Flat Tax or Sales Tax? A Win-Win Choice for America.

The Heritage Foundation ^ | 8/14/1997 | Daniel Mitchell

[Leto]

Dan Mitchell is a economist with the Heritage Foundation. This article is a good primer on the Flat Tax and The NRST, there is good information in the foot notes, be sure to check them out.

The information on the correct rate for the Flat Tax and NRST and the issues arount Tax Exclusive and tax inclusive rates are clear and concise, there are some charts that are missing due to my poor HTML skills, and some inserted information boxes are in the srticle so faults in the flow of the document are the posters (My) fault, not the authors fault.

I believe the differences between the Flat and NRST have been greatly exaggerated.

[Leto]

Ping to the usual tax suspects.

I'm outta here tonight will see ya tomorrow.

Please Note this article was composed BEFORE HR 2525 was
introduced.

[Taxman]

Thanks for the post, Leto. This article is as good today as it was when Dr. Mitchell first published it.

Be interesting to see the comments that arise from your post.

[LurkerNoMore!]

You mean you can actually sleep with all this tax excitement?

And do you not know that Rove is on CSPAN *now*?

(I need to lay off those chocolate covered expresso beans)

[LurkerNoMore!]

Not one word about what may arise from my posts here, Mr Taxman.

[ancient_geezer]

The essential differences between the Flat Tax and the National Retail Sales Tax:

As the Government extracts revenues from the Citizen.

• The SalesTax case:
  • increases the visibility of taxation by the Citizen.
  • gives Citizen control of first allocation of resources.
  • tends to inhibit tax increases from visibility and Citizen priority.

• The FlatTax, subtraction method VAT case:
  • decreases the visibility of taxation by the Citizen.
  • gives Government control of first allocation of resources.
  • tends to allow tax increases from lack of visibility as regards the business side of the Flat Tax with Government priority the rule of tax increases.

The two cases can be equivilent only in a the sense of the one postulate of raising the same revenue for Government from an algebraic equivalency, not one of taxation mode.

Consumption = Income - Investment

The Retail Sales tax is place on the left side of the equation, the Flat Tax is imposed on the right side of the equation.

They may both raise the same amount of revenue for the government under some nominal equilibrium conditions. But That postulate cannot be maintained because the politics and economics are dynamic.

The substantial difference lies within who has first control of the allocation of resources, the Citizen or the Government.

Flat Income Tax, Income tax case.

The first allocation of resources goes to the government, leaving whats left to the Citizen.

Government extracts monies from the citizen before the citizen has opportunity to allocate funds toward the citizen's goals. That leaves the Government in contol of substantial portions of the revenue flow.

Government extracts additional monies from the business, business pays for taxes and the cost of overhead for planning, accounting and litigation from the price it receives from the citizen as the customer of business.

The government's tax take is split between the citizen and the business, with taxes collected from the business hidden from the perception of the citizen.

Retail Sales Tax case:

The Citizen has first crack at allocation leaving whats left for Government extracted from retail sales tax.

The Citizen receives his Full Earned Pay: and may allocate to tax free investments, or tax free products, as opposed to taxable products. The Citizen has the opportunity and choice do as he wishes and actually control whether or not the government is able to extract anything at all from him.

The Flat Income TaxFlat Income Tax, case would remove roughly 1/2 of the potential voters out their from having a perceptual stake in the tax system (perceiving no tax below the Flat Tax exemption level).

In other words, 1/2 the voting population gets bennies from liberals on the backs of the other 1/2 and blaming rising prices on business not government taxation.

A great formula for political disaster for conservatism. Foster class warfare and make the culprit look like Robin Hood.

A point made by Alan Keys , in an interview with Des Moines Register reporters and editors:

He said a national sales tax could be structured so that some goods are exempt. People could shop in stores that featured no-tax items if they wished to avoid paying the tax.

"You don't pay them until you decide what you do with your money," Keyes said. Under the current system, "we pay government before we do anything else."

Keyes said under his system, stores would develop that offer nothing but goods that aren't taxed.

Taxpayers "could cut their taxes to nothing and they wouldn't have a fancy accountant to do it," Keyes said.

He said a 23 percent national sales tax could allow for the elimination of both the income and payroll taxes. If only the income tax were replaced, the rate would be between 15 percent and 17 percent.

I disagree with Alan on this Critical matter, an NRST should be applied as a single rate, single stage Retail Sales Tax across the board. Single stage as it only taxes an Item Once, (items already taxed once may be resold without tax).

Interesting implications arise for the potential of the Citizen to control how much tax gets to the Government in that NRST case if one thinks about it, as in the HR2525 FairTax used goods, older homes, and used cars are not taxed. The rule is tax once but only once.

[Coleus]

Thanks for the ping.

I'm a little ambivalent on the subject; however, I am leaning towards the National Sales Tax. It seems this tax would be the easiest to argue against the liberals since the poor won't be affected as much as the rich. The poor tend to buy less luxury or other non essentials. I just hope consumables wouldn't be taxed.

Just a note, which the liberals and the liberal media always leave out: Russia has a flat tax, about 13% and Germany has NO capital gains tax.

I've been a member of the Heritage Foundation for about 5 years. They send out an interesting newsletter and their research is great. It was originally funded mostly by Adolph Coors, owner of the beer company.

[ancient_geezer]

It seems this tax would be the easiest to argue against the liberals since the poor won't be affected as much as the rich. The poor tend to buy less luxury or other non essentials. I just hope consumables wouldn't be taxed.

The proposed National Retail Sales Tax uses an monthly payment mechanism based on household size allowing the individual to purchase upto the povertyline of consumption goods and services with taxes prepaid for him. The Consumption allowence operates in place of the personal exemption/standard deduction of the Flat Tax and current income tax systems.

 

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

[Holden Magroin]

Forget the economic benefits of abolishing the income tax; any income tax is theft. No government has the right to take the first fruits of one's labor. Theft is theft, whether it's done by criminals or the government.

[arielb]

The NRST is a terrible idea that will lead to a massive underground economy as people use cash to avoid paying the tax. It will lead to multiple rates on products that the government favors or disfavors. It is heavily biased against consumption which is anti free market and will lead to overinvestment. It will also lead to the taxation of the internet which will shift e-commerce sites offshore.

Some people want a more voluntary system. You do that by adding more fees to government services-not by taxing goods and services in the private sector (which most states find difficult to tax)

[Quicksilver]

The one problem that I don't see how NRST can surmount is that retired and disabled citizens--who don't pay federal payroll taxes--won't have any incentive to support it.

[ancient_geezer]

I don't see how NRST can surmount is that retired and disabled citizens--who don't pay federal payroll taxes--won't have any incentive to support it.

I am, and I support it. For my family, and it does provide a compensation to the retired individual through the FCA.

 

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%.

The effective FairTax rate for a family of four at various expenditure/income levels:

[Free the USA]

http://www.freerepublic.com/perl/bump-list

[Badger1]

Either system is better than what we have now. The current tax code is the mechanism whereby the government micromanages the economy with tax breaks. Any system that removes this micromanagement that pits one group of Americans against another in a quest to get preferential tax treatment from the government is long overdue.

[Bigun]

...not by taxing goods and services in the private sector (which most states find difficult to tax)

Excuse me sir but that statement simply doesn't hold water in view of the fact that 45 of 50 states have a sales tax in place TODAY!

[ovrtaxt]

Why can't we just have Tariffs? It's the CONSTITUTIONAL way to raise revenue. And we would own the planet inside of ten years.

[Bigun]

The NRST is a terrible idea that will lead to a massive underground economy as people use cash to avoid paying the tax. It will lead to multiple rates on products that the government favors or disfavors. It is heavily biased against consumption which is anti free market and will lead to overinvestment. It will also lead to the taxation of the internet which will shift e-commerce sites offshore.

Have you any DATA which supports those claims or are you just running your mouth?

The state of Texas (a rather LARGE economy in it's own right) has financed government with ONLY a sales tax for quite a long time and NONE of those problems has surfaced on a significant scale.

[ovrtaxt]

It is heavily biased against consumption which is anti free market and will lead to overinvestment.

Or it will lead to a run on savings. And wiser choices in spending. Yes, the economy will feel a shock as it adjusts, but in the end, it will be much stronger, people will have more cushion to avoid fluctuations in income, and the phenomenon of over-financing will taper off.

The IRS taking our insome off the top is immoral. And the President who abolishes it will be politically immortal.

[Bigun]

Why can't we just have Tariffs?

Because tariffs get rolled into the price of goods and thus HIDDEN from those who ultimately pay them! If we want a SMALLER federal government that is the LAST thing we should wish for!

It's the CONSTITUTIONAL way to raise revenue.

So is the NRST administered by the states and has the added benefit of being COMPLETELY visable to EVERY Tom, Dick and Harry in the country EVERY time they purchase a NEW good or service!

How long do you think it would take for the federal government to begin to shrink under that system?

[Taxman]

LNM, good to see you posting on the tax threads -- hope all is well with you.

For more information, see http://www.salestax.org and http://www.votr.org.

FReegards