Consumption taxes are not the answer

TownHall.com ^ | Friday, May 28, 2004 | by Bruce Bartlett

[JohnHuang2]

Two tax issues seem to be getting a lot of discussion on the Internet these days. First is a big increase in the gasoline tax in order to discourage oil consumption and make the nation less vulnerable to the OPEC oil cartel. Second is the idea of replacing the Social Security payroll tax with a progressive consumption tax. Both have serious flaws.

The idea that a higher gasoline tax will help our energy situation is ludicrous. All European countries have far higher gasoline taxes, and they are just as vulnerable to increases in the price of oil as we are. If a higher oil price translates into a 50-cent per gallon increase in gasoline prices (net of tax), then the Europeans and we are both going to pay 50 cents more per gallon.

The reason is that oil is an internationally traded commodity. Whether you are importing oil or exporting it, you are going to pay the world price one way or another when you use oil. If you are an oil exporter, you can hold the price of gasoline down for your citizens, but then the nation as a whole pays an opportunity cost equal the foregone profit. In the end, it is no different than an oil importing country using public funds to subsidize the price of gasoline.

The point is that from the point of view of a consumer, it makes no difference whether you live in a country that is self-sufficient in terms of oil or one that is not. When fundamental market forces cause the price of oil to rise, everyone pays. There is no way of insulating yourself except by shifting the cost to someone else.

Raising the gasoline tax may reduce domestic oil consumption, but this will happen only very slowly. It takes time for people to trade-in their gas-guzzling SUV's for fuel efficient Mini Coopers. Leaving aside the loss of welfare for those forced to drive in tiny little cars when they would rather be in something much bigger, let's suppose that the lower demand lowers the world oil price. Unless it goes down by an amount equal to the tax, consumers are still worse off.

In the end, the only beneficiaries of a higher gasoline tax are the government and the road building industry. That is because under current law, revenues from the federal gasoline tax go into the highway trust fund, which is used to build roads, bridges and such. When there are uncommitted funds in this trust fund, Congress tends to treat them like free money that can be used for any stupid pork barrel project as long as it involves transportation.

As a consequence, increases in the gasoline tax don't even reduce the budget deficit except for the minuscule amount of time between when the tax is imposed and the time it takes for Congress to spend it. Of course, the law could be changed to put higher gasoline taxes into general revenues. But the road builders and others who benefit from increased transportation spending will strenuously oppose this. Hence, this is unlikely to occur.

The idea of replacing the payroll tax is similarly unworkable. This system of funding Social Security benefits was created for a specific reason that is still valid. By tying a worker's contributions directly to his benefits, workers tend to view the payroll tax not so much as a tax, but rather as a payroll deduction for his 401(k) plan, life insurance or medical benefits. To the extent that this is the case, the payroll tax is viewed as part of a worker's pay and not a subtraction from it.

Of course, a worker loses the use of his payroll tax deduction. But most get it all back with interest. Indeed, because of the highly progressive nature of the Social Security benefit system, low-income workers get a very high return on their payroll taxes. They get back benefits in retirement that are far greater than the money they paid in. In this respect, the Social Security system reinforces work incentives, rather than being a simplistic "tax on work" that it is often portrayed as.

Replacing the payroll tax with some other broad-based tax that is unconnected to a specific worker's wages breaks the link between contributions and benefits. It will convert Social Security into a pure welfare program, rather than a government pension. The effect would be to reduce political support for the program and work incentives at the same time. Any disincentive effects from the replacement tax would come on top.

If we are going to replace some tax with a progressive consumption tax, it should be the income tax, not the payroll tax. If done properly, this would increase incentives for work, saving and investment that would boost real economic growth.

[GregoryFul]

Will my "after tax" dollars in my retirement savings be given similar favorable treatment?

[ancient_geezer]

Will my "after tax" dollars in my retirement savings be given similar favorable treatment?

You will receive the FCA, and overall you will be spending the same amount for a given basket of goods that you do today. Remember that 20-25% of consumer shelf prices are due to business taxes & costs related to them. Those business taxes are repealed under the NRST.

The reason for refunding NRST on old business inventory is to make sure you don't pay a double tax, NRST plus corporate income/payroll tax carryovers embedded in the price of goods.

[ampat]

As we all know, its the politicians who are compulsive spenders that make any tax plan a disaster of growing proportions.

[Final Authority]

Read 156. Get over it.

[Final Authority]

With respect to 157, in 154 I answered it exactly. In the future if you can't understand what I wrote or mean in the use of the English language please ask for assistance before you attempt a reply.

[Final Authority]

With respect to your reply 160, I believe I answered it precisely in 154. That however, is not the issue of this thread. Way back when you accused me of being a socialist (collectivist) the issue before us is whether or not a sales tax can ever be enacted and whether such a tax after enactment will be a good thing. In all of your replies to me you have not added one iota of insight into the discussion but rather have decided to cause some sort of hindrance to constructive dialog and thoughts. Your efforts have bordered on ad hominem (to the man) attacks which are not only discouraged on these threads but are simply improper.

In the future please reply to the discussion of ideas and facts with ideas and facts and leave personal attacks at home. FreeRepublic will cease to exist if all dialog is represented by your efforts on this thread as directed to me.

[Zon]

You shoot yourself in the foot and lose credibility and tell me "to get over it". Get a clue dude. It's your problem, not mine.  

You're a hoot!

[Zon]

Are you feigning that you didn't know that you wrote the word "we"? And are also feigning that you didn't know what I meant when I asked who the "we group of people are that you speak for"? And you never did answer the question. 

I did ad value to the thread -- thanks to you shooting yourself in the foot.

[Principled]

I answered it exactly.

No, you didn't answer it at all. Are you retarded?

In the future if you can't understand what I wrote or mean in the use of the English language please ask for assistance before you attempt a reply.

What indicates to you that I could not understand what you wrote or meant? I understood well that you refused to answer a simple question five times. Lewislynn answered on your behalf - indicating your use of the plural we meant Lewis and you. Why he would answer on your behalf is another question....but it is clear you will continue to avoid the issue -

Your myopic self importance is funny.

[Principled]

Lewislynn said the WE meant Lewislynn and Final Authority. FWIW. But it is clear than Final Authority will not answer the direct question. He thinks a lot of himself.

[Final Authority]

I am glad you are amused.

You or both, are a waste of my time, but if on post 154 the answer you wanted wasn't there, because you couldn't read it, so I will repeat, there are others on this thread and in the universe who agree with me, therefore there is a we. We agree. Period. Lewislyn, if I may speak for him, was just being a bit more direct than I usually write, to get the point across.

There was a second personal attack here and it is reported. So be warned.

[Principled]

What were the personal attacks? I don't read any of my posts to contain them. Can you point them out?

[Principled]

There's others "in the universe" he's speaking about.... ROTFLMBO

[GregoryFul]

So how will businesses sell their old inventory, since it is 20-25% more expensive than newly minted product?

Incidentally, in Europe where they have a NRST, prices for comparable products are considerably higher than they are here.

[ancient_geezer]

So how will businesses sell their old inventory, since it is 20-25% more expensive than newly minted product?

Vendors receive a 23% transition credit for inventory held prior to implementation of the NRST.

Incidentally, in Europe where they have a NRST, prices for comparable products are considerably higher than they are here.

There is no NRST in Europe, they have a VAT that is levied on all business-business purchases that becomes embedded implicitly into the price of products.

 

Definition [ http://www.encyclopedia.com/articles/13330.html ]:

value-added tax
levy imposed on businesses at all levels of production of a good or service, and based on the increase in price, or value, added to the good or service by each level. Because all stages of a value-added tax are ultimately passed on to the consumer in the form of higher prices, it has been described as a hidden sales tax. Originally introduced in France (1954), it is now used by most W European countries.

The NRST is levied only on retail purchases, for final consumption and is separately charged from the shelf price so that it is totally visible to the customer, price & tax are separated, thus is the precise opposite of the European VAT. The NRST does not tax purchases made for investment or business purposes, a VAT does.

The current income/payroll tax structure now in place acts like a subtraction method VAT, in that it is a levy imposed on businesses at all levels of production, it is passed on to the consumer hidden in the price of goods and services(more than 22%[the lowest estimate that prices would fall with enactment of the NRST] of the price of all goods and services), lower wages, lower returns on investment for investors, and higher interest rates(as much a 25% greater than they would be under the NRST).

Purpose of the NRST is to replace all Federal income/payroll taxes and gift/estate taxes with a single tax levied on all new goods and service once and only once at the retail level paid by the final consumer(the purchaser) of those goods or services. Goods that have been previously taxed under the NRST (i.e. used) are not taxed on resale.

The NRST is a specific remedy and replacement for the implicit VAT we now pay in the form of inflation and lower income(i.e. the corporate income/payroll tax). The NRST repeals over 95% of all Federal taxes in place and replaces them with one simple, easy to administer and understand, Retail Sales Tax.

[Zon]

The irony I see is that he (she?) uses the screen name "Final Authority", which by definition means each individual is the ultimate authority. That there is no higher authority to rule or guide one's life. The irony that he used "we" in support for his position -- needing group support/authority -- contradicts the screen name. Apparently he holds the illusion that external authorities have real power over individual authority. 

That illusion is held by collectivists leaders, sheeple and cult leaders and its members. Any person no mater what their occupation or profession, that respects each person as responsible for their own authority and actions will often find themselves up against the cult within their field. If the person is honest they will not go along to get along. Cults operate mostly within government, religion, law field, media and academia. 

'Cult' by definition. Not by political correct interpretation that means not conforming to establishment bounds, outside the status quo. An establishment status quo that is premised on the illusion of external authorities. 

Another irony is this is not over FA's head. Rather a vested interest has him at odds with reality and thus it's outside of his radar. Therein lies a key to out flanking and outcompeteing all cults and their illusions of external authorities. Each individual empowers themselves honestly as the final authority.

[GregoryFul]

So what is the "FCA" you spoke about?

[ancient_geezer]

So what is the "FCA" you spoke about?

FCA is the Family Constumption Allowence. It equals the NRST on the HHS povertylevel of consumption paid monthly for every legal resident of a household. It is based solely on household size and represents a prepayment of NRST for necessity level expenditure.

Every year, the Department of Health and Human Services [HHS] determines a statistic called "poverty threshold" based on the cost of a specific basket of goods and service updated by inflation and published annually in the Federal Register.

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 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%.

To illustrate, examine the tax burden that a family of four will have at various annual expenditure levels.

[MarkL]

Not all consumption is controllable by the taxpayer, so the amount of tax is not truly controlled by the citizen. Essential consumption is not controllable, while most discretionary spending is controllable (it can even be done over the internet and in foreign countries where that consumption would escape the NRST).

And that's taken into consideration. HR25 calls for a monthly rebate to every household to "reimburse" the taxes paid on "poverty level" essentials.

Another place to save on the taxes would be to buy used products, as the NRST only applies to new, retail sales. So while the NRST would be applied to a new house or car, purchasing a used house or car would NOT be taxed.

Mark

[GregoryFul]

Another place to save on the taxes would be to buy used products, as the NRST only applies to new, retail sales. So while the NRST would be applied to a new house or car, purchasing a used house or car would NOT be taxed.

The price of a used house comparable to the taxed new house would rise to equal the new house with the taxes (a windfall for old homeowners).