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 that’s 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 Congress’s 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 Linder’s 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 Linder’s 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 Linder’s 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 Linder’s 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.
A rare article of opposition, ping.
Could someone explain where these 30, 36, 50, and 100% tax rates are coming from? Our annual consumption is around $12 Trillion. A 10% sales tax brings in $1.2T, which is close to what the IRS does.
Where am I wrong?
The author is right; Americans won't tolerate a sales tax of more than about 15%--exclusive.
Like I've said before, the first step to going to a national sales tax is the simplification of our tax code back to a flat tax.
The economic growth incentive of the flat tax will raise the wealth and tax revenues over time. As tax receipts increase, the flat tax rate should be reduced to keep the Federal budget on a fairly even keel. Then when the nation reaches a certain level of wealth, which can be determined best by a trained economist, the transition to a national sales tax can take place, without requiring the reimbursement scheme because the tax rate will be low, and the personal income levels will be higher.
At least, that's the way I see it. Jumping to a national sales tax system now will probably fail, but a flat tax system now will probably work. But a national sales tax following a flat tax will probably work...
I am continually surprised by the emphasis from both sides on the way things were as opposed to the way things should be. Instead of taking last years budget or the monstrosity of the tax code and doing minor tinkering with it, how come we don't just ask, "how should we spend our money now and in the future?" Instead of trying to make a sales tax 'revenue nuetral', why don't we ask, which is the more proper way to collect taxes, on income or expenditure? Instead of trying to be 'revenue nuetral', why don't we ask, "how much money do we have to confiscate from tax payers this year?"
'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.'
Crushed? Pshaw...the writer is overstating and mistakenly refering to the narrow (and questionable) loss by Woody Jenkins by a few thousand votes as "crushed". The truth of Jenkins loss is he would have sailed into victory had there not been a pro-gambling vote taking place that election. Sales tax issues had nothing to do with it.
P I N G ! ! !
People would completely freak out if there were a tax on food and medical care.That would eliminate that area. The rate would have to be higher for everything else. I'm all for it.Sick of the IRS and their intrusive BS
Will that also be eliminated?
Remember that is an almost 10% tax on income, directly from a person's pay check.
For a lot of wage earners that is tax is higher than the income tax that they pay.
Also, we need to remember that if the Amendment XVI is not repealed, sometime in the future, the income tax could be legally revived.
Thus, we or our future citizens would have a very high national sales tax to pay, social security and medicare tax to pay, and then a new income tax to pay.
This article is nothing but hogwash. Consumption taxes would not have to get anywhere close to 30% or 50%. That is a pure fallacy.
The increased cost (inflation) would be offset by an overwhelming increase in salaries and wages due to the elimination of federal taxes deducted.
The consumption tax creates a system of transparency where you take home what you earn (without hidden deductions or employer contributions) and you know exactly how much of each purchase is going to the federal gov't.
This will lead to a reduced need for accountants (perhaps this author's motivation) and an increased interest and scrutiny of federal budgets.
Even a cursory glance at the coming costs of entitlements guarantees it. Our children are in for a rough ride, tax wise.
And just how are your Dad's children doing?
You cannot have a flat tax. The lawyers in Congress will not be able to keep their hands off it.
BULLSHIT!!! If EVERYONE had to "contribute" a small percentage, the rate would be around 5%. Right now we have a tax system where 20% of the population pays almost ALL of the tax and 80% pay very little if any.
I'm not falling for this propoganda crap!!
I like their version of tax rates - it will make the American public even MADDER!
The article is MORE HONEST than most of these low-ball figures being spouted when you tack on ALL of the taxed areas and not simply income tax. Taxes do not always take the form of $$ but in cost additions from unfunded illegal "MANDATES" from the govt.
60% (+ -) has always been the figure I've known of and heard used for at least 20 years of actual total tax and it has never been disputed.
Eggsactly Batman, also note that if you have a sales tax then Foreign Visitors and Illegal Aliens have to pay it as well! So everybody gets to pay!
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