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.
Thass right! Bump!
The states tax these now; why wouldn't the Feds? They also tax services (and in Florida, "wealth" which is a tax on your possessions.)
That could only be true if the "production chain" was in America..it isn't, he knows that.
When the IRS is abolished and the taxes against US production are replaced with taxes on consumption and/or imports, then the "production chain" will move back in America where it should be.
Foreign producers would, for the first time, have to contribute to our tax burden.
As it is, revenue from the income tax is declining (according to a recent IRS report), and will continue to decline as more offshore and illegal immigrant labor is utlilzed to replace US citizens. Taxing US production (through income) is a lose-lose proposition for the future, and the government is finally getting a clue.
Our exports are taxed (through the income tax) rather than our imports (through a consumption and/or import tax). Reversing this dynamic is essential to the survival of our economy.
I wonder, how exactly would the process to repeal the 16th work with the NRST legislation?
Repealing the federal income & payroll tax statutes, abolishing the IRS and requiring the destruction of IRS records, and implementing a viable alternative tax system, creates the conditions where the amendment process can go forward with an appropriate amendment proposal as required under Article V of the Constitution:
Such as Sam Johnson's proposed Joint Resolution and sister bill to HR25:
H.J.RES.61
Title: Proposing an amendment to the Constitution of the United States to abolish the Federal income tax.
Sponsor: Rep Johnson, Sam [TX-3] (introduced 6/24/2003)
One things for certain, no proposal to amend the constitution to repeal the 16th across the last hundred years has been successful with the income tax statutes in place.
When the IRS is abolished and the taxes against US production are replaced with taxes on consumption and/or imports, then the "production chain" will move back in America where it should be.
Indeed:
Chairman of the House Ways and Means Committee,
Rep. Bill Archer (R-TX)
August 12, 1996
- "A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."
What kind of tax revolt would we see in this country if we did away with payroll withholding and made everybody pay their taxes by writing a check to the government. You would be suprised how many people I know, well educated people, who think if they get a small refund back that they haven't paid any taxes that year.
Or increasing the profit of the seller. It is simply bad economics to contend that a lowering of production and/or distribution costs is reflected in a lowering of price.
Or increasing the profit of the seller. It is simply bad economics to contend that a lowering of production and/or distribution costs is reflected in a lowering of price.Yes it is. There are people pushing a producer price drop as if consumers prices would drop accordingly. They wouldn't.
There is also data that suggests consumer prices more closely follow producer prices on the way up than on the way down. It seems businesses are in this for the profit. (Who wudda thunk?) The consumer price drop with a NRST is grossly overstated.
The roles of labor and capital in production dilute the cost effects of a change in input materials prices. In the typical U.S. industry, almost one-half of production cost is attributable to labor and physical capital, with the remainder attributable to input materials (Jorgenson, Gollop, and Fraumeni; U.S. Department of Commerce).7 Consequently, if prices of input materials rise, the importance of labor and capital in the production process will approximately halve the cost effects of such a change. Rising prices for input materials would be mitigated by unchanged prices of labor and capital, so that in percentage terms production cost would rise only half as much as materials prices. For example, if input prices rise by 1 percent, production cost and product prices should rise by only about 0.5 percent.8
Nonsense. You're forgetting competition -- a seller cannot maintain too high of a profit margin, or he opens himself to losing market share to existing competitors, or creatign a niche for a new competitor to enter the market as a lower-priced alternative.
No idea why you quoted this -- all it is saying is that a change to one component of the cost of doing business affects proces proportionally to the percentage of that particular cost as compared to the producer's overall cost. In other words, exactly the point the NRST proponents make -- the consumer cost will drop by the percentage of the pre-NRST price that is the result of income and payroll taxes.
Where o Where would all of the accountants find jobs?
"Or increasing the profit of the seller. It is simply bad economics to contend that a lowering of production and/or distribution costs is reflected in a lowering of price."
Oh, the horror, those evil bourgeois increasing their profits off of the backs of the proletariat.
Since you are such an economics whiz, maybe you'll explain to us all why a CD costs $18.
That's a nice straw man. I didn't say it was a horror. I said that the declaration that lower taxes on a producer will lead directly to lower product prices is FALSE. When you get your head out of your dogma you may be able to figure out the difference.
It's a non-competitive market. Most CD producers fall under the umbrella of the RIAA, who are essentially engaging in price-fixing (as the class-action lawsuit settlement can attest to). One of the hallmarks of a non-competitive market is that sellers can price their products to maximize the units sold vs. profit per unit curve without regards to competition. You would still see a pre-tax price adjustment on non-cmpetitive items as they would have to adjust to keep that sales/profit point at the ideal level (otherwise, the added cost of the tax would lower sales to a non-optimal point).
Also, I constantly see ads for (selected) new CDs for as low as $9-$10. If you're paying list price for a CD (or most other items, for that matter), you need to shop around some more.
I am fortunate to be in the highest percentile of earners in the US. I can guarantee that I spend a much smaller % of my annual income as a consumer. I invest considerably more. That is where I am now. I have spent many years in the "what I bring in barely pays for what I need" lifestyle. If during that decade of my life I would have had to pay an additional tax on everything I consumed as a buyer I might not have made it.
There are too many citizens, of all stripes and hues, just getting by. Tax them at the register but leave guys like the current me alone and we'll see revolution.
"So, which non-laboratory markets will realize a dollar for dollar price reduction commensurate with tax reduction?"
Any market where share is more important than high ROS. For example, the automotive market in NA would certainly adjust downward. But that one doesn't have a lot to do with our economy......
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