Top 11 Secrets of a National Retail Sales Tax

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.

Exactly, and it's this amount that will decrease due to higher sales tax evasion/avoidance
This higher sales tax evasion/avoidance is what isn't accounted for in the FairTax rate.

Sorry, the amounts that are reported into NIPA, are reported from obviously compliant sources under even the poor enforcibility of the current federal income tax system.

Most of the IRS noncompliance tax gap is due to factors such as EITC fraud, fraudulent and erroneous deduction claims, fraudulent trust and income sheltering schemes, non reporting of international income etc. which are all are part and parcel to the complexity of the income tax system and not a factor in an NRST.

Where you have any complex tax system with large numbers of filers in relation to the bureaucracy that tries to administer it you have a disaster, the EU experience with its own complex of tax systems is a clear example of how countries with similar tax rates have highly divergent evasion rates and underground economies that result more from complexity and high bureaucratic burdens than rates of taxation. Countries with generally 20% sales tax rates exhibit both high and low compliance and evasion rates related mainly to complexity and bureaucratic burdens on small businesses, than to the tax rates imposed upon them.

We can expect the above factors to be eliminated where non-compliance is concerned rather than increased with an NRST in place and reduced where the arise as a function of confusion, and complexity of the income tax system in place.

Of more interest, of course, here in the US, IRS non compliance measures don't begin to touch the fraud and hiding of taxable income under the 40% income plus self employment tax rates hitting self employed transactions that are the core evasion under the current tax system.

A single proprietor or small business operating off the books to avoid the redtape and high rates doesn't report sales or income to anyone, especially the single proprietor not bothering to file at all which does not show up in any of the IRS noncompliance data or NIPA for that matter, and will continue in the same operational pattern as he does under the current system.

The transactions that arise from core evasion are not simply not tracked in the NIPA, or by the IRS and those amounts will continue to not be reported as sales or income under any tax system thus no change to be expected there and are not a part of the the taxbase measure for the NRST.

As far as the compliance tax gap measures of the IRS goes, The information comes from analysis of its ongoing litigations and audits of tax returns, relying on recorded and tracible information associated with filing of income tax returns and not in any way related to retail sales taxes and the features of an NRST.

No filing or reporting, guess what it isn't included in the NRST taxbase for calculating the tax rate.

IRS’s Comprehensive Approach to Compliance
Measurement
by
Robert E. Brown and Mark J. Mazur*
Internal Revenue Service; June 2003
http://www.irs.gov/pub/irs-soi/mazur.pdf

Taxpayer compliance is a multi-faceted measure. One theoretically appealing way to define taxpayer compliance is to consider three distinct types of compliance: payment compliance; filing compliance; and reporting compliance.2 These three mutually exclusive and exhaustive measures together provide a comprehensive look at overall taxpayer compliance, which would feed into estimates of the Tax Gap (the difference between taxes paid and taxes owed for all federal taxes and all taxpayers).

*** SNIP ***

There are three characteristics of the Tax Gap Map worth noting. First, definitive data exists only for a few component items, primarily the estimates of payment compliance and those for reporting compliance for the Earned Income Tax Credit and for Duplicate Dependents.4 The other estimates all represent projections from earlier studies, primarily the Taxpayer Compliance Measurement Program (TCMP) studies done by the IRS in the 1980s and earlier. Second, these projections from dated compliance studies cannot possibly account for all the changes (tax and non-tax) that have taken place over the passing years. Therefore, the estimates should be viewed as rough guides to the magnitude of the tax gap components, despite the seeming precision of the estimates. Third, despite the imprecision of the estimates, it is likely that the largest components of the tax gap are noncompliance with the reporting requirements for the individual income tax and employment taxes. This should not be surprising given that these are the two largest components for federal tax revenue.5

There are very few instances of recent reporting compliance estimates, which are based on specific, targeted studies the IRS has conducted. One example is the Earned Income Tax Credit, where the IRS has conducted fairly reliable compliance studies for tax years 1997 and 1999. 6 In general, though, the most recent comprehensive studies on reporting compliance relate to tax years the late 1980s.

*** SNIP ***

The three measures provide different views of the compliance puzzle, and when placed next to one another provide a comprehensive picture of the overall level of compliance.

The filing compliance measure tracks the percent of required returns that are timely filed.

The reporting compliance measure tracks the percent of true tax liability that is correctly reported.

The payment compliance measure tracks the percent of reported tax that is timely paid.

The major factors there have much to do with tax system complexity, EITC and child tax credit scams and taxpayer error as it does fraudulent deductions on the filed tax returns that are submitted:

refer ==> IPI Publication Full Text - IPI Policy Report - # 168

Simplifying Federal Taxes: The Advantages of Consumption-Based Taxation
by Chris R. Edwards on 02/12/2002

Noncompliance

Tax complexity leads to noncompliance with the tax system, whether through confusion or a desire to evade taxes. The General Accounting Office estimates that the government loses about 17 percent of income tax revenues to noncompliance, or about $200 billion annually.⁵⁹ [GAO, “Reducing the Tax Gap,” GAO/GGD-95–157, June 2, 1995 page 2]

Former IRS commissioner Shirley Peterson thinks that confusion plays an important role in noncompliance: “A good part of what we call non-compliance with the tax laws is caused by taxpayers’ lack of understanding of what is required in the first place.”⁶⁰ The JCT notes that for other taxpayers, “complexity can foster multiple interpretations of the law and aggressive planning opportunities. In addition, taxpayers may consciously choose to ‘play the audit lottery’ by taking a questionable position on their tax returns, in the belief that complexity will shield them from discovery.”⁶¹

The IRS noncompliance data of the IRS shows only a tip of a very large undergound iceberg, only hinted at by the growing tax gap of IRS measures.

Tax Evasion, IRS Priorities, and the EITC

I. The Scope of the Tax Evasion Problem

Former IRS Commissioner Charles Rossotti (2002) estimated that in a given year, the IRS assesses almost $30 billion of taxes that it will never collect. This is not theoretical tax evasion. The $30 billion represents underpayments of tax that the IRS has identified, but cannot collect because its staff is spread so thin. Rossotti estimated that it would cost about $2.2 billion to collect that money. If you accept that estimate, the IRS could net almost $28 billion from tax fraud and errors that are identified and ripe for collection.

Assuming that the amount grows with GDP, collecting on assessments would, over the next decade, cover the entire cost of the new prescription drug benefit under Medicare (although not the superfluous new savings accounts in the House version of the bill). It is more than the entire cost of the Jobs and Growth Tax Relief Reconciliation Act of 2003 as scored by the JCT (although not enough to finance the extension of the myriad expiring provisions). It is serious money.

But it is tiny compared with the entire "tax gap"—the IRS's estimate of total taxes due but not collected. The IRS estimated that $232 billion in taxes were due in 1998, but never collected. (See Figure 1.) These estimates are highly uncertain because the IRS stopped systematically measuring tax compliance for all but working poor people after 1988, but it suggests that tax compliance is a huge problem, and it has been growing. According to Commissioner Rossotti, "Despite significant improvements in the management of the IRS, the health of the federal tax administration system is on a serious long-term downtrend. This is systematically undermining one of the most important foundations of the American economy."

Why is the gap growing? To begin with, the number of tax returns has been growing much faster than the IRS staff. This has occurred for several reasons. There are more head of household and single returns and fewer married filing joint returns because couples are marrying later, if at all, and the divorce rate is rising. Also, many more children are filing tax returns. (Plumley and Steuerle, forthcoming)

Moreover, after steady growth in compliance resources through the 1980s, IRS staff dedicated to compliance and enforcement plummeted in the 1990s. Between FY 1992 and 2001, the IRS workload increased by 16 percent while its staff declined by 16 percent. Field compliance personnel fell by 28 percent—more than 8,000 FTEs—between FY 1992 and 2002.

The effect on examinations is even more striking. According to the Internal Revenue Service (2001), the number of field examiners fell by almost two-third between 1997 and 2000. The number of collection cases closed fell by nearly half over the same interval. The number of criminal tax cases not related to income from illegal activities fell by more than two-thirds, from 1,498 in 1997 to 409 in 2000.

A large part of the problem, according to the Commissioner, is budgets with "unrealistic assumptions about such items as pay raises, inflation and other mandates, including specific mailing and notification requirements." In the late 1990s, a key factor was the taxpayer bill of rights, which required the IRS to answer its telephones and focus its efforts on "customer service." The better service, while surely welcome, came at the expense of audit activity. This decade, Congress has twice mandated that the IRS interrupt its ordinary operations to mail out springtime checks to most taxpayers—advance payments on the low-end tax rate cut in 2001 and on the child credit increase in 2003. Without a supplemental appropriation to pay for additional staff, the staff managing these huge mailings must come out of existing employees, typically compliance staff.

Finally, the opportunities for evasion have been growing. While the overall number of returns grew by 16 percent, the number of tax returns reporting more than $100,000 of income grew by 342 percent. These people who face the highest marginal tax rates have the most to gain from tax evasion, and the most opportunities to engage in it. Commissioner Rossotti reported that "enormous amounts of money ... flow through 'pass-through entities'—such as partnerships, trusts, and S-corporations," which are ideally suited to hiding income. In tax year 2000, pass-throughs accounted for 4.8 million tax returns with over $660 billion of income.

*** SNIP ***

Conclusion

Noncompliance is a serious issue that undermines the tax system and carries a huge cost in terms of higher taxes on law-abiding citizens, fewer government services, and more government debt. The IRS is taking a number of important steps to improve tax compliance. However, the IRS's preoccupation with EITC recipients seems like a poor use of scarce audit resources, is likely to undermine the EITC program, and is unfair. It would be better to address the endemic problems in the income tax at all income levels. EITC compliance, and compliance in other areas, could also be improved by simplifying the tax law.

Figures

Tax Gap Map for Tax Year 1998 (in $ Billions)

You are the one, nightie, who was trying to somehow equate the FairTax rate as "having somehing to do" with the marginal income tax rates. You were attempting this in the post I'm replying to right now. That was not the point as you know full well.

Nor will your "stunt" work of pretending the income tax rate does not matter and that there is no evasion while at the same time pretending that the FairTax rate is so high as to trigger massive evasion. That's simply not true. The relevant points are the gains due to evasion by anyone under the present system as compared to gains under the FairTax.

The IT system has higher marginal rates than the FairTax even including the probable state sales tax rate. In addition, just the withholding taxes at 15.3% t-i (or 18.06% t-e to use your t-e comparisons). Adding on the 7% t-e state sales tax you tried to add to only one side (the FairtTax side - imagine that) of the calculation, you'd end up with 42.71% t-e at a 15% (17.65% t-e) marginal IT rate. That's a lot more than under the FairTax with the probable state sales tax rate and in fact, the 15% marginal IT rate is probably at least 20% (25% t-e) so that the truly comparative rates would easily be over 45% (50.06% t-e in fact) IT vs 33% FairTax.

"The FairTax rate has absolutely nothing to do with marginal income tax rates or income tax evasion/avoidance." Certainly the FairTax rate has absolutely nothing to do with marginal income tax RATES (in that it does in no way determine them), but the last phrase in that sentence when used correctly from a grammatical standpoint is a flat lie. The FairTax rate and the income tax rate and the comparison of them have everything to do with evasion.

The obvious point being that 45% (which we showed is over 50% remember) is MUCH greater than 33% and anyone with half a brain (eliminates you I guess) would realize there was a bigger incentive with evading the 17+% higher IT rate ... in other words, the present IT system is more likely to incentivize evasion than the FairTax.

Services are certainly no more difficult to tax than products and evasion is neither easier or harder - but let's keep in mind the evasion under the IT of services which is exactly comparable to the FairTax (except that with the IT, the evasion gains the evader more bux than with the lower-rate FairTax; 50+% vs 33%, remember). Or perhaps you'd like to lie and say there is no evasion with services under the IT?

Claiming that, somehow, under the FairTax evasion is vastly increased for either products or services is ludicrous and makes you look like the dolt you are. There will be evasion under any tax system and the amount is greatly governed by how much the evader stands to gain under the particular tax system and the safety he perceives in evading and has nothing at all to do with your lovely (and inapplicable) "expenditures" digression.

With less to gain under the FairTax and with the ability to concentrate more collection resources on a smaller number of taxpayers, an evader would have to be an utter fool to think the FairTax is "better" for him --- it ain't; just the opposite. Go ask your dad.

But what does income tax compliance have to do with the NIPA expenditure numbers or the FairTax rate calculation? Answer: nothing.

You are right because income tax non-compliance is not an issue under NRST which shares little in common with an income tax system. As a consequence the rate determined from NIPA production sales data as current evasion activity as such is not incorportate into the taxbase.

This is a really long post that is totally irrelevant (typical AG: volume over accuracy or relevance).

Let see the total information component of your response, nil. But is a nice try at deflecting the the issues involved.

The IRS compliance figures, which you base your claim that somehow an NRST will increase because of higher rates, ignore the result of complexity and bureaucratic regulatory burden imposed as a prime motivator in tax evasion. A major factor unaddressesed in you simplistic economic views of the world of taxes.

Complexity of tax system is a well documented factor of noncompliance & tax evasion in all countries that operates regardless of high rates, where compliance is both very high for some countries and very low with others with the same 20+ percent sales tax rates on their citizens, the only differences being the more complex the tax system impacting small businesses, the higher the tax avoidence and evasion found.

With tax rate, being your focus, you neglect to note the high marginal rates of the income/payroll tax system 40%+ focused on small businesses and self-employed income are much greater even than the maximum 23% marginal rates of the NRST collected from business customers. Once the pattern of evasion begins in the first increment on that next dollar earned subject to 40% under an income tax system it grows to total evasion and non filing to deter discovery. Thus 40% marginal rate is a very in relation to the much lower maximum marginal rate of 23% or less under the provision of HR25.

Whether a small business begins evasion from frustration/confusion arising from complixity and bureaucratic hijinks, or from high marginal rate on that next dollar earned. The safest route under an income tax system is for the little guy to go wholehog and fail to file altogether, relying on the cover of 130 million filers he can be sure the IRS is focused on.

That is the core of the income tax evasion problem, large businesses are too visible to not file returns, have too much to risk, and far too many third party transaction records standing as witness against them to successfully evade the taxman outright. The risks of discovery are too high for outright evasion attempts.

However, the avoidance opportunites under the income tax abound, arising from out of its complex rules and structure, factors that are eliminated wholesale in going to an NRST.

Avoidence under the NRST amounts to saving and investing income and which contributes to an expanding business infra-structure and more efficient production resulting in economic growth, and creates more income which is ultimately spent on taxed consumption. A self correcting factor compensating for tax avoidence activities under the NRST.

Bottomline in turning to an NRST, there is little basis on which to expect an increase in tax avoidence or evasion over what already exists in the current income/payroll tax system.

In going to an NRST, the citizen is empowered to make the choice of invest or spend as he will, rather than handing government the first options on rewards of his productivity. Whichever choice that citizen makes enhances first his own living standard self reliance, advances growth of economic activity and their by ultimate assures revenue for the proper functions of national government under the constitution.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.