Posted on 08/18/2004 5:34:18 AM PDT by CSM
A National Sales Tax No Vote The rates would be vastly higher than what you might suspect.
House Speaker Dennis Hastert created a flurry of excitement in Republican circles the other day when it was reported that he is proposing the abolition of the Internal Revenue Service in his new book. This would be accomplished by eliminating all existing federal taxes and replacing them with a national retail sales tax.
There is no indication of what tax rate Speaker Hastert thinks would be necessary to replace all federal revenue. A current proposal by Rep. John Linder (R., Ga.) says that a 23 percent rate would be adequate. But such a low rate can only be sustained by making completely absurd assumptions about what would be taxed. Every serious economist who has ever looked at this question has concluded that a vastly higher rate would in fact be needed.
An unstated assumption is that the 23 percent rate proposed by Linder is comparable to existing state and local sales taxes, where the tax comes on top of the purchase price. Thus, a 5 percent sales tax on a $1 purchase comes to $1.05.
But thats not the way the Linder plan works. He deceptively calculates the rate as if the tax is part of the purchase price. He calls this the tax-inclusive rate. Calculating the rate the normal way people are accustomed to with state and local sales taxes would require a 30 percent tax rate, not 23 percent.
When Congresss Joint Committee on Taxation scored the Linder proposal four years ago it estimated that it would actually require a tax-inclusive rate of 36 percent, not 23 percent, to equal current federal revenues. Calculating the rate in a normal, tax-exclusive manner would mean a 57 percent rate.
Economist Bill Gale of the Brookings Institution notes that supporters of the sales tax assume that there will be no tax evasion under their proposal and that the size of government will not grow, even though they would send a large annual check to every American in order to offset the regressivity of the tax. Making realistic assumptions, Gale estimates that the tax-inclusive rate, comparable to Linders proposed 23 percent rate, would actually have to be about 50 percent. A rate comparable to existing sales taxes would be close to 100 percent.
And let us not forget that state and local sales taxes would come on top of the federal sales tax, pushing the total rate even higher.
Obviously, the federal government is not going to impose tax rates this high, nor would anyone pay them if it did. There would be a massive tax revolt.
The Linder bill (H.R. 25) is also deceptive in its basic assumption that all consumption of goods and services in the U.S. would be taxed. Implicitly, Americans would be taxed on, among other things, all medical care, purchases of new homes, and services provided by state and local governments if Linders bill became law.
This means that if you are sick and have large doctor bills, you are going to pay 30 percent on top to the federal government. (Alternatively, you would pay 30 percent more for health insurance.) If you buy a new house listed for $150,000, your actual purchase price is going to be $195,000, including the sales tax. (Alternatively, there could be a tax on the imputed rent homeowners pay themselves for living in their own homes.) And if your children receive $20,000 worth of education each year from the local public schools, somehow or other you are going to have to pay an additional $6,000 to the federal government.
Of course, it is completely idiotic to think that the American people will ever allow this to happen. The idea of taxing all consumption sounds nice in theory until you realize just how broad the definition of consumption would be under Linders plan.
Economist Evan Koenig of the Federal Reserve Bank of Dallas makes the point that any new sales tax is going to raise prices by that amount. If the Federal Reserve accommodates it, we are going to have 30 percent inflation the year the tax is introduced. If it is not accommodated, then producer prices are going to have to fall by 30 percent, which will cause a severe recession and greatly reduce the tax yield.
Somehow or other, Linder has gotten 54 House members to co-sponsor his proposal. They should all pray that their opponents overlook their poor judgment. When last the national retail sales tax was a major campaign issue in the 1996 senate race in Louisiana the Republican sales tax supporter was crushed by his anti-sales-tax Democratic opponent. That may explain why only two senators support Linders plan, one of whom is retiring this year.
With all due respect to Speaker Hastert, trying to eliminate the IRS by adopting a national retail sales tax is a very dumb idea.
Bruce Bartlett is senior fellow for the National Center for Policy Analysis. Write to him here.
This article is so flawed and full of misinformation it is almost laughable. The fact that much of the information is coming from government sources indicates what Bozo's we have in Washington. Taxes are not that complicated if you look at them logically and the actual rate that would be necessary isn't that hard to calculate or anywhere near as high as 57%.
First of, you must realize that with only a few exceptions, all taxes are basically sales tax anyway. Whether you own GM stock, are a GM employee, a salesman or a parts vendor, the money you pay in taxes comes from the sale of GM cars trucks and services. The end user supplies the money that you end up sending in as taxes, it is built in to the price of the product or service. Eliminate or lower taxes and the price of the product or service goes down. Incidentally, this is why tax cuts for the wealthy is such a misnomer. Tax cuts end up lowering prices to the consumer because that is where the tax money was coming from anyway.
The easiest way to figure out what a national sales tax would have to be is to look at what percentage of GDP is being taken in as Federal Taxes. Typically this is between 18% and 21% depending on economic conditions. Only a small portion of this is related to non-transactional taxes like the death tax. So even given that the tax code would be massaged to exclude certain items (essential food items for instance) in the silly belief that it would shield the low income people from taxes (a totally ridiculous notion since the cost of taxes, no matter how they are collected is built into the final cost of an item) a sales tax in the range of 20% to 25% would be pretty close to accurate. The interesting thing is that it would not basically affect the end cost of the product since all of the built in taxes would be removed from the original price of the product. The net cost to the consumer would be pretty neutral.
I used to be opposed to sales taxes since it appears that they are regressive. When you stop and follow the real flow of money through the economy, it is fairly easy to see that all taxes are regressive because the consumer is the one that ultimately provides the money to pay the taxes. Changing how taxes are collected does not really change who pays them, it only affects the efficiency of the system and the ability of politicians to bamboozle the public while using the tax code for social engineering.
I didn't say it WAS necessary, I am saying they are admitting that they are CURRENTLY stealing 57% of our assets!
I disagree. A consumption tax will keep the tax burden low since people can see upfront how much they're actually paying. In our current income tax system, you never see how much the government withholds from your paycheck before you get it. A national sales tax in the long run will reduce the size of government because people will have to consider how much they're prepared to pay to support government programs. Plus what Bruce Bartlett neglects to mention is people can reduce their tax burden at any time simply by reducing their spending. Eliminating the IRS is still the right idea but it will take us a lot of legwork to get us there.
The change to a taxation system based entirely on purchases has two extremely inherent problems:
1)Higher prices will have a negative effect on consumer demand, which could lead a depression (over capacity is the primary cause of every depression)
2)The state will have authority over every transaction, leading to a more insidious control of our consumption. Simple transactions such as barter would become illegal if not declared. All Internet transactions would be taxed, therefore, tracked.
There is a possibility if we elect an overwhelmingly Republican House and Senate, and have a Republican President.
I think that it's an excellent idea in theory. However, I think that the reality is that we'd eventually wind up with both a Sales and an Income tax. The change would be incremental.......Income tax would be abolished, then a few years later a small tax on the 'richest 1% of the population' would be put in place, and within a few years, we'd be right back where we started, except much, much poorer for it.
As far as I'm concerned, the only way to reduce taxes is to cut the government.
Thanks. I didn't know about the counter article. BTW, I am in favor of the NRST, but I wanted to post the article for a thorough dissection. Thanks for helping me reach the intended consequences.
Wrong. Only way we can reduce the size of government is to get rid of the income tax. Otherwise government will continue to grow on autopilot, thanks to the hidden tax hikes leveraged in our byzantine income tax code.
With regards to your 2 problems, I have a couple of questions that maybe you can clarify.
1) How does removing the current tax imbeded in the price of goods and adding the sales tax automatically lead to higher prices of goods? Even if an increase was inevitable, wouldn't that be off-set by the higher net incomes of the consumers?
2) Which is more evil? The state having authority over every transaction (therefore giving each citizen a choice of the amount of authority they give the state) or the state having authority over all income (therefore, removing from citizens the ability to control the state's authority.)?
So the author would rather report his income to the government?
Part of the Linder bill is to repeal the 16th ammendment that grants the fed the authority to collect a income tax.
I'm still not convinced - what I've been able to find is pretty generic, though. One thing that I saw was the 'monthly rebate'. I don't like the idea of a monthly government refund - sounds like we're replacing one massive bureacracy that's easy to defraud (the IRS) with another one.
Obviously, the federal government is not going to impose tax rates this high, nor would anyone pay them if it did. There would be a massive tax revolt.
Whatever tax replaces the present income tax must, by law, be revenue neutral. It must bring in the same amount of funds as the income tax now brings. The proposed NRST tax rate is 23%. That said, if the actually amount needed to maintain a revenue neutral statis was 50% then that demonstrates that people would be revolting right now if they knew how much they are already paying for government. Bruce Bartlett is such a putz.
With all due respect to Speaker Hastert, trying to eliminate the IRS by adopting a national retail sales tax is a very dumb idea.
When voters realize that they can vote out of office any representative or senator that votes against HR25 -- that votes to not abolish the IRS -- The People will finally be reclaiming their power to control the government. HR25 is a single issue worthy of being a single-issue vote for or against congressional candidates.
Part of the Linder bill is to repeal the 16th ammendment that grants the fed the authority to collect a income tax.No it's not. The bill only states that "Congress further finds that the 16th amendment to the United States Constitution should be repealed." That's just lip service.
Whatever tax replaces the present income tax must, by law, be revenue neutral.I believe that law recently expired and wasn't renewed.
Here in Wyoming we pay sales tax on food; all of it is imported except beef - but we still pay tax on that too.
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