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.

I just believe it is misleading to tout that the NRST eliminates the IRS when there will still be tax collectors at the federal and state level.

The IRS is eliminated. There will be sales tax revenue agents just as there are today. I believe it is misleading to connote that the IRS is going to stay.

Not in Jorgenson and Wilcoxen's model.

Of course you over look the emperically determined parameratized inputs, that establish the relation between change in tax policy production, prices (including price of labor) and consumer behaviour that of necessity implicitly incorporates all cost factors involved in a change in tax policy.

You know, the unique little twist that distinguishes J&W's IGEM from the run of the mill attempts at macro simulations.

Sorry, YN, but the more you twist and turn the more you are losing ground. Thanks for the opportunites to enlighten folks.

But if both the doctor and drug dealer are going to buy a Mercedes, they will both be paying the same sales tax and the drug dealer WILL be taxed. If you have money, no matter how you got it, you will spend money. If you spend money, you will be taxed.

What seems clear to me is that the current system sucks big time. It's also clear that when "reform" gets talked, the truth is that all they're talking about is fiddling with numbers, deductions, rules.

It is absolutely true that an entire library is necessary to keep track of our current tax law; it is absolutely true that expert accountants preparing the same return cannot arrive at the same number; it is absolutely true that the code is on the side of those with a bank of lawyers; it is absolutely true that the code is a tool that government uses to bludgeon people it finds distasteful; it is absolutely true that the code is corrupt.

Now, it seems that I'm on the side of anyone who's talking about changing a system, not just "reforming" a line here and a line there.

That is pretty much limited to the NRST and the flat taxers.

The drug dealer gets to pocket all of his receipts.

Yep just as he does today under the income/payroll tax system.

That is where the drug dealer cheats the sales tax system, which is about identicle to how he cheats the income tax.

As you point out.

The difference lay when he purchases anything under the NRST from a legitimate business.

That drugdealer/consumer then pays the full tax. Under the income tax system today, when buying the same thing, he pays only that portion of federal tax per-se that happens to get passed on in the prices of goods and services.

Which you have been telling me for years is 30%.

No I have been telling you for years that the combination of federal taxes, tax system related costs on business, and increased efficiency providing growth in productivity allows reduction of producer prices by about 20-25% in the short term rising to 30% over time under competition for the consumer/investors dollar.

That however is not the federal tax per-se, passed through prices. But then you know that, as I have stated as much hundreds of times to you and others as well.

But nice try at a strawman, anyway.

This is really silly. The problem is not when they spend it. The doctor has to remit sales tax on his gross receipts, and drug dealer does not. The drug dealer gets to pocket all of his receipts. The drug dealer has 23% more money to spend than the doctor. That is where the drug dealer cheats the sales tax system, which is about identicle to how he cheats the income tax.

Not really. The drug dealer is never going to pay any tax on his receipts. Let me give you a better example. Here in Southern California there is a massive underground enonomy. Both legal and illegal immigrants from Mexico work jobs that pay cash. Some are gardeners, housekeepers, construction laborers, etc. This has been going on for decades. They never pay income tax and never will and in many cases they are considered day laborers and their employers are not required to withhold taxes. They are eligible for food stamps because of no documentable income, and if they are paid by check, there are dozens of liquor and grocery stores that will cash them. I have seen it hundreds of times. In fact, there are stores I will avoid on certain days because of the large number of people in line waiting to cash their checks. They are always "even dollars" like $300, $250, something like that. They are never for $321.45 or some odd amount so you know there are no taxes being withheld from them.

The point here is that you can never stop people from cheating if they are inclined to cheat. BUT you can collect taxes from them when they make purchases from legitimate retailers. In you example sure, the Dr. has less spendable income. But when the drug dealer has to go to the Dr., he IS going to pay at least something.

You can find $60,000 cars for sale just down the street from $18,000 cars, can't you?

There are many dissimilar types of cars. Dissimilar cars may have different prices.

What you won't find is two similar cars with such price differences.

The reason you find all similar products priced similarly is because competition drives out unnecessary costs, just as competition would force eliminated tax costs from prices after implementing the nrst. Then add the nrst and prices come back to today's level.

But you will have no withholding (you'll pay your 100% of your taxes when you purchase for retail consumption) - no payroll tax withheld and no income tax withheld. ANd you'll have a prebate to cover the costs of poverty level spending.

So now it depends on what the definition of 'similar' is. LOL!

That is also a point I have been making -- that businesses make their product as different as they can, so they don't have to reduce their prices or sell their cars for $18000. There's a lot more to competing than dropping your price, and that's where your argument has collapsed into a damp spot on the rug.

That's not enforceable anywhere that has a saltwater coast.

The fact is, if you had enough gasoline on a 30' boat, and were willing to drive the requisite thousand miles it would take to get from Mexico to some little pier on the Gulf, you could do it, and chances are, you wouldn't get caught, because everyone excepts the runners to use the easy route via Miami.

As it is now, most of our ports have at least one bent customs agent, now, they are likely not to let terrorists in, with drugs and contraband though, it becomes entirely different. All that you would do would be to create a contraband industry for goods you don't have to register with the government in anyway. (as opposed to a car)

Alcohol, Tobacco, CD's, Books, there would be a huge black market because people wanted to sidestep the tax, and there would be more than enough customs agent to oblige.

Every time the government tries to track down, people will find a way to get around, and they'll do it just so they can defy the government.

Every time the government tries to track down, people will find a way to get around, and they'll do it just so they can defy the government.

And this is different from the current system, with its 15-25%(as percent of GDP) cash underground and illegal trade how?

The issue in not on how oppressive a government must be to extract the last drip of blood for a turnip.

The fundamental is what kind of tax system is appropriate to fund a constitutionally limited government of a nation that is rooted in principals of personal liberty, and protection of the rights and property of the citizen, not the empowerment of government.

If the revenues are sufficient to the legitimate constitutional functions of federal government, then no more burden than that should be expected to be extracted from the citizen.

A retail sales tax system administered by the states provides the necessary buffer and protection of the individual citizen, while assure that level of funding necessary to the proper exercise of constitutional powers of government.

I also collect my income tax from customer, so where's the difference? The biggest difference is under the sales tax I pay on gross income, and under the income tax I pay on net income.

Huh? I'm not sure what you're saying here.

The fact is I still send a check to the government and the customer is where the money came from in BOTH cases.

The difference is in that you're collecting the customer's portion of HIS tax due to government. A tax he is VOLUNTARILY paying because he is making a purchase. You're not paying a damn thing. It ain't your money; it isn't coming out of your pocket, you're just routing it to where it needs to go. In computer parlance, it's a distributed processing sort of system. And as a retailer, you're already part of it, only just at the state level. A few programming changes and it's also on the federal level.

You, likewise, are not paying any taxes on your income until you purchase some new service or goods.

So this brings me back to what I said in Post 343, which you somehow have failed to address. Which is: If this whole system is a wash revenue wise; then why are you in favor of keeing the current Rube Goldberg (nice term for - Cluster F#@k) of a system we have now????

The difference is in that you're collecting the customer's portion of HIS tax due to government. A tax he is VOLUNTARILY paying because he is making a purchase. You're not paying a damn thing. It ain't your money; it isn't coming out of your pocket, you're just routing it to where it needs to go. In computer parlance, it's a distributed processing sort of system. And as a retailer, you're already part of it, only just at the state level. A few programming changes and it's also on the federal level.

That is one of the clearest statements of the bottomline of how a retail sales tax operates I have seen.

My hat is off to you.

The federal government is still exercising undue authority on the state's, by telling them, you will have this law, you will collect for us, there's no way around it.

That is firmly against the principles of state's rights.

You still have a federal government bureaucracy, my solution (which is somewhere on this thread, but I'll repeat)

The only federal functions should be the military and some base law enforcement

Everything else goes to the states, they want a welfare state in their state boundary, lovely, they want to create a Libertarians paradise, so be it.

Each state would contribute a percentage of it's revenue, however it decides to collect it, to the feds for law enforcement and defense.

Part II: What do you do if a governor decides, we're not complying with the sales tax. Are you really willing to send in federal troops to protect a national sales tax.

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