National sales tax gains momentum

Lawmakers and experts who support fundamental tax reform are eyeing a consumption-tax plan being worked out by the Bush administration that they believe if implemented would make the U.S. tax code much simpler to follow and be a boon to economic growth.

The administration's plan, first reported by the Washington Post last month, calls for shifting the tax system away from taxing income and targeting consumption instead. The paper reported that administration tax policy wonks within the Treasury Department are still working out the details, and that their progress has largely been kept under wraps.

Officially, White House tax-policy experts have spent the past year working on reform options to present to the president, but "economists and tax lobbyists close to the effort believe that Treasury Secretary Paul H. O'Neill is serious about elevating tax reform on Washington's agenda," said the Post.

Some experts and lawmakers have long complained that the government's system of taxation is painfully complex, difficult to administer, too costly and inefficient. The labyrinth of rules and regulations – mostly the work of a Congress seeking to curry favor with constituents and business interests – grows increasingly more convoluted by the year.

While it may not be a panacea for hard-core tax opponents, a consumption-based system is seen at least as a more equitable way of raising the money necessary to fund government functions, according to supporters.

"The Bush administration's plan to move toward a consumption-based tax is a winner on all fronts," says Chris Edwards, the libertarian CATO Institute's director of fiscal policy. "A consumption-based tax would be simpler, more efficient, pro-growth and fairer to taxpayers."

In a policy briefing, Edwards said a consumption tax would not only benefit consumers, but the businesses they patronize as well.

"On the business side, a consumption-based tax would scrap the complex depreciation system for immediate capital expenses. That reform would make U.S. businesses much more competitive in the world economy and create an investment boom that would drive Americans' wages higher," he said.

"On the individual side, a consumption-based tax could be arrived at by greatly expanding the Roth IRA and turning it into a Universal Savings Account. That would boost the savings rate and increase financial security for all Americans," Edwards added.

Consumer spending comprises two-thirds of the U.S. economy and was credited with helping curb a recession in 2001.

The consumption tax is also a staple of Americans for Fair Taxation, a tax-reform group that says taxing goods and services is simpler and fairer.

"Georgia is a prime example of the power of the frustrated taxpayer. In several congressional races and one Senate race, Fair Tax supporters and angry taxpayers worked to produce major upsets in support of pro-Fair Tax candidates. We witnessed this in other key races across the nation," says Genie Hayes, a spokeswoman for the group.

"We expect that these recent political victories will solidify the White House's decision to make tax replacement … into a key part of the president's agenda," she added.

Hayes said the Post report "confirms what we have been told by Washington insiders for the last two years – President Bush is listening to the American taxpayer."

"Any tax reform must result in a tax code that is simple, fair, voluntary, transparent, border neutral, industry neutral, strengthens Social Security and has manageable transition costs," said Rep. John Linder, R-Ga., in The Washington Times Oct. 28.

"These neutral principles would all be fulfilled by my proposal to eliminate all income and payroll taxes and replace them with a national retail sales tax," said Linder, author of the Fair Tax Act of 2001.

That's a good idea, says Rep. Ron Paul, R-Texas, as long as Americans don't end up with both an income tax and a consumption tax, as is the case in most of Europe.

"My worry," he told WorldNetDaily, "is that somewhere down the road, after we replace the income tax with a consumption tax, the American people will get saddled with an additional income tax."

Critics of a consumption-based sales tax say adding a levy at the point of sale would likely lead to less consumer spending, thereby worsening a weakened economy. Also, they say a national sales tax would have to be astronomical for the government to collect its current level of revenues.

William Gale, a senior fellow in economic studies at the Brookings Institute, a public-policy think tank, estimates that proposals to replace virtually all federal revenues with a 23 percent tax-inclusive national sales tax rate are based on assumptions that real government spending would decline by $480 billion per year, and that there would be no tax avoidance, evasion or political erosion of the tax base.

"Correction for these assumptions indicates that the required tax-inclusive rate would be over 50 percent," he writes in a 1999 policy paper.

But some economists say reducing income taxes means Americans will have more disposable income – and will spend it.

Indeed, the Commerce Department reported earlier this month that "robust" consumer spending contributed to third quarter economic growth at twice the rate of growth in the second quarter of this year. GDP climbed at a 3.1 percent annual rate in the three months from July to September, up from the preceding quarter's 1.3 percent rate.

"The largest contributors to the step-up were an acceleration in consumer spending – especially for motor vehicles – and a slowdown in imports," said the department.

"The tax shift is one of the great games of government. In the game, the government uses the prospect of lowering one tax in order to buy support for raising another," says Lew Rockwell, president of the Ludwig von Mises Institute, a libertarian economic think tank based in Auburn, Ala. "The proposal to move from an income tax to a consumption tax is a good example of the game."

Rockwell told WND that "the essential key to understanding the trick is to realize that the government wants money and is going to get it one way or another."

"Zigzagging from one method to another does not change the reality, but it can fool the gullible. And it can raise a lot of money from affected groups during the transition period," he said.

Fundamentally, Paul agrees. He also believes that for Americans to achieve real tax reform, the government has to become more frugal.

"I think if we waved a wand today and had a sales tax implemented and the income tax removed, we really don't solve a lot of our problems because we still have the (government) spending side to deal with," he said.

Other experts say that millions of Americans are paying more than their fair share of taxes under the current system.

"The total tax burden on Americans is – and will remain – at near-record levels," says an assessment by the Heritage Foundation, a public-policy think tank in Washington, D.C. "Marginal tax rates are far too high, savings and investment are still subject to discriminatory taxation, and needless complexity in the Internal Revenue Code foments corruption and adds a hidden compliance tax on productive activity."

Rockwell says the argument for a consumption-versus-income tax rests on a few key principles.

Supporters claim "the consumption tax is at least voluntary," he said, but "actually, it is just as coercive as any tax."

"Under the income tax, if I earn income and don't pay the tax, I can be fined and jailed," said Rockwell. "Under the consumption tax, if I consume a taxed item and don't pay the tax, I get fined and jailed.

"It's true that I can choose not to consume that item. Similarly under the income tax, I can choose not to earn income," he added. "Nothing is voluntary if I am not permitted to exempt myself. There is no such thing as a voluntary tax. If there were, it would be called something else."

Meanwhile, now that Republicans are back in control of both houses of Congress, the administration will seek to make a set of tax cuts set to expire in 2010 permanent, while working on another tax-cut package to include reducing the taxation on share dividends, the Financial Times reported last week.

The new tax cuts, in addition to the Federal Reserve's half-point cut last week in the rate banks charge each other for overnight loans, will be aimed at helping consumers reduce personal debt and get their own financial houses back in order without inducing another slowdown, according to White House economists.

"If we look at the personal savings numbers, the reach for excess in the 1990s is being unwound," said Larry Lindsey, Bush's chief economic adviser. "I think that will continue, and it makes it incumbent on us to maintain real personal disposable income.

"While Republicans will control Washington, they'll also be under the gun to deliver an economic turnaround," said an analysis last week in BusinessWeek magazine. "If they pull it off, they can look forward to an even giddier Election Night 2004. If not, there won't be much room for excuses."

"I don't think any more will happen [on tax reform and reduction] now than happened during the Reagan administration or since Republicans took over the House in 1994," he said.

"The one thing no one should expect, despite the rhetoric, is that their taxes are going to go down, because government needs money now more than ever," Paul added. "I hope there's serious debate, but I don't see much happening."

are there actually socailist who want smaller goverment???? I have my doubts.

So do I, however, the NRST answers the socialist's arguments about treatment of the poor by assuring everyone is rebated the tax payment for the poverty level of consumption. Even a socialist has a hard time turning their backs on the economic advantages of the NRST to every one including their own constituencies.

All legal residents will receive a FCA equivalent to the FairTax paid on essential goods and services. The FCA will be paid in advance, in equal installments each month. The size of the monthly FCA will be determined by the government's Poverty Level for a particular family size, multiplied by the tax rate.

Every year, the Department of Health and Human Services [HHS] determine the "poverty level" for each family size.

The 2001 "FairTax" Family Consumption Allowance Figures
Family Size	HHS Poverty Level	Annual FCA	Monthly FCA
One	$8,590	$1,976	$165
Two	$17,180	$3,951	$329
Three	$20,200	$4,646	$387
Four	$23,220	$5,341	$445
Five	$26,240	$6,035	$503
Six	$29,260	$6,730	$561
Seven	$32,280	$7,424	$619
Eight	$35,300	$8,119	$677

1) Federal Register: February 16, 2001, Pages 10695-10697).

[ The monthly FCA for each adult is .23 * (HSS poverty level for a single person)/12 to assure no marriage penalty due to the manner in which the poverty level is dependant on family size. The monthly FCA for each child is .23 * (the incremental increase of HSS poverty level for a family with one child over no child) ] A. Geezer

A family of four, for example, could spend $23,220 per year free of tax because they will have received over the course of the year rebates totaling $5,341. $5,341 is the amount of sales tax paid on $23,220 in expenditures. A family spending double the "poverty level" or $46,440 per year will effectively pay tax on only half of their spending and, therefore, have an effective tax rate of 11 ½ percent or half the FairTax rate.

The beauty of the FairTax is that you can control how much you pay in taxes. If you happen to save, invest or spend a portion on used [previously taxed] items, you can get your effective tax rate below 9%.

H.R.2525 "The FairTax Act

Not only does every family receive a FCA based on family size, not income, but they will also receive 100% of their paycheck:

Fedup Smith makes $39K per year...once the FairTax is the law of the land he will receive an instant increase in pay of $200.00 per week. Since he has a family of four, he will receive a FCA of $445 per month, for a total of $1,305.00 additional income per month that he can do with as he sees fit .

Protecting the Poor from the Tax

A common assumption about the NRST is that it is naturally regressive, since lower income individuals spend a greater percentage of their income in any given year on consumption of necessities. Because a sales tax is an altogether different paradigm of taxation, any judgment on the equity of the tax must be accompanied by a different analysis of regressivity.

To examine how a national retail sales tax could address such concerns, a number of issues should be broached. First and foremost, taxing income at a graduated rate is not the only means of making a tax system progressive. Moreover, a tax on income, no matter how steeply graduated, does not necessarily make an income tax progressive. Even if progressivity is measured by the common standard of "ability to pay," the income tax is imposed only on productive labor and the return to capital and not on wealth. An income tax does not tax consumption of older accumulated capital, whereas a sales tax does.

Equally important, using taxable income as the basis to determine progressivity is necessarily based on a year-to-year analysis where the ability to pay is measured as a function of income per unit of time. Consumption over the life of a taxpayer is in many respects a better measurement of the ability to pay taxes. Because people's incomes fluctuate throughout their lives, the lifetime application of a sales tax is much less regressive than it would appear to be when examining a cross-section of taxpayers in any given year. Since all income is earned for the purpose of eventual consumption, under a national retail sales tax, the taxpayer can defer taxation by saving his income. But he cannot forever avoid the tax.

In any case, an NRST plan can be made progressive through a rebate mechanism that would shelter low-income people from paying the tax. One manner in which the NRST could be made less regressive would be to exempt certain necessities--such as food and clothing--from the tax. That approach would exempt, however, the most expensive food (lobster and caviar) and the most expensive clothing ($1,000 designer suits). It is a very inefficient means of providing tax relief to lower and middle income Americans and would necessitate a much higher overall rate. A more neutral and less distortive approach is to simply provide each family a level of consumption free of tax by providing a rebate of the tax on expenditures up to the poverty level.

The rebate could work as follows: A family consumption refund would be established for each household at an amount equal to the sales tax rate times the poverty level. The poverty level is defined by the Department of Health and Human Services guidelines and should be raised by the sales tax rate.

The family consumption allowance approach has several effects. First, it makes the sales tax applicable only to consumption beyond the necessities of life. Second, it makes the tax in effect progressive, not only because it is based on consumption, a better index of true ability to pay, but because--if one wants to continue to view progressivity through an income tax lens--it entirely exempts lower income workers. Third, unlike most state taxes, it does not undertake the complex and politicized task of determining what to tax and what to exempt, thereby minimizing administrative and compliance questions and economic distortions.

The 23 percent NRST plan would have a highly beneficial impact on the U.S. economy and raise the standard of living of the American public. The tax compliance costs borne by our economy would fall sharply. And the degree of intrusiveness of the tax system in our lives would decline greatly. Once set free from the burdens of compliance with the current system and the punitive tax rates imposed on work, savings, and investment, the United States will become a more productive and more prosperous republic. A national retail sales tax is more compatible with the principles of a free society than any other alternative tax system.

81 Posted on 03/21/2000 12:48:00 PST by CHIEF negotiator

1) it is biased against consumption. This will lead to overinvestment which can lead to a crash. Both consumption and investment should be taxed but with lower rates
2) the burden on collecting the tax will go to retailers who tend to be small businesses, mom and pop stores.
3) the underground economy will go up as more people will use cash to avoid paying the taxes. just like they already do with state sales taxes
4) it is hidden. It will be hard for most consumers to know if the tax goes up and it will be the death of a million cuts. Furthermore it will be very easy (and common with many state sales taxes) for politicians to tinker around with it so you end up having different rates for favored and disfavored products. Taxpayers won't have a single rate and a single number of the dollars they spent in taxes
5) it's harder to make the supply side argument for cutting this tax

Okay, one at a time... =)

You assume that investment opportunities (i.e. growth) would not occur. With capital being freed up there's likely to be a huge wave of new business. Yes, some will fail. Them's the breaks in investing. But it'd be a person's choice and that's what freedom is about, yes?
Most, if not all, 'mom and pop stores' already collect local sales tax. Add another line of code to the cash register. Voila, no problem.
The only way to make money at tax fraud is if you do it wholesale (i.e. in large quantities) rather than nickle and diming it to death. The big boys will keep their noses scrupulously clean (because, instead of tens of millions of taxpayers, you have many less retailers) and mid-level operators will be the big target for law enforcement. What about Sam and his turnip truck? Well, I think we can all agree that's not a huge portion of the GDP. =)
It is not hidden. Most of the NRST plans have a single rate for everything that's printed right on the receipt. In fact, it is integral to having it be fair and balanced. No loopholes, no exemptions.
This is nearly the easiest point of all. It removes the tax calculations from the entire production stream and instead puts it where it belongs: at the end points. Investing would have the hideous warping effect of a confiscatory and biased tax system removed. Just removing the tax compliance burden alone would have dramatic (positive) effects on the way business is done in this country. Instead of spennding money to avoid taxes, it would be used (supply side) on higher revenue items such as more R&D, capital investment or even dividends (remember those?)

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