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. 

[AzaleaCity5691]

Let me explain something to you.

If a state decided to opt out of your system, but also decided it was going to have a 20% flat income tax, a 2 percent sales tax, and some system of property tax (in otherwords, nearly the same tax burden we have now) but all that money was going to stay in state, not go to the rest of the country.

Not a single state would opt into your system, they wouldn't need the funds because if they were doing the old burden but all at state level, and they rejected the federal burden, why, then they would be self-sufficient, they wouldn't need Uncle Sam to pay for schools, or roads, or renovating 100 year old GM & 0 Terminals.

[carenot]

The doctor has to remit sales tax on his gross receipts, and drug dealer does not.

No, just the sales tax that is swown on the receipts.

[EternalVigilance]

Not a single state would opt into your system...

A ludicrous assertion, which makes the rest of your post not even worth addressing.

[ancient_geezer]

Why don't you just admit that business will need to submit documentation for the NRST?

I have never denied that retail businesses need to submit forms for retail sales tax. For the NRST, the incremental increase over state sales tax reporting requirements already in existence is nil.

Your statment however was:

They want you to compile and file monthly tax returns! You think the IRS takes a lot of your time -- you ain't seen nothing until you look at what the NRST people want you to do.

I don't see supporting that hyperbole as a reasonable contribution to this debate, and quite frankly a misrepresentation of reality. Especially seeing as all businesses, including retail vendors, are relieved of federal income tax returns and associated schedules that go with them which amount, in some cases, literally hundreds of pages of documentation in a single return filed with the IRS.

>>>There is a deminimus dollar amount of sales that one must meet to be a certified
>>> business required to collect and remit taxes under the HR25.

I don't see it. Please cite the section in HR25 or quote it.

Actually two sections are applicable, the first requires the person to pay taxes on goods and services purchased in support of the activity:

As under Section 701, teenage mowing of lawns for spending money it is classifiable as a Hobby and not a business, if the enterprise is determined not-for-profit, (i.e. wages/salary received, taxable property or services purchased and any taxes paid exceed total reciepts).

The second sets the De Minimus level of sales receipts on which a person would not be subject to collecting, reporting and remitting NRST:

Under Section 901, $1, 200 of sales receipts are exempt on casual sales of taxable property or services in a calendar year.

 

H.R.25

Fair Tax Act of 2005 (Introduced in House)
http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.25:

---

SEC. 701. HOBBY ACTIVITIES.

• `(a) Hobby Activities- Neither the exemption afforded by section 102 for intermediate sales nor the credits available pursuant to section 202 or 203 shall be available for any taxable property or service purchased for use in an activity if that activity is not engaged in for-profit.

• `(b) Status Deemed- If the activity has received gross payments for the sale of taxable property or services that exceed the sum of--

• • `(1) taxable property and services purchased;

• • `(2) wages and salary paid; and

• • `(3) taxes (of any type) paid,

• in 2 or more of the most recent 3 calendar years during which it operated when the business activity shall be conclusively deemed to be engaged in for profit.

`SEC. 901. ADDITIONAL MATTERS.

• `(c) De Minimis Sales- Up to $1,200 per calendar year of gross payments shall be exempt from the tax imposed by section 101 if received--

• • `(1) by a person not in connection with a trade or business during such calendar year prior to the receipt of said gross payments; and

• • `(2) in connection with a casual or isolated sale.

[EternalVigilance]

There are going to be enterprises who if they figure out a way to get away with it, will start under-reporting to the tax people. If you don't officially record a sale, don't give a receipt or anything, then how will the government know this sale has occured.

Which shows your complete lack of knowledge about where the vast bulk of sales taxes are collected now, and would continue to be collected under the NRST; ie, from large commercial retail enterprises like Walmart, etc.; who would have no interest at all....zero...in avoiding paying the tax.

[pigdog]

And you think, somehow, that under the present system these very same evasions are NOT going on now?? In fact, there is less motivation to evade the FairTax at a 23% rate than the present income tax which has a much higher marginal rate (and withholding taxes as well that make it even higher) - say 40% rather than 23%.

So is it your position that evading for a lesser reward is somehow more likely than at present? And keep in mind that with the FairTax, there are fewer audit points meaning that it is easier to go after such sorts of things if it is a problem.

It is far more likely that evasion will DECLINE under the FairTax ... Gale, Bartlett, & Brookings Institute nothwithstanding. Keep in mind the vested interests of these folks - and a number of the SQL (Status Quo Loving) posters on this thread, also, when you consider their outrageous claims.

[ancient_geezer]

Not a single state would opt into your system

Strange, the State of Texas doesn't have much of a problem with it far as I can determine:

 

House Ways & Means archives 106th Congress:

Statement of Billy Hamilton, Deputy Comptroller,
Office of the Texas Comptroller of Public Accounts,
on behalf of Honorable Carole Keeton Rylander,
Texas State Comptroller of Public Accounts

Testimony Before the House Committee on Ways and Means

Hearing on Fundamental Tax Reform

April 11, 2000

[pigdog]

A tax bill though is not a spending bill - and none of the FairTax supporters I know support higher government spending (quite the opposite, in fact).

Before we can do much to accomplish spending reductions, though, we have to get the tax system into a method of operation where the costs of government are apparent to all - which the FairTax does. The SQL argument that the paystub is the same is no argument at all, since there are costs embedded into products that everyone pays that do not appear on the paystub - but they are real nonetheless.

In addition, the FairTax eliminates a number of other sorts of taxes as well - estate tax for example.

[AzaleaCity5691]

Really, a ridiculous assertion

Of the taxes we pay, who gets the majority of any money...

The federal government via the income tax. So, what you propose is to eliminate the income tax, and institute a national sales tax, and if a state opts out it, they don't get revenue.

Well, let's follow this line of reasoning, all taxes are sales tax, there are no income taxes, estate taxes, et al, all sales.

So, let's suppose a state, in seeing this makes the decision, I can impose this tax burden, be eligible for federal money, but I have to give a cut to the federal government, or... I can impose the same burden but not give it to the feds, I will have enough money to pay for everything in state, I won't need federal money.

[EternalVigilance]

and if a state opts out it

No state can opt out, and in this day and age, none is even remotely going to try.

As I said before, that makes the rest of what you're saying not worth the time it takes to talk about it.

[ancient_geezer]

... I can impose the same burden but not give it to the feds, I will have enough money to pay for everything in state, I won't need federal money.

Wouldn't make a gnats worth of difference, as the U.S. Treasury would just set up shop in the state and collect the tax directly from the retailers, inplace of the state, as is provided for in the legislatation in any state that decides it's going its own direction.

Bottomline, you are over looking a big factor in all this. Taxation by the national government is not dependant upon what any state does or wants to do, it will happen regardless.

Federalist #34:

• ``A CONCURRENT JURISDICTION in the article of taxation was the only admissible substitute for an entire subordination, in respect to this branch of power, of State authority to that of the Union.'' Any separation of the objects of revenue that could have been fallen upon, would have amounted to a sacrifice of the great INTERESTS of the Union to the POWER of the individual States. The convention thought the concurrent jurisdiction preferable to that subordination; and it is evident that it has at least the merit of reconciling an indefinite constitutional power of taxation in the Federal government with an adequate and independent power in the States to provide for their own necessities.

 

Federalist #39:

• "The difference between a federal and national government, as it relates to the OPERATION OF THE GOVERNMENT, is supposed to consist in this, that in the former the powers operate on the political bodies composing the Confederacy, in their political capacities; in the latter, on the individual citizens composing the nation, in their individual capacities. On trying the Constitution by this criterion, it falls under the NATIONAL, not the FEDERAL character;"

 

Anti-Federalist Papers #3 NEW CONSTITUTION CREATES A NATIONAL GOVERNMENT;

There are but two modes by which men are connected in society, the one which operates on individuals, this always has been, and ought still to be called, national government; the other which binds States and governments together (not corporations, for there is no considerable nation on earth, despotic, monarchical, or republican, that does not contain many subordinate corporations with various constitutions) this last has heretofore been denominated a league or confederacy. The term federalists is therefore improperly applied to themselves, by the friends and supporters of the proposed constitution.

Federalist #45:

• "The change relating to taxation may be regarded as the most important; and yet the present [Continental] sic Congress have as complete authority to REQUIRE of the States indefinite supplies of money for the common defense and general welfare, as the future [Constitutional] Congress will have to require them of individual citizens;

 

The states have the opportunity to act a agent in administering the NRST and receive compensation for doing so if they choose to exercise that option. If they opt out of it, or default in the responsibilities they contract to by agreement with the Treasury, then the U.S. Treasury has the authority necessary to collect NRST from businesses completely separately from whatever a state does.

[EternalVigilance]

The other thing these people never talk about, or even realize, is that there are HUGE economic and social distortions caused by the current tax system, some intentional by the social engineers, most simply due to the law of unintended consequences.

The current system stifles initiative very effectively.

If we ever actually knew the true economic and social price tag of those distortions, I have no doubt we would be staggered by it.

[AzaleaCity5691]

I know where the vast areas of sales taxes are collected right now, I can't help but know whenever I read a receipt for chrissakes.

And no legit business is going to cheat, but as you should be aware, not every establishment in this country that is listed as a business plays by the rules. That's why we have the BBB, so when we see a violator, we can report them.

You'd be surprised what people do today that qualifies them for a business license.

Not everything in this country is a chain or franchise.

And in this whole grand tax overhaul scheme, have you ever taken the time to look at the finances of state governments that run primarily on sales tax revenues.

Sales Taxes, in terms of actual taxes are the single most economy senstitive tax scheme out there, and that ain't voodoo economics.

Income, for the most part, that's a stable variable, now property values will never really decline in numerical value, though they can decline in real value. But all and all, a somewhat stable variable. Sales Taxes are not stable. If you have a year where sales are 50% down, then guess what, your tax revenue off those sales will be 50% down, meaning, you're in a deep financial hole. I have yet to see anyone here explain how this NRST will be buffetted against the fluctuations in consumer activity.

[pigdog]

It's under "SEC. 901. ADDITIONAL MATTERS." It is phrased as sales by an individual so that the individual becomes not a business under the clause if:

"`(b) De Minimis Payments- Up to $400 of gross payments per calendar year shall be exempt from the tax imposed by section 101 if--

`(1) made by a person not in connection with a trade or business at any time during such calendar year prior to making said gross payments, and

`(2) made to purchase any taxable property or service which is imported into the United States by such person for use or consumption by such person in the United States.

`(c) De Minimis Sales- Up to $1,200 per calendar year of gross payments shall be exempt from the tax imposed by section 101 if received--

`(1) by a person not in connection with a trade or business during such calendar year prior to the receipt of said gross payments; and

`(2) in connection with a casual or isolated sale."

If beyond these parameters, the "person" becomes a "business" for tax purposes.

[EternalVigilance]

Sales Taxes, in terms of actual taxes are the single most economy senstitive tax scheme out there, and that ain't voodoo economics.

Income, for the most part, that's a stable variable, now property values will never really decline in numerical value, though they can decline in real value. But all and all, a somewhat stable variable. Sales Taxes are not stable.

As I said earlier in this thread, if revenues fall, the Congress will have two choices: Cut spending, just as the American people are having to do in an economic downturn, or raise the rate. Option two will quite naturally be politically unpopular, and could reduce revenues even further, as Alexander Hamilton explained so clearly in the Federalist.

So, we will have created a situation that naturally puts pressure on our elected leaders to get spending under control.

Please explain to me what can possibly be bad about that.

[AzaleaCity5691]

You know how to get rid of that. Simplify the tax code. I have yet to see a good argument against the flat tax. The standard argument is "well, thats how it started out, but then they changed it"

What is to say that would not happen to a sales tax too. The reason I go to Mississippi to buy expensive liquor is because I can actually save some money there, and by the same token, people from Mississippi often drive into Louisiana for the same damn purpose.

Because if you don't buy alcohol at an ABC store in this state, you will not only have to pay the state sales tax, you also have to pay an in-built excise tax, which means you pay a higher price.

In Pascagoula, it is possible to get a pack of Camels for $2.25 plus sales tax. That ain't possible in the City of Mobile, you're lucky if you get away with paying $2.95

What is to say, if the federal government gets this, they won't feel the need to expand upon it, be bold, impose additional surcharges on things they are already taxing in order that they can get more money.

And what if this NRST government decides it wants to do some social engineering on, so it decides that it wants to slap an additional 25% excise tax on the purchase of french fries, or 30% on a certain kind of boat. You'd be surprised some of the excise non-sense that is in the code. And then, what happens if the government decides, in addition to NRST, they also want to find a way to fenagle a VAT in there, adding even more taxes.

Once a government gets away with one tax, it's hard to stop them from expanding.

And if the Sales Tax is such a great idea, then tell me why it is that across the country, retailers try and get sales taxes reduced.

[EternalVigilance]

I know where the vast areas of sales taxes are collected right now, I can't help but know whenever I read a receipt for chrissakes.

And no legit business is going to cheat, but as you should be aware, not every establishment in this country that is listed as a business plays by the rules. That's why we have the BBB, so when we see a violator, we can report them.

You'd be surprised what people do today that qualifies them for a business license.

Not everything in this country is a chain or franchise.

All of which totally ignored the main point: That the vast majority of sales taxes are collected by big retail firms that have no possible motivation for cheating.

[Fido969]

"What was Tah-ray-za's rate? 2% on 50 million?"

So, you're argument now is "rich people don't pay taxes"?

hah ha ha ha ha

[ancient_geezer]

And no legit business is going to cheat, but as you should be aware, not every establishment in this country that is listed as a business plays by the rules. ...

Not everything in this country is a chain or franchise.

Over 80% of all retail dollars flow throughm the large retail businesses, that is all that is necessary to assure a higher compliance with a National Retail Sales Tax in dollar terms than currently exists under the federal income/payroll tax system today.

refer: Tax Evasion: The Underground Economy

Income, for the most part, that's a stable variable

Actually income is less stable, as a taxable base, than consumption expenditure.

 

FairTax and Stable Government Revenue

 

 

Standard Deviation of Tax Bases Normed to the average of the series
Norm	Consumption	Taxable Income
Average of Series	.24	.35

 

FIGURE 1: This figure compares the percentage of variation of real taxable income and real personal consumption expenditure to a steady state constant growth curve. Personal consumption expenditure (PCE)
is shown to be less variable and more stable than taxable income.

[AzaleaCity5691]

There are better ways to do it than that, because there are some government programs you have to keep. The other problem with this is, when you introduce sales taxes, you bring in another concept I find abhorrent, the idea of earmarking.

Earmarking states that no matter what our revenues are, this particularly agency or whatever will get a certain amount. Other agencies won't be earmarked (of course, things that would be earmarked are things with powerful lobbies behind them)

Our problem in Alabama is we had so much of our budget earmarked so that we couldn't shift around the general fund. Technically, we were not short. The problem was, so much of our revenue is not really part of the general fund because it is earmarked, meaning you cannot shift that money around, meaning, in times of fiscal crisis you have certain agencies taking the big piece of the pie emboldended by law, and because the other agencies don't have political clout (apparently) they have to fight for crumbs because of earmarking.

Because the minute you have to make contingency plans to cut, every lobbyist will come crawling out of the termite patch to speak for whoever is paying him that week.

Explain to me how earmarking doesn't eventually become part of this scheme. I don't mean by the bill, I mean, looking at the nature of politics, what makes you think that this system is not gonna be tinkered and altered until it's as big a mess as what it replaced.