A National Sales Tax No Vote

National Review OnLine ^ | August 9, 2004 | Bruce Bartlett

[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.

[William Terrell]

I wonder, how exactly would the process to repeal the 16th work with the NRST legislation?

[lewislynn]

the income tax is eliminated, that takes a huge chunk out of the cost of products all the way up the production chain.

That could only be true if the "production chain" was in America..it isn't, he knows that.

[Bigun]

Thumbnail Sketch of the FairTax

The FairTax is a federal retail sales tax that replaces the entire federal income and Social Security tax systems, including personal, gift, estate, capital gains, alternative minimum, Social Security/Medicare, self-employment, and corporate taxes. The FairTax allows Americans to keep 100 percent of their paychecks (minus any state income taxes), ends corporate taxes and compliance costs hidden in the retail cost of goods and services, and fully funds the federal government while fulfilling the promise of Social Security and Medicare.

The income tax exports our jobs, rather than our products. The FairTax brings jobs home. Most importantly, U.S. exports are not burdened by the FairTax, as they are with the current income tax. So the FairTax allows U.S. exports to sell overseas for prices 22 percent lower, on average, than they do now, with similar profit margins. Lower prices sharply increase demand for U.S. exports, thereby increasing job creation in U.S. manufacturing sectors. At home, foreign imports are subject to the same FairTax rate as domestically produced goods. Not only does the FairTax put U.S. products sold here on the same tax footing as foreign imports, but the dramatic lowering of compliance costs in comparison to other countries' value-added taxes also gives U.S. products a definitive pricing advantage which foreign tax systems cannot match.

All Americans take home their whole paychecks. Not only do more Americans have jobs, but they also take home 100 percent of their paychecks (except where state income taxes apply). No federal income taxes or payroll taxes are withheld from paychecks, pensions, or Social Security checks.
Retail prices no longer hide corporate taxes or their compliance costs, which drive up costs for those who can least afford to pay. Did you know that hidden income taxes and the cost of complying with them currently make up 20 to 30 percent of all retail prices? It's true. According to Dr. Dale Jorgenson of Harvard University, hidden income taxes are passed on to the consumer in the form of higher prices - from 20 to 30 percent higher than they would otherwise be - for everything you buy. If competition does not allow prices to rise, corporations lower labor costs, again hurting those who can least afford to lose their jobs. Finally, if prices are as high as competition allows and labor costs are as low as practical, profits/dividends to shareholders are driven down, thereby hurting retirement savings for moms-and-pops and pension funds invested in Corporate America. With the FairTax, the sham of corporate taxation ends, competition drives prices down, more people in America have jobs, and retirement/pension funds see improved performance.

The FairTax strategy is revenue neutrality: Neither raise nor lower taxes. If you were in a 23-percent income tax bracket, the federal government would take $23 out of your paycheck for every $100 you made. With the FairTax, if the federal government gets $23 out of every $100 spent in America, the same total revenue is delivered to the federal government. This is revenue neutrality. So, instead of paycheck-earning Americans paying 15.3 percent of their paychecks in Social Security/Medicare payroll taxes, plus an average of 18 percent of their paychecks in federal income tax, for a total of about 33 percent, consumers in America pay only $23 out of every $100 they choose to spend on new goods or services for their own personal consumption. And this tax is collected only on spending above the federal poverty level, thus making the tax rate zero up to that level.
At this rate, the FairTax pays for all current government operations, including Social Security and Medicare. Government revenues are even more stable and predictable than with the federal income tax because consumption is a more constant revenue base than is income.

No tax on used goods. No tax on business inputs. With the FairTax, if you choose to buy any new good or service, the sales tax is charged just as state sales taxes are computed today. If you choose to buy used goods - used car, used home, used appliances - you do not pay the FairTax. If, as a business owner or farmer, you buy something for strictly business purposes (not for personal consumption), you pay no consumption tax. So, in deciding what to buy, you get to choose whether or not you pay the federal consumption tax.

No federal sales tax up to the poverty level means progressivity like today's tax system. Furthermore, to ensure that no American pays tax on necessities, the FairTax plan provides a prepaid, monthly rebate for every registered household to cover the consumption tax spent on necessities up to the federal poverty level. This, along with several other features, is how the FairTax completely untaxes the poor, lowers the tax burden on most, while making the overall rate progressive. However, the FairTax is progressive based on lifestyle/spending choices, rather than simply punishing those taxpayers who are successful. Do you see how much freer life is with the FairTax instead of the income tax?

Tax criminals - don't make criminals out of honest taxpayers. Today, the IRS admits to 25 percent non-compliance with the code. FairTax.org will be generous and simply take the position that this is likely a conservative estimate of the underground economy. However, this does not take into account the criminal/drug/porn economy, which equally conservative estimates put at one trillion dollars of untaxed activity. The FairTax taxes this - criminals love to flash that cash at retail - while continuing to provide the federal penalties so effective in bringing such miscreants to justice. The substantial decrease in points of compliance - from every wage earner, investor, and retiree, down to only retailers - also allows enforcement to concentrate on following the money to criminal activity, rather than making potential criminals out of every taxpayer struggling to decipher the code.

What is Americans For Fair Taxation? Americans For Fair Taxation (FairTax.org) is a non-profit, non-partisan, grassroots organization dedicated to replacing the current tax system. The organization has hundreds of thousands of members and volunteers nationwide. Its strategy supports sound economic research, education of citizens and community leaders, and grassroots mobilization efforts. For more information visit the web page: www.fairtax.org or call 1-800-FAIRTAX.

Read more

[babyface00]

That could only be true if the "production chain" was in America..it isn't, he knows that

There are many reasons to offshore/import products and components.

One is that anything made in America has income tax costs built into the product cost at every stage of the process. This makes not only the end-product subject to offshoring/importing, but every part that goes into it along the chain.

Taxing products only when sold to the end-user would eliminate a large disadvantage domestic products currently have, both at the final product level, and on the component/service level.

Obviously, there are other incentives to offshore or import products and services, but taxing all items the same, regardless of their origin, would be a big step forward to helping domestic products lose a competitive disadvantage that is created by our tax system.

[Stu Cohen]

I have a question about compliance with a NRST. There already is a large underground economy to get around State sales taxes which are in the 4-8% range. Would not this underground economy increase if an additional 15-30% NRST were imposed? Would the government want to move to a "cashless" society so the NRST could not easily be evaded?

Well, when Drug Dealers buy Nike's and BMW's ... they would be forced to pay taxes on their income, which they don't now. This would actually bring MORE people into the taxsystem, which, in theory, should lower everyone else's tax burden.

Will there be people jocking this system? Well, sure. They already do. Offshore bank accounts, under the table cash deals. There are maybe 3 people in the country who adhere to the IRS "code" to a T. Most people just cross their fingers that they do not get audited, because when they are ... they usually ave to pay. There will always be a percentage of people who will try to defeat ANY tax.

The question really is not compliance, because that's already hit and miss and fill of loopholes and whatnots (didn't Ariana Huffington pay like $100 in federal taxes in 2002?). Some of the wealthiest folks in the country pay little or NO tax at all. I doubt they are going to go "all cash transaction" if this were to be passed. They would end up paying what everyone else does.

The issue is whether the current system of the IRS seizing people's paychecks at the source and demanding compliance on 7,000 pages of regulations is reasonable.

I say, it's not. If people are going to try to skirt a tax system (which they will until the earth stops spinning), i'd rather it be a fair one for those that DO participate in it.

[lewislynn]

This article is nothing but hogwash. Consumption taxes would not have to get anywhere close to 30% or 50%. That is a pure fallacy.

Actually Linder's 23% tax is close to 30% (29.87%) ...His tax is 23% "of the gross payment".

$129.87 (gross payment) minus 23%(of the gross payment) = $100.00...but that would only be the law for the first year because after that SS "determines" the rate to suit their needs.

[Bigun]

I, for one, am against a National Sales tax.

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.

I suppose you are aware that there is CURRENTLY no protection against just such a senario but, when the FairTax bill becomes law, there WILL be because:

1. income taxes will be illegal by statute

2. the IRS is defunded

3. all IRS records are required to be destroyed.

[lewislynn]

What about the Social Security and Medicare tax on income? Will that also be eliminated?

No tax is elimimated, only replaced.

Linder's plan allows the bureaucrats at SS to "determine" the gross payment tax rate every year based on their needs wants.

[ancient_geezer]

A Taxreform bump for you all.

If you would like to be added to this ping list let me know.

John Linder in the House & Saxby Chambliss Senate, offer a comprehensive bill to kill all income and payroll taxes outright, and provide a IRS free replacement in the form of a retail sales tax:

H.R.25, S.1493
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information: http://www.fairtax.org & http://www.salestax.org

[Honcho]

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.

You have to understand that there are certain goods and services that would be politically difficult to tax, such as medical expenses. To exclude medical expenses would exclude 10% of the entire US economy right off the bat. What about food? Are you going to tax food purchases? Housing? Utilities? For every good and service you exclude, you raise the tax on all other items not excluded. Now I haven't run the numbers but I think you should run an exclusion on medical expenses and then raise the tax on items somewhere else... like say jewelry over $1000 (it's just an example). If you kill the tax on food, raise it on adult beverages (again just an example). That way you could keep things politically moving by exempting those items you wouldn't get political support for, but keeping the base tax much lower.

[Stu Cohen]

o exclude medical expenses would exclude 10% of the entire US economy right off the bat. What about food? Are you going to tax food purchases? Housing? Utilities? For every good and service you exclude, you raise the tax on all other items not excluded.

As someone who comes from a family of goverment "workers", I can assure you that we don't "need" nearly was much as we take in.

If you believe nothing else I ever say, believe the above paragraph.

[lewislynn]

Our tax system may be a problem but itsn't 'the' problem.

If it is, then why has 'the' problem only gotten worse since we've elected Republican's as a majority?

[ancient_geezer]

What about the Social Security and Medicare tax on income?
Will that also be eliminated?

Yes, HR25, is specifically drafted to replace all federal income and payroll taxes as well as the gift/estate tax, with a 23% of total expenditure for consumption retail tax.

H.R.25, S.1493
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information: http://www.fairtax.org & http://www.salestax.org

Just replacing the federal income tax would provide a rate of 15% of total expenditure on consumption.

Replacing both income & payroll taxes the rate comes out at 23% of total expenditure.

The general form of the NRST was discussed broadly by Alan Keyes in the last presidential elections:

 

Alan Keyes Interview with Des Moines Register:

• Conservative commentator Alan Keyes said Thursday one of the first things he would do as president would be to replace the federal income tax with a national sales tax.

• 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.

 

HR25 and it's predecessors are implementations of that National Retail Sales Tax.

[CMAC51]

"I didn't say it WAS necessary, I am saying they are admitting that they are CURRENTLY stealing 57% of our assets!

No they aren't. All you have to do is divide the total Federal tax revenue by the GDP and you get what they are taking in taxes. It is that simple. Everything else is either ignorance or misdirection. When all taxes, Federal, state and local are added up, the latest numbers I have seen are between 40% to 50% depending on local.

[Stu Cohen]

Do you ever wonder why the government needs your money when it prints it's own money anyway?

It's not like they can't get as much fiat currency as it wants. The Fed isn't going to cut us off. If it wasn't for us providing fiat value, Federal Reserve notes would be woth nothing.

The government does "need" you money to fund it's operations, it "needs" your money in order to control inflation let too many people get too much.

This whole "the government will have no money if it doesn't take yours" arguement really is silly. They have access to as much as they want. And the Federal Government can run a deficit forever. The Fed ain't cancelling the credit card.

Go ahead, spend it ... we'll print more ...

[CSM]

"That could only be true if the "production chain" was in America..it isn't, he knows that."

Geez, I didn't realize that we no longer have any manufacturing in this country. I better figure out what the heck I get paid for.

[CSM]

I must be one of the lucky ones. I get to keep a whole 55% of my earned income (not including state sales tax, gas tax or any other consumption tax.)

[ancient_geezer]

Whatever tax replaces the present income tax must, by law, be revenue neutral.

The Budget Enforcement Act and PayGo rules expired and was not re-instated to facilitate Bush adminsteration tax cuts and makeing them permanent.

With that in mind, there is potential to drop HR25's rate down to the 20-21% range based on where we sit now with the Bush administration tax cuts. Looks to me an excellant way to not only replace both federal income & payroll taxes but to assure the Bush tax cuts become permanent.

[Stu Cohen]

I must be one of the lucky ones. I get to keep a whole 55% of my earned income (not including state sales tax, gas tax or any other consumption tax.)

Considering that every other first world country on the planet with a tax rate approaching ours includes access to the the healthcare system, and most of them have equal or better life expectancies and infant mortality rates ... I consider Health Insurance Premiums and Doctor visits as a "tax" personally.

When they government unbundles charges to you that you have already paid for, it really is another tax, whether it is stated as one or not.

And if you do include that state sales tax (8.5% here) in your figures, you're getting precariously close to 60% of your total income.

[CMAC51]

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.

You are erroneously neglecting the fact that taxes are already contained in the current prices of goods and services. Replacing one system with another won't change that fact. Prices only go up if either of two things happen.

1. The Feds take a larger cut, increasing the percentage of GDP that they take in taxes.

2. The new system is less efficient than the existing system. The real costs of operating a tax system are total loss to the economy just like heat lost to friction in a machine.

You have to get a handle on the fact that when you go to Wal-mart and see an item priced for $5.00, $1.00 of that is tax you are paying to the Federal Government.

Admittedly, I seriously doubt the ability of our legislators to implement a transition from one tax system to another without totally screwing it up. First, they don't understand straight forward economics in the first place so they don't understand the underlying basics of the current tax system. Second, they won't settle for revenue neutral changes. They will try to hide an increase in the government take. Third, since they are so confused themselves, they won't know how to accurately convey common sense to the public so they will incorporate a boatload of misguided and totally ineffective exceptions in to the system.

Incidentally, barter transactions are illegal when they are not declared. It's just a case of selective enforcement.