Visions of vaporizing the IRS abound again

sacbee ^ | 11-18-04

[LouAvul]

Think of a world where there is no income tax, where you get to keep everything you earn and you pay the tax man when you buy stuff," said Minnesota Republican Rep. Gil Gutknecht.

That's the basic premise behind a proposed national sales tax, just one of many ideas for overhauling the nation's tax code. Under a bill co-sponsored by Gutknecht and more than 50 others, all federal taxes on income would disappear, but consumers would pay a 23 percent federal sales tax on their consumption - on top of existing state taxes.

Washington is abuzz with ideas after President Bush won a second term and immediately pledged to make "tax reform" a top domestic priority.

Nevertheless, the Senate's top tax-writer is expressing doubts about prospects for a major overhaul, perhaps dealing a blow to its chances. Sen. Chuck Grassley, R-Iowa, chairman of the Senate Finance Committee, told USA Today that comprehensive tax reform would be "difficult" to do.

Grassley said Bush would have to aggressively use his "bully pulpit" to win wider popular support.

[elbucko]

Look. I don't want to argue tax policy to the point of nausea. I was involved with the Proposition 13 revolution in the late 70's in California. A bunch of us would mull over different methods of taxation. NONE are perfect or painless. These examples that you give are for small states with immature economies that are finding their way. They are not a huge, mature, global economy like the US.

I know that Karl Marx preferred the progressive income tax, so do I. That doesn't make me a Marxist or make Marx wrong about everything. Marx also advocated eating, sleeping and breathing. That does not make these necessary activities "communist". However, I do admit that our present progressive income tax has become polluted and needs to be cleaned out. But replaced? No! After sitting around with calculators and different tax schemes, those of us volunteers in Prop. 13, agreed that the progressive income tax was still the most fair and productive. It only was in need of drastic repair, not replacement.

The consumption and flat taxes that you advocate, are regressive and counterproductive to the economy and would only benefit government at the expense of the taxpayer.

[ancient_geezer]

If this is adopted it would shift ALL tax burden from corporations to individuals. Somehow I'm not completely sold on the idea yet.

You are overlooking something in that, Business must be able to finance it taxes and all the cost associated with them from of sales to you or go bankrupt. You pay for it all in the prices for goods and services today.

With an NRST you get the full picture of just what government extracts out of you, along with every other voter. That to me makes for a growing constituency clammering to curtail the horrentdous growth of government we are saddled with.

Taxes & Government Spending:

• "The income tax in effect makes us vassals to the government – the politicians decide how much income we can keep. No mere “reform” of this slave tax, such as flattening the rate, can correct its fundamental denial of control over our own money. Only the abolition of the income tax itself will restore the basic American principle that our income is both our own money and our own private business - not the government's."

• "Replacing the income tax with a national sales tax would rejuvenate independence and responsibility in our citizens. True economic liberty and moral revival go hand in hand."

• "A national sales tax would also put the American citizen back in control of national fiscal policy. The best way to curtail government spending is to cut taxes, because they can’t spend what they don’t get. But with a sales tax, we could deny funds to a spendthrift government – and give ourselves a tax cut – whenever we make the private choice to alter our spending and saving habits."

[numberonepal]

... "poverty point", having to pay an extra 23%

Only if he buys a NEW car.

[elbucko]

Ummm. I think you quoted the wrong guy.

Yes I did. Sorry.

[Mack the knife]

This comes close to the science fiction story where every transaction was subject to a "Floating Instantaneous Sales Tax", or FIST. Every time you agreed to buy something, you paid with your hand held computer, which automatically added the FIST, so of course you could see it. And every time Congress voted for a spending bill, the FIST was automatically increased.

However, there was a check and balance -- if half the people in a congressional district got pissed off enough to punch their red button on their computer, a small explosive charge would go off in the back of the head of their congressman. :)

[numberonepal]

... the progressive income tax was still the most fair and productive

How, pray tell, is it "fair" that a greater amount of my life (earnings) are taxed more than someone less productive than me. Oh, and did I mention that it was at the point of a gun? The government has absolutely ZERO BUSINESS knowing how much money I earn. What's so difficult to understand about this?

[Marine_Uncle]

"This is a common fallacy -- the "extra 23%" concept. This misses the fact that current prices are artifically inflated by 20-25% on average due to the effects of an income tax. Remember, the NRST is a replacement for existing taxes, not an additional tax."

I understand what you are communicating. I have no problem with your statement. What I am talking about is the millions who pay next to nothing in federal taxes, or nothing due to their very low earned income, which includes a lot of retired folks as one example. To them it could be a very large burden. Not everyone is making big bucks. The federal tax system has provided a way for those super low tax bracket folks not to have to pay federal taxes or pay a low rate. So for those bracket of people, who barely are making it, who don't even have to pay taxes, I feel this scheme will put a burden on them.

[elbucko]

So you will have more money to spend and some of it will go to pay the sales tax.

My view is that you will have less to spend. Less than now, with income and sales taxes combined. With a consumption tax, government has no incentive to promote your income, only your spending. Filling out a 1040 may be mandatory now, but under a national sales tax, if you don't spend enough, you will be fined.

There's a huge paradox here that is understandably difficult for some to comprehend. Reform the progressive tax, including a Taxpayers Bill of Rights (that is federal and state), have the states do the collection and no federal filing. Taxes. They'll never feel good, just hurt less.

[M. Dodge Thomas]

Direct Consumption Taxes, such as a National Sales Tax (NAT), might make a substantial contribution to Federal revenue, but it's highly unlikely that it could provide more than perhaps 50% of what's required.

One pratical limitation of direct consumption taxes is that they encourage widespread evasion via both informal and semi-formal back market arrangements – experience in Europe suggest that even in the case of "indirect" consumption taxes (such as VAT taxes) the break-even point is tax rates somewhere in the low or mid teens, beyond this point it rapidly becomes more difficult to collect such taxes, creating an culture of widespread tax evasion that in turn evokes increasingly intrusive tax collection methods.

It's also uncertain how well US political and economic culture will deal with the regressively of such taxes (on the average, the lower your income the greater percentage of your income is paid into direct consumption taxes). In Europe such taxes are tolerated in part because they coexist with expectations that a large portion of the revenue collected will be returned to lower and middle-income taxpayers via programs such as government funded medical care, while in the US country taxpayers would likely see a lower proportional return on their tax payments.

But the biggest problem is the rates that would be required to produce a revenue neutral result: if a NAT was sole source of current Federal revenue realistic estimates (accounting for such factors as funding a cut-over of SS to a "privatized" system for taxpayers under 50, servicing the projected Federal debt, and other factors that are often left out in such calculations by their proponents) are in the range of 17-21%, which would be collected in addition to state and local taxes.

Such a tax rate is clearly a non-starter, which is why we are starting to see accounts of more "realistic" plans like those in the WaPO article cited above.

Why isn’t a NAT or a VAT included in such plans as a revenue supplement?

As a taxpayer, do you expect that if the Federal government had an additional major method of taxation your other taxes would be lowered by an equal amount?

The ATP cited above is a very different kind of tax, it achieves its "low" rate by very broad application and being quite progressive (higher-income earners pay a higher proportion of their income in taxes. Also, though he doesn't stress the point, his sort of transaction tax makes it a lot more difficult for sophisticated taxpayers to evade taxation.

That's fine with me – I believe that there is a need in successful market-based economies for relatively high levels of "social investment", and on pragmatic grounds I’d prefer to have it funded from moderately progressive taxation.

But readers here need to be aware that the APT runs strongly counter to the current trend toward increasingly regressive taxation of earned income and reduced or eliminated taxation of unearned income, which most posters here appear to favor.

[kevkrom]

What I am talking about is the millions who pay next to nothing in federal taxes, or nothing due to their very low earned income, which includes a lot of retired folks as one example. To them it could be a very large burden.

The NRST as proposed has what is called the Family Consumption Allowance (FCA), which provides each person (with a valid Soc. Sec. number) with a monthly allowance equal to the taxes paid on poverty-line (i.e., subsistence) spending. This essentially makes the NRST progressive, not regressive, as those who only spend up to the poverty line have an effective tax rate of 0%, spending double the poverty line leads to an effective rate of 50% of the sales tax rate, etc.

An example with made-up numbers for simpler math:

Assume an NRST rate of 20% (tax-inclusive), and a poverty line of $12,000 per year ($1,000 per month) for a single person. Each month, that person would be eligible to receive an FCA of $1,000 x 20% = $200.

If the person spent a total of $1,000 that month, they paid $200 in taxes. Their net taxes paid is $200 - $200, or $0 (0% effective tax rate).

Someone else spends $2,000 ($400 in taxes), their net tax is $400 - $200, or $200 (10% effective tax rate).

Bll Gates spends $100,000 ($20,000 in taxes), his net tax is $19,800 (19.8%).

As spending increases, the effective tax rate logarithmically approaches the marginal tax rate. Note that for those who are not eligible for the FCA (specifically, illegal immigrants), their effective tax rate equals the marginal rate.

Now, of course, the effective rate is in relation to spending. If you only spend 75% of your income on retail goods and services, your effective tax rate in relation to your income would be 75% of your effective tax rate in relation to retail spending.

[tvn]

I simply do not believe that it is the government's business to redistribute wealth via the "progressive" income tax. It certainly was not an objective of the Founding Fathers. In any event, the following is another approach to consider:

AUTOMATED PAYMENT TRANSACTION (APT) TAX
Taxation technology for the 21st century

Dr. Edgar L. Feige, Professor Emeritus of Economics from the University of Wisconsin-Madison and the originator of the APT Tax concept, has just produced new estimates suggesting that a broad-based transaction tax as low as six tenths of one percent could replace the entire Federal and State 2005 budget revenue requirements of the United States of America.

The APT concept is elegant in its simplicity - potentially replacing the entire federal and state tax system - including income, corporate profits, excise and estate taxes - in favor of a tiny tax on all transactions. The tax would be automatically deducted from special taxpayer accounts, linked by software to all accounts at financial institutions capable of making final payments to the government seamlessly in real-time. The APT tax therefore eliminates the need for individuals and firms to file income and information tax returns. This is estimated to save citizens and the government roughly $200 billion per year in administration, enforcement, evasion and compliance costs, roughly seven times the amount currently being spent on homeland security.

The APT tax seeks to maximize the goals of both the government and the people - collecting necessary revenue with the lowest possible tax rate. The difference between the APT tax and our current income tax, as well as the proposed consumption taxes, is simplicity, progressivity, and breadth-the APT tax allows for significantly lower rates spread more equally throughout the world of economic activity. The APT is a transaction tax, and as such, taxes every single transaction that occurs in the economy including fund transfers between accounts and transactions involving the exchange of bonds, securities and foreign exchange. Because the wealthy conduct a disproportionate share of these financial transactions, the tax is highly progressive despite its flat rate. Progressivity is achieved through the skewness of tax base itself rather than through the progressive income tax rate structure of the current system. The very small tax is "sliced" off each side of every transaction as it moves electronically through banks and all other qualifying financial institutions. The tax collection is orderly and transparent, the rules are simple and universal and apolitical. The APT system eliminates the entire present tax code. No more exemptions, no more deductions, no more special interest loopholes and no more tax returns.

Feige's 2005 projections of total debits of $881 Tril., and total transactions of $832 Tril. (based on the most recent 2002 Bank for International Settlements data) update the figures he used in his original paper, published in Economic Policy in 2000. Taking the average of these two estimates ($856 Tril.), he conservatively assumes that the replacement of the current tax system with a revenue neutral APT tax will reduce total transactions by 50%. The projected potential APT tax base for 2005 would then be $428 Tril., permitting a revenue neutral flat tax of .57 percent on all transactions or .28 percent on each (buyer and seller) transactor to replace projected 2005 Federal and State tax revenues.

The tax rates required for a "revenue neutral" tax are divided into three phases which are the result of a suggested implementation plan that would gradually replace virtually all Federal and State taxes. The projected tax rates are calculated conservatively, assuming that only 50% of the potential 2005 APT tax base is available, since the volume of total transactions is expected to fall with the introduction of the APT tax. To the extent that transactions decline less than is assumed in the current calculations, an even lower tax rate would be able to raise the requisite revenues. As individuals and businesses use their new found economic freedom, transactions naturally grow over time, suggesting that future tax rates could be even lower.

Utilizing 50% of the projected APT tax base for 2005 of $856 Tril., that is, $428 Tril, the estimated tax rates required to raise the revenues projected for 2005 budgets are as follows:

Phase I (Eliminate all Federal taxes other than SS and Medicare)
Required revenue neutral target=$1.242 Tril:
Required tax rate = 0.29% per transaction or 0.15% per transactor.

Phase II (Eliminate all Federal taxes including Social Security and Medicare "payroll" taxes)
Required revenue neutral target = $2.036 Tril.
Required tax rate = 0.48 % per transaction or 0.24% per transactor.

Phase III (Eliminate all Federal taxes including Social Security and Medicare "payroll" taxes and all State personal income; corporate profits and sales taxes)
Required revenue neutral target = $2.436 Tril.
Required tax rate = 0.57% per transaction or 0.28% per transactor.

The estimates above are based on 2005 revenue and transaction projections. Implementing the three phases will require several years and careful government management, especially the third phase. However, Dr. Feige has built in a safeguard for the APT Tax by calculating the required tax rate based on only half of the transactions that are actually observed.

Examples: Assuming full implementation of Phase three:
1. $100 restaurant bill would have a tax to the customer estimated to be 28 cents and the restaurant would pay 28 cents.
2. $50,000 family income deposited and spent or moved to savings results in $100,000 of transactions paying a total tax of $280 distributed over all the individual transactions as they occurred through the year. These amounts would be doubled if businesses fully shifted their tax burden to the consumer, but nowhere near the $15,000 to $20,000 the family would pay under the current federal and state systems.

It is now important to begin the process of planning the economic, legal, technical and administrative requirements necessary for a smooth and transparent transition from the current tax system to an APT system. The proposed, new collection system will be tested by computer simulation to capture all potential errors and omissions (new job for the IRS). Then, it will take several years to rollout, especially Phase III involving central collection and distribution to the States. A national commitment to this revolutionary, fair, automatic and lowest cost tax system is needed NOW!

For more details, please visit www.apttax.com

William J Hermann, Jr. MD, Director APT Tax Project Contact: administrator@apttax.com , 713-932-3773

[M. Dodge Thomas]

Sorry - careless use of my spell checker above: "NAT" (in several places) shoul be "NST" (National Sales Tax).

[elbucko]

I simply do not believe that it is the government's business to redistribute wealth via the "progressive" income tax. It certainly was not an objective of the Founding Fathers.

I DON'T EITHER AND I DID NOT SAY THAT. I SAID THE FAIREST AND MOST PRODUCTIVE WAY FOR THE GOVERNMENT TO COLLECT THE REVENUE TO PAY ITS BILL IS VIA THE PROGRESSIVE INCOME TAX.

I don't believe in wealth transfer, I never mentioned wealth transfer and I don't like people putting words in my post!

[kevkrom]

Filling out a 1040 may be mandatory now, but under a national sales tax, if you don't spend enough, you will be fined.

Gee, I didn't see that in the bill anywhere. Care to point it out to me?

[Sprite518]

"If I buy a bottle of Coke for $1 and the government immediately extracts 23% in “sales tax”, that is the same as an income tax."


You obviously do not understand the fair tax(aka consumption tax). Your taxes are based on consumption. Therefore, the more you use, the more taxes you pay. The less you use the less taxes you pay. How is that a bad thing? BTW, the 23% tax is not the number. They are now looking at 19%. BTW, since Russia has gone to a fair tax, there tax revenues have increased. How do you not understand this?

[Sprite518]

Ok Karl Marx. Let's just tax ourselves into prosperity!

[Marine_Uncle]

"You are ignoring the fact that your paycheck will not be reduced 25%-40% by state and federal income tax withheld. So you will have more money to spend and some of it will go to pay the sales tax."

State taxes aside, they will not be abolished, in fact they will have to rise as during slow economic or depressed business cycles finds less people buying things, the states will have to raise their tax rates to make up the differences in lost federal allocations for things etc..
Point I wanted to make and thought perhaps I did at least partially, was that those that fall below a certain level of income, will have to sign on to a federal controlled program to monitor their income intake, and in so doing will put in place a system that can later be expanded as required to bring more into the "fold of control", to encompass more people. For instance, if this new taxing device was found to be inadequate due to the actual amount of taxes collected per sales. Then the federal government would be forced to either decrease the exempt status of those that formally qualified for exemption from paying the sales tax, or further restrict those that currently qualify.
In so doing it would place a further burden on those, AGAIN,
that are retired and on fixed incomes.
And please don't believe for a minute that corporations will lower the price on large ticket items such as cars, because they are no longer federally taxed. That is just ridiculous. They will simply reep the extra bucks. It always works that way. So then some of you are going to say, well hells frigen bells......why doesn't the Federal Government force them to lower the price of their cars by the amount saved per car, due to the new system. So now you will suggest the USA further control our free enterprise system.

[elbucko]

The tax would be automatically deducted from special taxpayer accounts, linked by software to all accounts at financial institutions capable of making final payments to the government seamlessly in real-time.

If that isn't "Orwellian", I don't know what is. Do you think the Founding Fathers would have had allowed the federal government to have unlimited access to the financial information of post revolutionary farmers, mechanics and yeoman? I don't think so! What is it with you computer geeks that makes you want to trust computers in your personal affairs. Financial or otherwise.

[Big Red Clay]

Your concerns are valid M.U. Let me make a couple of comments that may clear things up for you. First, the low income guy who goes to buy that car would, most likely, buy a used car, correct? In that case he would not pay the sales tax. The sales tax is on NEW goods only. Taxes are only paid on an item once. Therefore, no taxes on this purchase.

As far as the vouchers go, let me clarify that as well. EVERYBODY gets one. It is not based on income. It is based on the idea that no one (from Bill Gates on down, as long as they have a Social Security number) should have to pay the NRST on basic goods and services and is based on a percentage of the estimated policy level. Therefore, no govt control.

The biggest part of the sales tax concept that folks I speak with cannot wrap their minds around (due to the fact that we are conditioned by the current situation to think that way) is that folks WILL TAKE HOME ALL OF THE MONEY THAT THEY MAKE!! No more losing half their check to income tax and FICA deductions. This would mean an immediate pay increase of about 15% across the board for the low income folks who dont pay any income tax but still pay FICA taxes. Not to mention the eventual effect that the NRST will have on retail prices. This change would be a big benefit to low/fixed income citizens. This is outside of the moral benefit to all of us of having the government OUT of our financial business.

[WhiteGuy]

"If I buy a bottle of Coke"

But we are not forced to buy coke.................