rhetoric and debate. Really, you should have gone to some of those liberal arts courses rather than blowing them off. I squeezed those in with my business, finance and economic courses and so now I don't need to debate with nit-wits anymore..
The context was keeping the profit margin the same - but you always are the one who takes things out of context.If all businesses are reducing their prices and keeping the same profit margin, how is one particular business suppose to increase their market share? Suppose the company doesn't have profits (some companies actually lose money, ya know)? Hint: market share does not equal profits.
(BTW, I don't assert that gross prices will be 30% higher, just that the FT dream that they won't go up at all is just a dream. My guess is 10-15%, but who knows)"
OK will the take home pay cover the increase in prices?
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