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.

[TChris]

If you want a deep and grinding economic depression, then hope for a national sales tax.

Huh? How so? It seems to work fine for other levels of taxation.

[Sprite518]

Yes those tax business would leave. However, economy would then be extremely business friendly. Just think of all the people that put their money overseas to shelter it from taxes. For instance in Swiss Bank Accounts, Camen Islands, etc... A lot of that money would come here. These people would invest their money, and shelter it here. Therefore, more companies would come to the USA. Instead of people looking for jobs. Jobs would come looking for people.

Oh yes, and do not forget about the new revenue that would be generated from illegal Aliens. How many of them do not pay taxes to the IRS. They would now be paying taxes. Who knows how much extra revenue that would generate?

[Big Red Clay]

quick correction- policy=poverty

[elbucko]

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

Ok moron, I didn't say that either!

[WhiteGuy]

"On the surface, this scheme may sound fine to those who earn a decent salary, or perhaps are simply blessed through family with a lot of money, but for many, and I am talking about vast amounts of very low income honest hard working Americans this could the a super nightmare."

Those who "earn a decent salary" are the ones paying the lion's share of ALL taxes now.

If this proposed reform eliminated capital gains taxes and corporate income taxes, it could be argued that the inflow of new investment dollars would generate millions of new jobs.

Food for thought

[TChris]

The consumption and flat taxes that you advocate, are regressive...

Isn't that a contradiction: "flat taxes ... are regressive" ??? They appear to be quite fair to me. Isn't the very definition of "flat tax" as being one that is neither progressive nor regressive?

[elbucko]

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

When the progressive tax started out with the passage of the 16th Amendment, it only taxed about .01% of the population with no withholding requirement. What makes you think that your "bill" will remain so pure once the Democrats get a hold of it. And they will.

[M. Dodge Thomas]

Direct Consumption Taxes, such as a National Sales Tax (NST) 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 practical limitation of direct consumption taxes is that they encourage widespread evasion via both informal and semi-formal back market arrangements – experience in Europe suggests 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 such taxpayers would likely see a lower proportional return on their tax payments.

As several posters note above, it's possible to produce less regressive (and even progressive) consumption taxes by rebating (or just not collecting) some of such taxes otherwise due from low-income payers. On grounds of simplicity and fairness the best way to do so is probably to exempt a "market-basket" of non-discretionary items or to tax then at a lower rate – once you start adjusting taxation on the basis of income, you are back to the various difficulties of determining, reporting and verifying income that are one of the chief drivers of complexity in the current tax-code as it applies to individuals. The problem, though, is that such consumption is a significant portion of the taxable total, so you then have to increase rates to raise income – which squeezes middle income taxpayers (too "rich" to avoid payment, but "poor" enough that a lot of non-discretionary income is taxed) hardest.

This in turn brings us to the the major difficulty with such taxes: the rates that would be required to produce a revenue neutral result- if a NST 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 of a NST in the range of 17-21%, which would be collected in addition to state and local taxes.

Such a tax rate is lilely a non-starter politically, 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 NST 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, OTOH, achives its "low" rate by very broad application (it taxes almost every sort of economic activity) and being highly progressive (higher-income earners pay a higher proportion of their income in taxes.

(Also, though the author 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 pragmantic 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.

[Lurking Libertarian]

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.

That opens the door to massive evasion, requiring a bureaucracy at least as large as the IRS to combat.

[Sprite518]

You need to read the fair tax because it covers that part too. Let me give you an example how the poor, and retired benefit. Aside from not paying any taxes(working poor)(401Ks for the retired) here is how they would benefit too. This is just an example. Let's say you have a family of 4 making $20,000 a year. Which is considered the poor. Anyone who is considered poor would be compensated for the 23% Sales tax. Therefore, if you have a family that makes $20,000 a year. Then the government would send a check for 23% of 20,000. I believe that is $4600 to cover that 23% Sales tax. Now instead of getting it once a year the family would receive a check for $383.33 each month to cover the tax. What do you think of that?

[Maringa]

Under the NST, would tourists and illegal aliens finally pay income taxes, or would they be returned them once they leave the country? i.e. Canada reimburses provincial taxes to tourists, etc...

[elbucko]

Isn't that a contradiction: "flat taxes ... are regressive" ???

You're kidding me, right? You really don't understand that a flat tax is regressive, i.e. that it falls heavier on the poor than the rich?

[Sprite518]

"they will have to rise as during slow economic or depressed business cycles finds less people buying things"


How do you come up with that? LOL! When people get more in their pay check. They spend more. That is a fact. You think Joe Blow is going to say hey I have $400 more in my pay check. I am not going to spend one extra cent. LOL!

[Marine_Uncle]

Thank you folks for all your input. I learned some things about the proposed plan, from your patience. I hope it turns out to benifit all Americans. The topic hopefully will be fully elucidated with no hidden gottchas, so that our congress can determine it's worth. I am sure we shall continue to see much debate pro and con on this issue.

[Sprite518]

What are you saying then? You obviously are economically illiterate.

[elbucko]

Huh? How so? It seems to work fine for other levels of taxation.

That's just it, it doesn't. How many states with sales (flat) taxes are in the black?

[elbucko]

What are you saying then? You obviously are economically illiterate.

Well, one of us is.

[Marine_Uncle]

"Those who "earn a decent salary" are the ones paying the lion's share of ALL taxes now.
If this proposed reform eliminated capital gains taxes and corporate income taxes, it could be argued that the inflow of new investment dollars would generate millions of new jobs. Food for thought"

Fair enough. But lets remember who foots the bills for new investment dollars more often then not. Depending on the type corporation/company, determines what precentage of re-investment dollars comes from their pocket, verse long term loans from banks etc.. But I would hope your assesment could in reality work.

[Dont_Tread_On_Me_888]

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 are not seeing the big picture.

Whores buy Coca Cola.

Pimps buy Coca Cola.

Shady businesses buy Coca Cola.

All these scumbags would be paying tax under a national sales tax plan. Currently, whores, pimps, drug dealers and millions of shady businesses avoid income taxes in the underground economy.

Good and decent people pay taxes today in the current system--the scumbags of society do not pay taxes under the current system.

Under a national sales tax, everybody--including the scum of society--would pay a national sales tax. Hundreds of billions of dollars currently go uncollected from the underground economy.

Under a new national sales tax, good decent people would pay a fair share because they will not be pulling the cart for the scumbags of society who would be forced to pay their fair share also.

[Conservative4Ever]

If that bottle of Coke were priced too high...putting it out of the buyers market..the company would eventually go out of business. Might make it easier for companies to better control costs, labor costs included. Just my humble opinion. Not a tax accountant nor economists