Posted on 11/06/2002 1:39:57 PM PST by Tree of Liberty
Neil Cavuto just interviewed Mitchell E. Daniels, Jr., the director of the OMB, and Neil let it be known that he's hearing rumblings that Pres. Bush is considering a total re-write of the tax code and that SecTreas O'Neill is strongly pushing a national retail sales tax!
That's true. However, since I'm only interested in the distribution of the tax burden that 4% will not be a major issue. Including state, local, and federal consumption in the tax base, Burton & Mastromarco concluded that a 21.1% tax inclusive rate would have raised sufficient revenues in 1995 to replace corporate and individual income taxes, FICA, excises, and the Estate tax. However, including federal government and state government consumption and "gross purchases" in the tax base is methodologically flawed. Using their data for all other numbers, a 24.3 tax inclusive rate would have been necessary to raise the required revenue in 1995.
B&M adjusts the 1995 personal consumption data of $4.9T that produces a projected tax base of $5.9T. Over $1.3T of the adjustment is for the abovementioned government consumption. While I understand what B&M say justifies this treatment, the reasoning is flawed. Please understand that I am not saying that I disagree with the inclusion of these numbers in the base. I I readily acknowledge that what is or is not included in the base is, essentially, a judgment call. I am saying their math is flawed. Let me explain why.
Let’s look, first, at Federal consumption. Things that cost $100 before would cost $130 after and $30 of it is the tax. (Note: B&M and I ignore any price changes resulting from the NRST). No revenue is raised, however, relative to the current situation. You still have the same services and have raised no money toward it. If such a process actually raised revenue, then a 1000% tax on government consumption would generate all the money and we could happily forget all other taxes!
With regard to taxing state and local government consumption, the federal government does gain revenue but the cost of state and local government would go up by exactly the same amount. There is no net gain once the offsetting state and local taxes come into play. Therefore, both of these adjustments require an equal offsetting adjustment requiring higher revenues offsetting the tax or we can eliminate them from consideration.
Let’s look, first, at Federal consumption. Things that cost $100 before would cost $130 after and $30 of it is the tax. (Note: B&M and I ignore any price changes resulting from the NRST).
Wrong, B&M does not indicate any increase in gross price(tax + after NRST shelf price) for before-NRST shelf prices which include embedded taxes & cost of compliance. Inf act Mastromarco is expressly aware that shelf price of goods and services fall by around 22% and that is reflected in the fact they do not increase the Tax Base summation by the amount of tax to be collected. Their calculation is strictly a tax inclusive basis, on a tax base that reflects gross payment.
http://www.cato.org/pubs/pas/pa-272.html
"Thus, the NST should be imposed on gross payments for the use, consumption, or enjoyment in the United States of any taxable property or service."
"It is important to distinguish between tax-inclusive and tax-exclusive rates. The income tax and the flat tax are imposed on a tax-inclusive basis while traditional sales taxes are imposed on a tax-exclusive basis. Let us take as an example someone who earns $100, pays $20 in taxes (whether an income tax, a flat tax, or a sales tax), and spends the remaining $80 on a CD player. Is the tax rate 20 percent or 25 percent? The income tax and the flat tax would be imposed on the $100 and thus the rate is 20 percent (i.e., 20/100 = 20%). The flat tax and income tax base are tax inclusive. Traditional state sales taxes are imposed on the after-tax or tax-exclusive base. Thus, we typically would say that the sales tax rate needed to raise $20 is 25 percent (i.e., 20/80 = 25%). In each case the government is extracting the same resources from the economy. Thus, to compare apples to apples, the sales tax rate that is comparable to the income tax rate or the flat tax rate is the tax-inclusive rate. [33] The 15 percent rate proposed in this analysis is the tax-inclusive rate.
That 15 percent tax rate is about half the rate that opponents of the NST claim would be required to raise as much revenue as do the current income tax and the payroll tax. Bruce Bartlett of the National Center for Policy Analysis has argued, for example, that the NST rate would need to be as high as 32 percent. [34] Bartlett's analysis is misleading because he compares apples to oranges. He compares a flat tax rate necessary to replace the current income tax structure with a national sales tax rate that would be required if every federal tax were replaced (including payroll taxes, all excise taxes, estate and gift taxes, and corporate and individual income taxes). He then proceeds to assume that many exemptions would arise under a sales tax but none would arise with a flat tax. Finally, he compares a tax-inclusive flat tax or income tax rate to a tax-exclusive sales tax rate, which has a particularly dramatic impact on the stated rate since he requires the sales tax to replace all federal taxes."
Note the consumtion included in the tax base are the aggregate of consumption prices including embedded taxes induced into price from the corporate level. These embedded taxes have not been removed from NIPA or GDP summations. Thus the NRST rate is tax inclusive(i.e. a tax on gross payment).
Note: B&M and I ignore any price changes resulting from the NRST
B&M doesn't, but you appear to be set on doing so.
Tax Analysts Document Number: Doc 1999-32575 (25 original pages)
Dan R. Mastromarco of the Argus Group, Washington,
"A. Hidden Upstream Taxes.
[34] The basic problem with our photograph of the distribution of the income tax is that the lens we have chosen filters out the hidden component of tax buried in the price of each good and service that rich and poor alike buy. It is an abecedarian principle of tax economics (although a revelation to many Americans who have been conditioned by the anthropomorphic language politicians and others apply to corporations) /19/ that corporations are not persons in the sense that they can really relieve mankind from tax. /20/ Their personage is, after all, a legal fiction. The legal fiction is nothing more than a collection of individuals engaged in a common industry.
[35] When a tax is imposed on a corporation or an unincorporated business, it is has been more appropriately likened to a hot potato that the business tries to pass on to someone else. The taxes are ultimately paid, but by whom? They must fall out either as lower wages paid to workers or managers, lower returns to capital, or in the form of higher-priced goods and services the business sells. In other words, taxes imposed on businesses fall on the factors of production, either labor or capital, or are pushed forward to consumers. There is no other outlet. When a tax increases the price of a good, we say purchasers are burdened on the "uses side," or that the tax has "forward incidence." /21/ If the tax decreases return on a factor of production that provides a source of income, we say affected persons are burdened on the "sources side" or that the tax has "backwards incidence." We shall use the layman phraseology, pushed forward (forwards incidence) or pulled back (backwards incidence) to describe the economic resting place of the tax. "
***
"[38] While the relative ratio of how much is pulled back or pushed forward depends on market forces, it is a safe assumption that some business taxes find their way into goods and services purchased by consumers.
[39] Dr. Dale Jorgenson, Chairman of Harvard University's Economics Department, believes that the price of goods and services are inflated by about 20 percent or more by upstream taxes consumers ultimately bear. In a recent paper Dr. Jorgenson estimated the built-in taxes contained in the price of goods and services. /22/ In the chart above, he quantified the hidden component of tax, estimating that producer prices would fall on repeal of upstream taxes an average of about 22 percent.
[40] The higher marginal rates of an income tax system may actually exacerbate the burden of the hidden taxes that are pushed forward under our income tax system. Some leading economists believe that hidden taxes increase prices charged at the counter even beyond the effective rate of the tax as a function of the price because of the higher marginal tax rates imposed under a progressive income tax regime. Consider this: another postulate of economics is that no profitable business will sell a product below its marginal cost. The marginal cost is determined partly by the marginal tax rates. Hence, if a business is in a high marginal tax rate bracket, the goods and service prices will reflect the cost of covering that marginal tax rate.
[41] If proponents of an income tax structure believe that these taxes are "pushed forward," then they must conclude the poor bear these hidden taxes in the form of higher-priced goods and services at the highest marginal rate of the producer. A portion of the income tax, therefore, is already partly a very regressive sales tax hidden from the consumer. If proponents of an income tax do not like a sales tax, why do they not find it troubling that the income tax is partly a consumption tax at a rate of more than 20 percent without a rebate? This is particularly perplexing when the leading sales tax plan, the FairTax, contains a rebate mechanism that exempts the poor entirely from tax on necessities through a demogrant equivalent to the sales tax rate times the poverty level.
[42] The point income tax proponents miss is this: If the hidden tax is taken out of the price structure of goods and services as in a properly structured retail sales tax, then why shouldn't the prices of goods and services fall when the tax is removed? If we want to cause consumer prices to fall the furthest, we would have a tax system with the largest base and the lowest marginal rates. A pure consumption tax base is almost twice the size of the existing income tax base. The Fair Tax base is much larger than the current income tax base. Moreover, by definition, one cannot have lower marginal tax rates than a system with single rates, like a sales tax, which levels the peaks and valleys of different brackets. Since the poor spend a disproportionate amount of their income on consumption, why then are they not the ones to disproportionately benefit from falling prices caused by zero implicit embedded taxes? "
Things that cost $100 before would cost $130 after and $30 of it is the tax.
Wrong, taxes levied on business (corporate income & 1/2 FICA) act to increase the current shelf price of goods and services.
When those taxes and the costs attendant to their planning, accounting, and litigation are removed when the NRST is in place, that base shelf price falls about 22-23%. NRST rate is expressed in regard to the gross payment (tax + base shelf price) after the NRST is implemented.
Thus things that cost $100 shelf price fall to less than $78 = 100 * (1-0.22), and the gross payment of NRST + new shelf price then equals $78/(1-0.23) returning the gross payment to something less than $101.30.
In fact Jorgensen, who Mastromarco refers repeatedly in his studies suggest an overall drop in total payment of 3% in the first year, and more than 10% by the 25th year after implementation of an NRST.
Refer:
The Economic Impact of Fundamental Tax Reform, in M. Boskin (ed.), Frontiers of Tax Reform, Stanford, Hoover Institution, 1996, pp. 181-196; reprinted in Joint Economic Committee, Congress of the United States, Roundtable Discussion on Tax Reform and Economic Growth, One Hundred Fourth Congress, First Session, 1996, pp 98-112. By Dale Jorgensen.
On page 27 section 7, Jorgensen discusses the effect on the gross purchase(tax + shelf) price of consumer goods.
At the business level he projects an overall drop in purchase prices of greater than 20%
"...The Sales Tax produces a reduction in investment goods prices exceeding twenty percent..." in the first year of implementation, "...rising gradually to between twenty-five and thirty percent over..." the fifth through the twenty-fifth years of implementation.
And at the retail level he expects an overall decline in gross consumption price (tax + shelf) of 3%.
"...The Sales Tax reduces the price of consumption by a little over three percent..." in the first year of implementation, "...but this price decline increases to more than ten percent by..." the twenty-fifth year of implementation.
I suggest you make you calculations reflect these changes in shelf price of consumption goods and services and how that impacts the capacity for the individual to invest, save as well as spend. The overall projection is for a very strong increase in standard of living through the enactment of an NRST in place of the current tax system.
I would suggest you spend a bit more time studying Mastromarco and Jorgensen before make the claims you do about prices. Or claiming their math in error.
DeMint argues that prospects for the bill also are better than ever because the code "goes beyond being unfair and complex. It's to the point where American competitiveness is at stake. … If we don't change our tax code, we will be much less competitive in world markets."
I researched the effect of repealing all income and payroll taxes laid on business on the theory that we as individual consumers end up paying those tax at the retail counter.
The following article covers the mechanism on how the current Federal tax system propagates and is embedded into consumption expenditure.
DO YOU PAY YOUR INCOME TAX
AT THE SUPERMARKET?
by D. Sherman Cox J.D. L.L.M. Taxation
The 24% in the article considers those factors actually paid to federal government out of impositions on the business in complying with the income, payroll, excise & tariff tax laws and does not account for accompanying overhead costs associated with tax planning accounting or tax litigation.
I refer you to the section of the following article about the Income/Payroll tax system and its impact on our economy "A. Hidden Upstream Taxes. " paragraph 39.
"[39] Dr. Dale Jorgenson, Chairman of Harvard University's Economics Department, believes that the price of goods and services are inflated by about 20 percent or more by upstream taxes consumers ultimately bear. In a recent paper Dr. Jorgenson estimated the built-in taxes contained in the price of goods and services. /22/ In the chart above, he quantified the hidden component of tax, estimating that producer prices would fall on repeal of upstream taxes an average of about 22 percent."
Looking at the accompanying chart, the range of values from industry to industry appears to be about 12-25%.
Economists Gary and Aldonna Robbins of the Texas-based Institute for Public Policy examined the case of dry cleaning a shirt, with a particular eye toward uncovering the hidden costs of taxes in price.
The Robbin's attributed over 33.6% of "consumer prices" to be due to federal taxation passed on to the customer.
The Federal Tax System
http://www.cbo.gov/showdoc.cfm?index=2125&sequence=0&from=1#pt1
From the Table 1 we may extract the proportionate contributions of each sector of taxes as they contribute to consumer price for the year 2000.
Those tax components which will not change prices as a consequence of enactment of HR2525
============================
Adjust for a conservative $600billion(1995 figure, AGCA '00, Payne '95, PillaBartlettNorquist '95 ) interest & cost of compliance effects. Payne suggest the number to be much higher (approx 65% in respect to revenue collected)
Estimated change in consumption prices as consequence of enactment of a National Retail Sales Tax, repealing all business income and payroll taxes:
33.6*(1186.5/1945) = 20.5% in consumption prices
Which compares well with the Jorgensen study of 22% fall in producer prices.
The sources are in reasonable agreement, and I see 20-23% a reasonable value to expect shelf prices to fall not only for customers here in the United States, but in our exports as well making them far more competitive on international markets.
The fall in prices for export goods are especially significant as exports leave with out taxes embedded which provides for an a more than 20% increase in out foreign trade competitiveness.
Geezer: B&M doesn't, but you appear to be set on doing so.
Some issues are issues of opinion. Others are issues of fact. For example, you keep coming back to the issue of tax inclusive vs. tax exclusive. You are right, Cliff is right. All NRST supporters are right with regard to this issue. Clearly, if one is comparing income tax RATES to NRST RATES the tax inclusive NRST rate is the appropriate one for that purpose. I have acknowledged that many posts ago. Now I am raising another issue. It is also a fact issue. The question is: does B&M or doesn’t B&M assume any price benefit related to the switch from the current tax structure to an NRST as reported in the Cato Institute dated April 15, 1997. I say “no,” but you seem to think otherwise. This is an issue of fact. It is UNRELATED to whether B&M in some other document make the argument that prices will decline under NRST. It relates solely to whether they make such an assumption in their 4/15/97 Cato Institute article. The answer is unambiguously, “No, they do not.”
Specifically, they compute a tax basis for the NRST of 5978 in 1995 based on EXISTING prices; they compute the tax inclusive rate needed to raise the $1293B as 17.8% and the tax exclusive rate as 21.6%. With the FCA, the respective numbers are 21.1% and 26.7% respectively. It is indisputable that THIS CALCULATION does not consider any price changes. The fact that B&M might endorse the Jorgenson conclusion elsewhere, there is ZERO doubt that they do not consider such effects in the referenced report. That’s all I am saying. Do you disagree with this?
Mow, my point in my last post is that the MATHEMATICS in their calculation is flawed. Once corrected, they require a 24.3% tax inclusive rate rather than a 21.1% tax inclusive rate. This is a simple fact. It isn't even particulary relevant to anything meaningful to me. The only important question is the distribution of the tax burden, which I will be calculating shortly.
I was unable to post the table reflecting my calculations but would be glad to do so if someone explains how or I will email the tables on request. The table shows that the lowest quintile group is ever so slightly worse off under NRST relative to the current tax structure. The top quintile benefit substantially. The table shows that people making under about $70K will pay more and people over $70K will pay less. The worst impact seems to hit the $35K income level.
My calculations assume no change in retail prices. Supporters of NRST point to studies by credentialed economists that estimate the NRST will unleash price reductions of 20% to 30%. With price declines of this size, all groups are better off than under the current scenario. In other words, when price decreases are included in the analysis, a “free lunch” scenario is created: even those income groups that pay a greater share of the ultimate tax burden under NRST will benefit relative to their present situation if prices decline sufficiently. For example, even the hardest hit 3rd quintile will fare better than the current structure if prices decline 16%. Of course, if such price increases do occur, all other groups do substantially better under NRST, particularly the highest income groups.
While I have not yet studied Jorgenson’s work, I will say the projection of 20%-30% price decreases do not sound very plausible on its face.
That should read "price decreases"
This should read:
This becomes even more dramatic if one assumes that those in the highest income groups save a significantly higher proportion of their income as those in lower income. categories.
Specifically, the nrst when passed will put heavy downward pressure on taxes and hence spending.
IMO, that is fundamental to the argument.
While I have not yet studied Jorgenson’s work,
Obviously
I will say the projection of 20%-30% price decreases do not sound very plausible on its face.
And Democrats say Republicans throw grandmothers in wheelchairs off cliffs to watch the splatttt.
Jorgensen is not the only source for determining a decrease in product shelf prices as a consequence of repealing business and payroll taxes.
See: Associated General Contractor's Testimony before Congress AGCA '00
I have also refered you to Mastromarko about the Income/Payroll tax system and its impact on our economy "A. Hidden Upstream Taxes. " paragraph 39.
"[39] Dr. Dale Jorgenson, Chairman of Harvard University's Economics Department, believes that the price of goods and services are inflated by about 20 percent or more by upstream taxes consumers ultimately bear. In a recent paper Dr. Jorgenson estimated the built-in taxes contained in the price of goods and services. /22/ In the chart above, he quantified the hidden component of tax, estimating that producer prices would fall on repeal of upstream taxes an average of about 22 percent."
Supported by Mastromarco's accompanying chart of emperical study of replaced taxes on price, where the range of values from industry to industry appears to be about 12-25%.
And the report by Economists Gary and Aldonna Robbins of the Texas-based Institute for Public Policy examined the case of dry cleaning a shirt, with a particular eye toward uncovering the hidden costs of all federal taxes in price.
The Robbin's attributed over 33.6% of "consumer prices" to be due to federal taxation passed on to the customer.
Refer The Federal Tax System
http://www.cbo.gov/showdoc.cfm?index=2125&sequence=0&from=1#pt1
From the Table 1 we may extract the proportionate contributions of each sector of taxes as they contribute to consumer price for the year 2000.
Those tax components which will not change prices as a consequence of enactment of HR2525
============================
Adjust for a conservative $600billion(1995 figure, AGCA '00, Payne '95, PillaBartlettNorquist '95 ) interest & cost of compliance effects.
Estimated change in consumption prices as consequence of enactment of a National Retail Sales Tax, repealing all business income and payroll taxes:
33.6*(1186.5/1945) = 20.5% in consumption prices
Which compares well with the Jorgensen empirical study of 22% fall in producer prices.
The sources are in reasonable agreement, and I see 20-23% a reasonable value to expect prices to fall not only for customers here in the United States, but in our exports as well making them far more competitive on international markets.
I have strongly supported the rationale for consumer shelf prices to fall in response to repeal of business remitted taxes
Now I would suggest you support your expectation that consumer price cannot fall when the component costs represented by taxes compliance costs remitted by business go away.
Your "I will say" fails to meet the mark. Jorgensen, the Robbin's and other economists working with AGCA have to stand up to peer review of their publications demonstrating the results they report with their professional credentials and reputations on the line.
My own thumbnail calculations confirm the correspondence between Robbin's & Jorgensen, along with the AGCA remarks on the topic.
I would contend your unsupported statements do not stand well against either common sense or the studies of people who reputations depend on being correct in their data and methodology from which their conclusions derive.
Tell us then where do the repealed business taxes go, if not into product price reductions and product quality under the extemely competitive pricing environment of consumer goods in todays markets.
This becomes even more dramatic if one assumes that those in the highest income groups save a significantly higher proportion of their income as those in lower income. categories.
Only if you assume that savings and investment dollars are never spent.
Those who invest or save from personal income, see a net flow of cash from themselves to the businesses they invest in. They can derive no benefit from moneys they are not able to apply to personal consumption. On the other hand, those who receive those investment and savings dollars do spend them on consumption, and provide jobs and commerce from those investment dollars out of which consumption taxes are paid.
A dollar saved or invested by one person does not go to feather some mattress, they are out in the economy increasing everyone elses standard of living. The one place they are not benefiting in the present is the person who makes the investment, the person who takes the risk that the dollars invested or saved with provide for future consumption with the same value as they do in the present. Inflation makes that hope a very difficult thing to realise.
Your bracket calculations are based on a snapshot of time rather than whole life income vs whole life expenditure. Since economic mobility in this society is clearly demonstrable. Those having low income today(predominately the young) are subsidized from parents and society initially expending more than they earn, then they readily gain "income" as they advance in their work careers, during which time they do their pay down of debt, saving and continued consumption expenditure. At the end of work careers, "income" falls again with a commensurate rise of expenditure out of personal investment capital, insurance and savings, such expenditure is taxed under the NRST.
Where in your spreadsheet do your distribution calculations take into account whole life income vs expenditure and how taxes distribute through one's whole productive life. There is the only true measure of distribution of tax burden that means anything. You have yet to provide anything of the sort or even hint that you have done such an analysis. Yet Mastromarco and Jorgensen have looked at the effect of the NRST vs the Income/Payroll tax system in just those terms.
I suggest you have a very long way to go in developement of your methodology and data incorporated into you spreadsheet before your spreadsheet will have much value in the debate going on in this thread.
How do you demark the "poor" in your distribution as opposed to those of merely low personal income but large capital resource from prior investment/savings or inheritence to draw from in their expenditures?
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