Abolish the IRS with National Sales Tax?

Fox News ^ | 11/3/04 | tgusa

[Age of Reason]

Aside from the fact that this will be a tax on the poor, it would be insane to punish people for spending money in a consumer economy.

[BearCub]

Why would you oppose a better tax system if that system didn't necessarily help you? I thought all conservatives supported a government that allowed for individual success. If I'm mistaken, then clearly we need to redefine conservatism to allow the half of the country that doesn't pay taxes to call themselves conservatives. Don't forget about the imbedded taxes in the price of goods that you already buy.

I'll grant that IF prices decline by at least the amount of the tax (I'm skeptical) then a person with accumulated after-income-tax savings wouldn't be any worse off. But he'd still be paying twice the taxes.

I personally support the idea of a sales tax of some sort. It would encourage saving and investing - both good for the country and individual families.

[Zon]

The 'prices will be lower' bit is a red herring. Everybody will be benefiting equally from the lower prices so this can be eliminated as a variable.

In effect you want a tax refund in the form of an exemtion. Even when you would be double taxed yet another person just entering the tax system is single taxed you are no worse off than under the income tax. That is limited to just the money you already saved after paying tax.

Suggestion: for big-ticket items, buy used. And remember that for necessities you are not double taxed because the government pays that tax for you via the prebate check you receive each month.

In other words, you seek tax reparations. I think everyone would like to get a refund for previously paid taxes. Again, with the NRST, in regards to spending your after tax savings from yesteryear, you'll be no worse off than you will be under the income tax.

[Principled]

I am 65 years old, just retired and have $500k in my Roth IRA. I have paid taxes, say $125k, on this already.

OK.

I will now pay another $125k in taxes as I spend this money for a total of $250k.

It seems you're thinking that if we stayed with the income tax, then the 125k in income taxes you paid on the money in the Roth is all the tax you'd be paying? That's not right.

When you buy something, anything under our income tax system, the price includes 20%-25% federal tax costs. So when you go buy something today and look at the receipt, 22.5% (or so) of the price is actually federal tax costs. You didn't know that?

The NRST strips those (invisible) federal tax costs out. Then it replaces them with a visible tax of very nearly the same amount - and the amount will be printed on your receipt.

If you buy a $100 widget today, you pay $77 for the widget and $23 in hidden fed tax costs- but you don't see it on the receipt. THe NRST eliminates the hidden $23 in tax. So the price becomes $77. Then when you buy the widget for retail consumption, the $23 is added and you pay $100 at the counter.

So whether you spend the Roth savings now or you spend it under an NRST, you pay the same tax.

Another guy starts saving in his Roth IRA today.

Under an NRST, all savings are "Roth" style - the earnings grow tax free. However, when the money is spent, it will be taxed - JUST LIKE IT IS TODAY UNDER THE INCOME TAX. But some people are unaware of the federal tax costs in prices and erroneously think that the only tax they pay is income tax!

I paid $125k more in taxes than the other guy on the same amount of money.

No, you paid the same amount in taxes as the other guy.

A fundamental concept to understand is that you're already paying federal tax costs at the counter - the nrst doesn't change that. The nrst eliminates taxation on earnings though.

I urge you to spend a few minutes kicking around here.

[Principled]

Poor people pay less tax than those who spend more. By virtue of the FCA, poverty level expeditures are exempted from taxes.

Look here for a quick rundown on the FCA.

BTW isn't it insane to punish people for working? The nrst doesn't punish spending any differently than our current system - but the NRST does't punish earnings...

[tgusa]

No, read the many excellent links posted. The Fair Tax proposal exempts the poor with a 'prebate' paying them up front the expected tax up to the poverty level. And has been explained, you ALREADY pay 'embedded tax' on everything you buy because the companies that produce the goods are taxed.

[Zon]

A fundamental concept to understand is that you're already paying federal tax costs at the counter - the nrst doesn't change that. The nrst eliminates taxation on earnings though.

You know, that's a good perspective to approach the NRST concept from. Educate a person to the taxes they pay at the counter. Make sure they understand how it is embedded into the price. Once they grasp that, explain that all other taxes are eliminated.

Then go on to explain other facets like the FCA demogrant, getting entire paycheck, eliminating the IRS, etc.

Obviously with a person that hasn't already shown an interest in taxes there needs to be an attention grabing headline or opening. For example, "How much better would life be if no taxes were taken out of your paycheck so you received the full amount -- the gross rather than the net pay you get now?"

[Principled]

I'll grant that IF prices decline by at least the amount of the tax (I'm skeptical)..

Why are you skeptical?

... then a person with accumulated after-income-tax savings wouldn't be any worse off. But he'd still be paying twice the taxes.

What indicates to you that that after tax savings will be taxed any more than now?

[BearCub]

What indicates to you that that after tax savings will be taxed any more than now?

Ahhhhhhhhhhhhhhh! My head is going to explode!

If one guy has paid income tax on his money and the other has not - and otherwise their costs, sales taxes, etc. are identical - then one guy has paid more tax than the other. That's all I was saying. For someone with significant savings the difference could be big.

[BearCub]

I'll grant that IF prices decline by at least the amount of the tax (I'm skeptical)..
Why are you skeptical?

Just shooting from the hip without really researching. I'm not an economist but it sounds like everyone's taxes are going to go down but the government is going to get the same amount of money. It sounds fishy.

I suspect the taxes 'built in' to the prices of everything we buy will remain there & prices won't decline. Why would they go away - the manufacturers & their employees all have to pay the sales tax too - their costs won't decline.

[Principled]

If one guy has paid income tax on his money and the other has not...

If someone chooses a Roth today, they chose to pay income tax on the earnings so they won't have to pay income tax on the investment income - but you still DO PAY 22% fed tax costs on ANY purchases.

Under the NRST, you never have to pay any income tax on earnings and you never to pay income tax on the investment income, but you still DO PAY a 23% fed tax on purchases for retail consumption.

So you object to the NRST because some who chose a ROTH paid income tax before investing? The ROTH investors are getting exactly what they expect- tax free investment income and a 23% tax when they spend it. I don't use ROTH for other reasons- but choosing a traditional IRA could save you some $ when we do change to NRST.

I urge you to visit a FAQ page here. A link specific to this question is here.

Seems to me your objection is that income tax has been paid on ROTH investments but not on traditional investments - and traditional investors were expecting to pay income tax on their investment income - but they won't have to under the nrst.

ROTH investors get exactly what they expect from their investment - traditional IRAs get better.

[Your Nightmare]

If you buy a $100 widget today, you pay $77 for the widget and $23 in hidden fed tax costs- but you don't see it on the receipt.

This just isn't true. The 22% "embedded federal tax" is a myth. You are misrepresenting the study you are quoting (besides that study being flawed).

Twenty-two percent of everything sold in the U.S. plus exports would mean the "hidden fed tax costs" would be $2.31 trillion! The total taxes paid by businesses in 2003 was $488.25 billion, and most of that was payroll taxes which virtually every economist agrees is really paid by labor through lower wages. That leaves a minimum of $1.8 trillion for business tax compliance costs! Most reasonable economists put the number around $100 billion. Let's double that to $200 billion to be fair, that leaves $1.6 trillion.

The numbers don't add up.

The vast majority of economists believe that the incidence of corporate taxes are born by investors in the form of lower returns and labor in the form of lower wages, not consumers paying higher prices.

[Principled]

I'm not an economist but it sounds like everyone's taxes are going to go down but the government is going to get the same amount of money.

Not everyone's - depends on how much you spend on retail consumables.

There is a tremendous amount of money wasted in our economy. THe NRST recovers much of it.

I suspect the taxes 'built in' to the prices of everything we buy will remain there & prices won't decline.

The idea of business is to maximize profit - not maximize price. When 22% of costs are removed, prices will fall to mazimize profit. If I sell widgets for $100 and a competitor sells the same widget for $75, who's gonna profit more? Link

...the manufacturers & their employees all have to pay the sales tax too - their costs won't decline.

The only sales tax is collected for retail consumption and services. Business purchases are NOT taxed. Quick overview.

[Principled]

Twenty-two percent of everything sold in the U.S. plus exports would mean the "hidden fed tax costs" would be $2.31 trillion!

Sold at RETAIL. not just anything sold.

[Your Nightmare]

How do products sold at retail have a higher "hidden fed tax costs" than products not?

[Your Nightmare]

Sold at RETAIL. not just anything sold.

The study you are misquoting state a 22% reduction in producer prices, not retail prices.

[kevkrom]

How do products sold at retail have a higher "hidden fed tax costs" than products not?

Are you really this dense, or are you just trying to stir up trouble?

Products not sold at retail are used to produce other goods and services, which eventually are sold at retail. All the taxes embedded in that production chain still exist, and that cascading effect is what causes the retail price to be inflated by as much as it is. The point is that each stage of production adds more and more embedded tax, which is eventually borne by the consumer.

[Your Nightmare]

So a product that could be sold at retail or wholesale (eg. a hard drive, tires, etc.) doesn't have the embedded taxes?

And how are export prices suppose to fall if the "hidden fed tax costs" are just in products sold at retail?

[Zon]

From past experience it's the former -- not to mention the synchronous screen name.

[ancient_geezer]

Aside from the fact that this will be a tax on the poor,

All legal residents will receive a demogrant called the Family Consumption Allowence(FCA) equivalent to the FairTax paid on essential goods and services. The FCA will be paid in advance, in equal installments each month. The size of the monthly FCA will be determined by the government's Poverty Level for a particular family size, multiplied by the tax rate paid to all households regardless of income or actual expenditure.

A family of four, for example, could spend $24,980 per year free of tax because they will have received over the course of the year a demogrant totaling $5,745. $5,745 is the amount of sales tax paid on $24,980 in expenditures. That family spending double the "poverty level" or $49,960per 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 as compared to that same family under the current system:

 

H.R.25 "The FairTax Act

it would be insane to punish people for spending money in a consumer economy.

Hmmm.

"A hand from Washington will be stretched out and placed upon every man's business; the eye of the federal inspector will be in every man's counting house....The law will of necessity have inquisical features, it will provide penalties, it will create complicated machinery. Under it men will be hauled into courts distant from their homes. Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the tax payer. An army of federal inspectors, spies, and detectives will descend upon the state."
-- Virginian House Speaker Richard E. Byrd, 1910, predicting the consequences of an income tax.

 

From Thomas Hobbes, Leviathan it is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income.