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.
You left out the ease with which the National Retail Sales Tax can be used for Social Engineering.
As if any income tax, flat or otherwise are not uniquely suited for precisely that purpose and function, including the inherent threat of a powerful bureaucracy with force standing over every citizen of the nation.
The Intent of any income tax is for political and social control not revenue collection.
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.)
Taxation under the legislation is for final use or consumption, not for the use in a business providing final consumption. It seems to escape your notice that the guy doing the lawn mowing for other people, is required to collect and remitt tax for his service from his customers.
I find it interesting you appear to want to continue a system that hides tax from the view of the citizen, rather than assure that each and every voter participates in and is aware of the economic burden levied on us as a consequence of ever growing government.
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.)
Yep they are called excise & license taxes and we already do that and have been doing over 220 years now. You figure they are going away? Seems to be a solid tradition of such taxes going back to ole George Washington himself.
This has what to do with the desirability of cleaning the slate with a single rate retail sales tax?
If a businessman gets 10% less volume when he raises his prices by 20%, guess what he is going to do? Read if you can't guess, read an elementary Economics textbook.
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.
Of course there is that small factor of repealing the Constitutional amendment that prohibits the levy of any tax that is made a requirement for voting.
As long as Congress Critters have a built in constituency to spend with folks not paying taxes you really figure that amendment is going to get through th 2/3rds reqirement of both houses of Congress to propose such to the states?
That is naive, fails Econ 101. If the market is not very elastic, you get very little extra volume if you lower prices, and you get LESS profit.
What happens in a market that is elastic because overhead costs of doing business fall opening the door to competitors undercutting prices to their market advantage? Lower costs make room for higher profits at lower prices.
Competition takes other forms besides cutting prices. Many prefer to get their extra volume by special features, or extra service, etc. You don't see Mercedes, Jaguar, Lexus, Cadillac cutting prices to compete with Hyundais.
Moreover, many businessmen see profitable co-existence as being preferable to unprofitable cut-throat price competition.
Your points in Post #420 on this thread have validity. Out of all the options, we on this forum may be best qualified to come up with a GOOD, workable proposal that would accomplish the good parts without the bad parts. Anyone up to the challenge? If we could get consensus here, we could sell it... :)
Competition takes other forms besides cutting prices.These guys seem to think pricing is a race to the bottom. It doesn't work that way for most products.
Doubt very much you will find much concensus as to mode of taxation.
This thread is a good example of the entrenched attitudes that exist on the subject.
Basically it comes down to those who believe they have an economic haven in the current system what to maintain it, those the perceive a disadvantage to themselves or families in the current system want a major change away from how taxation is accomplished today.
After engaging in continued debate and discussions on this forum extending back to early 1998, it doubt very much the entrench camps in these debates are likely to come to any sort of agreement such as you may envision.
Sometimes, the market is highly elastic and cutting prices hugely expands the total market by bringing in new large classes of customer, and everyone benefits (e.g., PCs during the 80's and 90's). Eventually, though, the market is bounded and you return to the scenario in the first para, like PCs now.
Great point!
With moderate elasticity, price cuts can sometimes yield higher profits, as long as your competitors don't follow your action. Usually, your competitors do, there's a price war for a while, and then everyone realizes they have cut their own throats, and prices go back up to more profitable levels.Game theory. Businesses don't act without expecting their competitors to react.
The more players there are in the market, the lower prices will be. High end versions of products are the exception to the rule. Their selling point isn't price. For everyone else, price is determined by supply and demand. More supply lowers the price. More competitors offering more of the product equals lower price.
If you're in business and you're waiting for the government to do something across the board for all businesses before you think you can compete you're in big trouble...even if the government does act.
Any businessman worth his salt is striving to REDUCE competition, especially price competition. His aim is to so differentiate his product from other similar products that his competitors thereby become few in number.
Some products (like gasoline) are commodities, where differentiation is not possible, but even here you will find substantial variations in price as you travel around. You view of competition is very simplistic, and just plain wrong.
With moderate elasticity, price cuts can sometimes yield higher profits, as long as your competitors don't follow your action.
You have done little more than construct a very poor and limited argument on which you hope people will generalize.
Sorry the economy as a whole is much broader more flexible than the limitations that you would like to artificially impose.
No change in overall sales volume is even required, merely adjustment in pricing offsetting repeal of business income & payroll taxes and the lower tax related overhead costs that come with that, with profit maintained.
Therein lay the fallacy of your elasticities argument.
As I challenged you before in #249, quantify it across the broad economy as has been done by others. Lets look at your methodology and test your results against broad sectors of the economy as it exits, not just a mere hypothetical in generalized language.
Very few sectors of the economy meet your restrictions. Those conditions you lay would especially be challenged considering a major change in mode of taxation from income taxation to an overt retail sales tax. Such a change would of necessity include large changes in market elasticities simply by virtue of the open incentives to the consumer to save & invest taxfree and spend more later, or spend less now and be taxed.
The pressure on business to reduce prices by the savings in overhead costs attendant with the repeal of the business income and payroll taxes will be tremendous.
With the added pressures place on business by the consumer/investor, as well as competitors more than happy to attract that consumer to their companies, producer level prices will indeed come down to the advantage of those that adapt, those that refuse to will be left hanging in the breeze of being passed by.
No change in overall sales volume is even required, merely adjustment in pricing offsetting repeal of business income & payroll taxes and the lower tax related overhead costs that come with that, with profit maintained.Were you saying something about "not just a mere hypothetical in generalized language"?----
Such a change would of necessity include large changes in market elasticities simply by virtue of the open incentives to the consumer to save & invest taxfree and spend more later, or spend less now and be taxed.
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With the added pressures place on business by the consumer/investor, as well as competitors more than happy to attract that consumer to their companies, producer level prices will indeed come down to the advantage of those that adapt, those that refuse to will be left hanging in the breeze of being passed by.
Any businessman worth his salt is striving to REDUCE competition, especially price competition. His aim is to so differentiate his product from other similar products that his competitors thereby become few in number.If it were all about price, there would be no advertising and we would all be buying stuff in white boxes.
Your arrogance is not a very attractive personality trait.
Your response is a lot more generalized hand-waving than mine. I'm afraid I don't have the time or inclination to carry out the large project you propose, especially since you and your FT co-religionists would reject it, anyway.
Were you saying something about "not just a mere hypothetical in generalized language"?
"As I challenged you before in #249, quantify it across the broad economy as has been done by others."
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