Posted on 04/04/2002 9:55:42 PM PST by kattracks
Throughout most of American history, taxes were levied principally on consumption, rather than income. Except during the Civil War, the federal government was financed almost entirely by import duties and excise taxes until 1913, when our current income tax was imposed. The Founding Fathers favored consumption taxes in part because they are harder to raise to confiscatory levels than incomes taxes.
In the Federalist Papers, Alexander Hamilton had this to say: "It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. ... If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens of this class, and is itself a natural limitation of the power of imposing them."
Hamilton was thinking here about direct taxes on consumption, such as the sales taxes levied today by most state governments. He was right in thinking that there is a limit to such taxes. Experience shows that general sales tax rates much above 10 percent are very hard to collect. They encourage smuggling, black markets, evasion, production for personal use, substitution for untaxed commodities and other activities that erode the tax base.
Thus, confining taxation to a form that is inherently hard to raise to excessive levels meant that the size of government would be severely limited. This view is consistent with the economic theories that earned James Buchanan the Nobel Prize in economics. In several academic papers, he argued that it is easier to hold down the size of government by limiting taxation than by trying to control spending directly.
Another advantage of consumption taxation, long recognized by economists, is that it does not double tax saving, as income taxes do. To see why this is the case, think of what you could do with $1,000 saved from your after-tax earnings. If you buy a new television with it, the "income" you derive from this investment -- in the form of viewing pleasure -- is forever untaxed. But if you buy a stock or bond instead, the interest or dividends you receive are taxed again, even though the income you used to buy the assets were taxed when you earned it.
World wars killed consumption taxation as the principal means of financing the federal government. The necessary rate would have been too high to be effective. Although the Treasury Department proposed a "spendings" tax to finance World War II, the idea was rejected by Congress in favor of higher and broader income taxes. Subsequently, the federal government essentially ceded the sales tax to the states, retaining only a few isolated excise taxes, such as those on tobacco and gasoline, for itself.
In the 1960s, the Europeans developed a new method of taxing consumption that overcame many of the collection problems inherent in traditional sales taxes. Called the valued-added tax, it was collected from producers, rather than retailers, and was embodied in the prices of goods, rather than being collected separately at the checkout. For these reasons, the VAT could be levied at rates far higher than was possible with traditional sales taxes. Now, some European countries have VAT rates as high as 25 percent on top of their income taxes.
The United States has always resisted the temptations of the VAT and is now the only major country on earth without one. It is not clear why this is the case. But every serious effort to establish a federal VAT has fallen flat in Congress.
Still, the idea of taxing consumption, rather than income, is an attractive one. In a new book, "Fair Not Flat" (University of Chicago Press), University of Southern California law professor Edward McCaffery makes the case for it. However, he argues for what economists call a consumed income tax that looks like an income tax, but actually falls on consumption, rather than a VAT or sales tax.
McCaffery makes the simple, yet profound, point that there are only two things one can do with income: either save (invest) it or consume it. If saving is entirely eliminated from the tax base, then the tax burden necessarily falls solely on consumption. McCaffery would remove taxation from saving by allowing people to have saving accounts like Individual Retirement Accounts, except with no restrictions. Contributions and withdrawals could be made at any time. At the end of the year, all net contributions would be fully deductible on one's tax return, and all withdrawals would be taxable.
McCaffery argues that this would give the United States a de facto consumption tax without the problems inherent in taxing consumption directly. It is an idea whose time may have come.
Contact Bruce Bartlett | Read his biography
©2002 Creators Syndicate, Inc.
Maybe I just don't get it. Contributions would be deductable. From what? Withdrawals would be taxable.
Is this suggesting that if I keep all of my money in a coffee can at home I would pay no taxes?
It leaves the greatest anti-privacy agency in history - the IRS - intact.
We are now losing roughly 100,000 wealthy Americans every year to expatriation, not because of the level of taxation, bur because of the intrusiveness of the IRS. The wealthiest 1% of taxpayers, who pay 36.2% of all personal income tax collected (1999 statistics), are leaving and taking all of their wealth with them to protect their privacy, much more than for any tax savings that they might recognize. This translates directly into lost tax base that must be made up by those who remain. It's a pretty safe bet that means you.
Therein lies the problem. In 1999, the IRS received 126 million tax returns totaling $877 billion in taxes paid. The top 1% (1.26 million) of those taxpayers were responsible for $317 billion (36.2%) of those taxes. If that top 1% continues to leave, as they are, that means that when they are gone, those who remain, will have to make up the difference. That translates into a 57% tax increase for those who remain, because Congress certainly isn't going to stop spending.
Now obviously, not all of that top 1% will leave. But then, consider that many of the top 5% of taxpayers will be leaving too, making up the difference. For the record, that top 5% amounts to 56% of taxpayers. Also, keep in mind that the more you make, the more likely you are to feel the need to leave, so the numbers of those who are leaving is skewed towards the high end.
At the current rate, how long will it take for us to lose most of that top 1% of taxpayers? Every year between now and then, the poor and middle class will have to shoulder more and more of the tax load, culminating in a 57% tax increase, over today's rates, at the end of that period. At current rates, that could happen in as little as 10 to 12 years. But, since it happens slowly, most people will not notice until it reaches critical mass. If it is allowed to get that far, we are looking at possible massive economic collapse.
Keep in mind that the wealthy are much more concerned with privacy than with the limited tax savings that they might recognize. The tax savings are not that great. The wealthy already structure their wealth in such a way as to significantly reduce their tax liability. And, if they move offshore, whey will almost certainly incur taxes that cannot be avoided. It has little, if any, to do with taxation.
Every year, the wealthy must spread out their entire estate for perusal by the IRS. This poses a tremendous business risk - much more than the level of taxes that they might have to pay. For example, exposure of certain private financial information at the wrong time can blow a perfectly legitimate multi-million dollar deal. There are many more reasons that are just as valid. In fact, the risk presented by having all of your financial information in one place, under the control of careless government officials, where it can possibly be accessed by others, is seen by more and more of the wealthy as too great to justify. The only alternative is to leave.
Furthermore, the United States is one of only three countries in the world (US, Philippines and Eritrea) who claim the right to tax the offshore income of its citizens (source: Wall Street Journal, December 28, 1998). In other words, the IRS claims the right to your money, regardless of where it is earned or banked. That means that, as a US citizen, your entire estate is at risk to a single event attack. By that, I mean, a signature of a single non-elected bureaucrat can suddenly put your entire estate in the hands of the US government.
If you spent most of your life attaining a net worth of just a hundred thousand dollars, you would not want to have to face the risk of having to do it all over again, in the event of a government confiscation. Now, think of how you would feel if your net worth was in the millions or even billions of dollars. That's why the wealthy are leaving.
For that reason, any tax system that leaves the IRS intact is doomed to fail.
To paraphrase an old campaign slogan, "It's our Privacy, stupid!" The continued existence of the IRS represents a risk to privacy and confiscation that is being considered by more and more wealthy Americans, as to great to bear. The above proposed tax plan does nothing to eliminate or reduce that risk. Therefore, it cannot succeed.
The only option on the table at this time, that will eliminate this risk, improve the economy and be fair to all concerned, is the National Retail Sales Tax. Nothing else comes close.
For more information on taxpatriation, see Tick-Tick-Tick - The Economy Bomb. If you have read that article in the past, you might want to check it out again, as it was updated with more recent numbers in February. You'll find out as you compare the numbers, that, as predicted, it's getting worse.
The United States has always resisted the temptations of the VAT and is now the only major country on earth without one.
Not quite true, as taxes on business income meet the functional definition of a subtraction method VAT:
Issue: What Is the Best Way to Collect a Value Added Tax?
A value-added tax (VAT) generally is a tax imposed and collected on the value added at every stage in the production and distribution process of a good or service. Although a VAT may be computed in any of several ways, the amount of value added generally can be thought of as the difference between the value of sales and purchases of a business. (e.g. Revenues - Costs = Taxable Business Income)
***
Subtraction-Method VAT. Under the subtraction method, value added is measured as the difference between a business's taxable sales and its purchases of taxable goods and services from other businesses. At the end of the reporting period, a rate of tax is applied to this difference in order to determine the tax liability. The subtraction method is similar to the credit-invoice method in that both methods measure value added by comparing sales to purchases that have borne the tax.
***
The subtraction method differs from the credit-invoice method principally in that the tax rate is applied to a net amount of value added (sales less purchases) rather than to gross sales with credits for tax on gross purchases. A business's tax liability under the credit-invoice method relies on the business's sales records and purchase invoices, while the tax liability under the subtraction method may rely on records that the taxpayer maintains for income tax or financial accounting purposes.
It is not clear why this is the case.
A name change to protect the guilty(i.e. Congress Critters) and give them political cover .
But every serious effort to establish a federal VAT has fallen flat in Congress.
Only because the European varity of VAT is so notorious, that anything that is called a Value Added Tax stinks.
But call it some thing else like taking away corporate welfare, or tax them rich corporations, or Call it a "Flat Tax". And the people will buy it every time.
None other than the father of the flat tax, Robert Hall of Stanford University (along with Alvin Rabushka), in his 1995 Ways and Means Committee testimony said, "The Hall-Rabushka flat tax is a value-added tax."
Which was pointed out again in additional hearings in April of 2000:
http://waysandmeans.house.gov/fullcomm/106cong/4-11-00/4-11kotl.htm
"Robert Hall, one of the originators of the proposal(Flat Tax), who describes his Flat Tax as, effectively, a Value Added Tax. A value added tax taxes output less investment (because firms get to deduct their investment.)"
"The Flat Tax differs from a VAT in only two respects. First, it asks workers, rather than firm managers, to mail in the check for the tax payment on that portion of output paid to them as wages. Second, it provides a subsidy to workers with low wages."
The Flat Tax; Chapter 3, by Robert Hall and Alvin Rabushka
| In our system, all income is classified as either business income or wages (including salaries and retirement benefits). The system is airtight. Taxes on both types of income are equal. The wage tax has features to make the overall system progressive. Both taxes have postcard forms. The low tax rate of 19 percent is enough to match the revenue of the federal tax system as it existed in 1993, the last full year of data available as we write. Here is the logic of our system, stripped to basics: We want to tax consumption. The public does one of two things with its income—spends it or invests it. We can measure consumption as income minus investment. A really simple tax would just have each firm pay tax on the total amount of income generated by the firm less that firm’s investment in plant and equipment. The value-added tax works just that way. But a value-added tax is unfair because it is not progressive. That’s why we break the tax in two. The firm pays tax on all the income generated at the firm except the income paid to its workers. The workers pay tax on what they earn, and the tax they pay is progressive. To measure the total amount of income generated at a business, the best approach is to take the total receipts of the firm over the year and subtract the payments the firm has made to its workers and suppliers. This approach guarantees a comprehensive tax base. The successful value-added taxes in Europe work this way. The base for the business tax is the following: Total revenue from sales of goods and services less purchases of inputs from other firms less wages, salaries, and pensions paid to workers less purchases of plant and equipment The other piece is the wage tax. Each family pays 19 percent of its wage, salary, and pension income over a family allowance (the allowance makes the system progressive). The base for the compensation tax is total wages, salaries, and retirement benefits less the total amount of family allowances. |
CONSUMPTION TAX PROPOSALS; 1996 Deloitte & Touche LLP
The truth is that the Founders considered tariffs (import duties) to be the least intrusive form of taxation, yet this article disingenuously places emphasis on excise (sales) taxes.
Federal Excise taxes have NEVER been a popular form of taxation. One of the very first attempts to levy such a tax led to the Whiskey Rebellion. In more recent times the federal excise tax on gasoline has become extremely controversial.
One of the more perverse proposals currently before Congress is the National Retail Sales Tax. This abomination would institute a 30% national sales tax to ALL retail sales, INCLUDING NEW HOMES!!!
Can you imagine THAT???
A form of taxation known as a "sin tax" when applied to alcohol and tobacco is proposed to be applied to New Homes???
What ARE these MORONS thinking???
That it's a "sin" to purchase a new home???
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