Top 11 Secrets of a National Retail Sales Tax

Various | 6-10-05 | Always Right

[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. 

[FreedomCalls]

Why would the doctor remit anything? Salaries are not taxed under the NRST. Taxes would only be paid when purchasing retail products and services.

The doctor's services to his patients are a taxable service. He is the collector for that tax. He must collect the NRST on whatever he charges his patients. The patients are in effect "purchasing" a retail health service from the doctor.

[lewislynn]

only a stupid idiot would sell a house for less than he paid.

Why would you sell the house for less than $260,000?

I thought you said there would be 20 to 30% price reductions? A $200,000 home purchased today would be worth only $140,000 in your world. How much are YOU willing to sacrifice for lower prices? It looks to me like YOU might be that stupid idiot...be careful what you wish for.

[SALChamps03]

Yes, but business owners assign themselves a salary. That is completely separate from the bills on which his patients would pay tax.

[ancient_geezer]

"Required"? I thought you said it was voluntary. Which is it?

The Social Security Administration already has that information which is necessary for them to fulfill your request for the sales tax rebate. You do realize government has an affirmative duty to perform on your application.

You have the option of making out the application for the rebate or not, that's your choice.

Thus voluntary to you, mandatory on the behalf of government upon your demand.

[lewislynn]

Yes, but business owners assign themselves a salary. That is completely separate from the bills on which his patients would pay tax.

LOL! Where does the business owners salary come from?

[Always Right]

Whose is going to go up zero? Nobody that I can think of. SS income is taxed and that tax goes away.

Shoot about half of the people in this country pay little to no income tax. Income tax is only for people with a significant amount of income, so most people on SS don't pay one red cent to the federal government.

[Always Right]

Why would the doctor remit anything? Salaries are not taxed under the NRST. Taxes would only be paid when purchasing retail products and services.

Medical services are taxable, so every penny a hospital or independant doctor receives they must remit sales tax.

[tomakaze]

re:That is an even bigger loser. Slavery is not the condition of Americans even if they pay income taxes. Pure silliness
 
Well it's obvious we aint gonna agree on that. While i acknowledge that there's no way in hell anythings gonna change, mostly due to fedgov getting away with it for so long, The words do mean what they say, unless read by someone who subscribes to the "living breathing document" view of the constitution (like say, a supreme court justice or any graduate of harvard).
so you're right it is a pretty pointless arguement.
 
that said, what's wrong with apportionment? feds set a yearly budget, and in addition to what the feds collect in tarrifs and excise taxes, the states pony their share based on % population. the state collect this by whatever means the states constitutions allow (myself, i favor a poll tax and nothing else)

[Always Right]

From the Sale Tax Bill:


`SEC. 703. GOVERNMENT PURCHASES.

`(a) Government Purchases-

`(1) PURCHASES BY THE FEDERAL GOVERNMENT- Purchases by the Federal Government of taxable property and services shall be subject to the tax imposed by section 101.

`(2) PURCHASE BY STATE GOVERNMENTS AND THEIR POLITICAL SUBDIVISIONS- Purchases by State governments and their political subdivisions of taxable property and services shall be subject to the tax imposed by section 101.

.....
The government is viewed as the end consumer, so items they pay for including services (employees) are subject to sales tax.

[Smokin' Joe]

So the customer is paying $100 for a $70 item? What's the difference?

30 dollars of tax on a 70 dollar item is 42%, not 37%

[Gaffer]

A legal sale under the income tax does not capture any federal sales tax, but captures income tax embedded in the car.

Whether it's captured in "income taxes" through the middle-men now under the present system or captured in an NRST scenario later, it doesn't make a difference in the end to the government. What it does, however, equalize is the misproportioned taxe rates, breaks, social credit system that the tax code has now. Based on your argument above, which is very confusing, I don't see the bad side.

[Always Right]

What to the it does, however, equalize is the misproportioned taxe rates, breaks, social credit system that the tax code has now.

A simplified code is nice, but we have 535 congresscritters, 100 Senators, and a gang of lobbiests who will fight everyday to muck it all up. Reagan cleaned up the income tax code quite a bit, but it did not last. The current bill already as some exemptions for education, next will be prescription drugs, then certain food....

[pointsal]

For goodness sakes, I cannot think of a bigger waste of time and resources than the time and money I spend preparing my books for compliance with IRS requirements! Throw the existing system out!

[Gaffer]

My beef is really with the social credits, namely the "Earned-Income-Tax-Credit." It is an insidious measure that takes a tax base who not only already doesn't pay (little or none) income taxes, and then "makes believe" that they really paid more taxes on a larger income, hence "earned income" credit, and then GIVES it back to them. There is even a provision for these "taxpayers" to calculate what their EITC payment would be at the end of the year and the government FORCES the employer to pay this out over the year in equal payments. The government does not however give the employer any interest for the us of his money throughout the year.

Early this year I was with a friend in rural Alabama at a general store (feed, seed, and other nik naks) and while we were there at least 10 low income people came in with those IRS checks, averaging about $3-4K a pop. The owner cashed them after taking his cut. All I could think of was that I didn't get a chance to donate MY tax money (definitely a portion of that doled out) to the charity of my choice; the government decided that for me.

EITC fosters single-parenthood and encourages (if it can be said that) idleness. It is one of the worst programs that was ever instituted, coincidentally by a Republican President.

[pointsal]

This post must be from the Accountant's Income Defense (AID).

Change the tax system. It's broke.

[ancient_geezer]

The government is viewed as the end consumer, so items they pay for including services (employees) are subject to sales tax.

Yep.

We tax government today under the federal income/payroll tax system, and would under the Flat Tax.

To not do so under the NRST, would provide a very large windfall to government on which it would use to increase its spending and size relative to the private sector. A condition that government has shown it is more than able, willing and infact determined to do.

 

Relative Shares of Economy
pre-1930	post WWII (1947)	TODAY (2004)

 

A fairly comprehensive discussion of the issues involved in the NRST levy on government consumption (as an issue raised by the JCT) can be found in this PDF:

Impact On State And Local Governments And Tax-Exempt Organizations Of Replacing The Federal Income Tax, JSC-4-96, April 30, 1996 pages  57 thru 61(pdf pages 61-65)

 

To get rid of the NRST provisions taxing government, then reduce the current tax revenues by repealing taxes on government wages, and the governments budget by the same amount. Your issue will be solved, other problems would crop up in place of it, but that problem will be gone.

[GGpaX4DumpedTea]

"Then what option do we have? The current tax system is outrageous, what's the better path to follow?"

Number 1 option - REDUCE SPENDING! Reduce spending at both Federal and State and Local level.

Number 2 - VAT is a bad thing. I saw it first hand during the 3 years I lived in the UK (Northern Ireland). VAT/National Sales Tax are similar, though they operate a bit differently. And all countries with VAT also have HIGH income tax rates. Stuff in England costs about double (US dollar equivalent) what it does here in the US.

Number 3 - My opinion is that some sort of a Flat Income Taxmight be the best alternative to the present system. Any legislation instituting a flat tax must also require major reorganization/reduction/curtailment-of-power in the IRS.

Number 4 - the only argument for National Sales Tax is that it would tend to put US manufacturing on a more equal footing with imports because it would require the same tax rate on incoming goods. Perhaps someone has a suggestion on how to accomplish this without the adverse effects on the rest of us. Note that EC countries avoid VAT on exports. But we can't tax those imports with duties to match the VAT avoided. This in effect is an EC subsidy on exports, but we can't do the same on our exports. Inequitable!

[GGpaX4DumpedTea]

"(myself, i favor a poll tax and nothing else)"

Interesting. Only those paying the poll tax vote? How determined - % of income? % of spending? fixed rate? Other?

This certainly would 'franchise' those of us who support the cost of government with our money. Makes it a lot easier to elect those who would do the will of the electorate.

[Doctor Stochastic]

You left out the ease with which the National Retail Sales Tax can be used for Social Engineering. The first Texas sales tax did exactly that; sugar purchased for baking cookies was not taxed (food), but sugar purchased for making candy was (industrial.) As the current proposal reads, buying a riding lawnmower to mow your own lawn is subject to tax; buying the same lawnmower to mow other peoples lawn isn't a final use; and thus not taxed. (Similarly for bags of fertilizer.)

Things that deemed harmful (taxed, alcohol, firearms) or socially useless (television, movies, chewing gum, hamburgers, soft drinks) can easily be taxed differentially. Similarly for professions. Socially harmful services (rich man, poor man, beggar man, thief) can be taxed higher than socially useful ones (doctor, lawyer, indian chief.)

[ancient_geezer]

Number 1 option - REDUCE SPENDING! Reduce spending at both Federal and State and Local level.

Hasn't happened under the last 100 years with the income tax inplace with half the voting public on the dole paying no tax at all. What makes you figure it will suddenly happen now, with no change in the tax system.

So many Americans paying little or no federal taxes makes for a natural spending constituency. It's like me in the restaurant: What do I care about extravagance if you're footing the bill?
---Walter Williams

Number 2 - VAT is a bad thing. I saw it first hand during the 3 years I lived in the UK (Northern Ireland). VAT/National Sales Tax are similar, though they operate a bit differently. And all countries with VAT also have HIGH income tax rates. Stuff in England costs about double (US dollar equivalent) what it does here in the US.

No argument there, hide the mechnics of major parts of a nation's tax system behind the corporate veil, just hides the economic burden government places on the citizen, it certainly doesn't remove it.

Number 3 - My opinion is that some sort of a Flat Income Taxmight be the best alternative to the present system. Any legislation instituting a flat tax must also require major reorganization/reduction/curtailment-of-power in the IRS.

Any form of income tax, by its very nature, requires a large IRS to administer it, that is not going away under a Flat Tax.

Any tax system that relies on the individual or citizen to assess and report his own tax, will have a large bureaucracy to make sure the assessment, no matter what the size of the form it is reported on, is accurate, truthful, and complete. In fact the less information in a tax return the more powerful an IRS will become to force compliance.

 

Number 4 - the only argument for National Sales Tax is that it would tend to put US manufacturing on a more equal footing with imports because it would require the same tax rate on incoming goods. Perhaps someone has a suggestion on how to accomplish this without the adverse effects on the rest of us. Note that EC countries avoid VAT on exports. But we can't tax those imports with duties to match the VAT avoided. This in effect is an EC subsidy on exports, but we can't do the same on our exports. Inequitable!

There are actually many more arguments for a National Retail Sales Tax than this, one very big one is to get the IRS out of the private lives and financial privacy of the citizen's home. A second is the very large costs imposed upon manufacturing and business in general by the income/payroll tax system that impede the economy and reduce the living standards of everyone, what ever the format of its forms or number of tax bracket in it.