Posted on 11/12/2002 11:46:28 PM PST by JohnHuang2
Lawmakers and experts who support fundamental tax reform are eyeing a consumption-tax plan being worked out by the Bush administration that they believe if implemented would make the U.S. tax code much simpler to follow and be a boon to economic growth.
The administration's plan, first reported by the Washington Post last month, calls for shifting the tax system away from taxing income and targeting consumption instead. The paper reported that administration tax policy wonks within the Treasury Department are still working out the details, and that their progress has largely been kept under wraps.
Officially, White House tax-policy experts have spent the past year working on reform options to present to the president, but "economists and tax lobbyists close to the effort believe that Treasury Secretary Paul H. O'Neill is serious about elevating tax reform on Washington's agenda," said the Post.
Some experts and lawmakers have long complained that the government's system of taxation is painfully complex, difficult to administer, too costly and inefficient. The labyrinth of rules and regulations – mostly the work of a Congress seeking to curry favor with constituents and business interests – grows increasingly more convoluted by the year.
While it may not be a panacea for hard-core tax opponents, a consumption-based system is seen at least as a more equitable way of raising the money necessary to fund government functions, according to supporters.
"The Bush administration's plan to move toward a consumption-based tax is a winner on all fronts," says Chris Edwards, the libertarian CATO Institute's director of fiscal policy. "A consumption-based tax would be simpler, more efficient, pro-growth and fairer to taxpayers."
In a policy briefing, Edwards said a consumption tax would not only benefit consumers, but the businesses they patronize as well.
"On the business side, a consumption-based tax would scrap the complex depreciation system for immediate capital expenses. That reform would make U.S. businesses much more competitive in the world economy and create an investment boom that would drive Americans' wages higher," he said.
"On the individual side, a consumption-based tax could be arrived at by greatly expanding the Roth IRA and turning it into a Universal Savings Account. That would boost the savings rate and increase financial security for all Americans," Edwards added.
Consumer spending comprises two-thirds of the U.S. economy and was credited with helping curb a recession in 2001.
The consumption tax is also a staple of Americans for Fair Taxation, a tax-reform group that says taxing goods and services is simpler and fairer.
"Georgia is a prime example of the power of the frustrated taxpayer. In several congressional races and one Senate race, Fair Tax supporters and angry taxpayers worked to produce major upsets in support of pro-Fair Tax candidates. We witnessed this in other key races across the nation," says Genie Hayes, a spokeswoman for the group.
"We expect that these recent political victories will solidify the White House's decision to make tax replacement … into a key part of the president's agenda," she added.
Hayes said the Post report "confirms what we have been told by Washington insiders for the last two years – President Bush is listening to the American taxpayer."
"Any tax reform must result in a tax code that is simple, fair, voluntary, transparent, border neutral, industry neutral, strengthens Social Security and has manageable transition costs," said Rep. John Linder, R-Ga., in The Washington Times Oct. 28.
"These neutral principles would all be fulfilled by my proposal to eliminate all income and payroll taxes and replace them with a national retail sales tax," said Linder, author of the Fair Tax Act of 2001.
That's a good idea, says Rep. Ron Paul, R-Texas, as long as Americans don't end up with both an income tax and a consumption tax, as is the case in most of Europe.
"My worry," he told WorldNetDaily, "is that somewhere down the road, after we replace the income tax with a consumption tax, the American people will get saddled with an additional income tax."
Critics of a consumption-based sales tax say adding a levy at the point of sale would likely lead to less consumer spending, thereby worsening a weakened economy. Also, they say a national sales tax would have to be astronomical for the government to collect its current level of revenues.
William Gale, a senior fellow in economic studies at the Brookings Institute, a public-policy think tank, estimates that proposals to replace virtually all federal revenues with a 23 percent tax-inclusive national sales tax rate are based on assumptions that real government spending would decline by $480 billion per year, and that there would be no tax avoidance, evasion or political erosion of the tax base.
"Correction for these assumptions indicates that the required tax-inclusive rate would be over 50 percent," he writes in a 1999 policy paper.
But some economists say reducing income taxes means Americans will have more disposable income – and will spend it.
Indeed, the Commerce Department reported earlier this month that "robust" consumer spending contributed to third quarter economic growth at twice the rate of growth in the second quarter of this year. GDP climbed at a 3.1 percent annual rate in the three months from July to September, up from the preceding quarter's 1.3 percent rate.
"The largest contributors to the step-up were an acceleration in consumer spending – especially for motor vehicles – and a slowdown in imports," said the department.
Other critics support tax cuts as a way to reduce government spending.
"The tax shift is one of the great games of government. In the game, the government uses the prospect of lowering one tax in order to buy support for raising another," says Lew Rockwell, president of the Ludwig von Mises Institute, a libertarian economic think tank based in Auburn, Ala. "The proposal to move from an income tax to a consumption tax is a good example of the game."
Rockwell told WND that "the essential key to understanding the trick is to realize that the government wants money and is going to get it one way or another."
"Zigzagging from one method to another does not change the reality, but it can fool the gullible. And it can raise a lot of money from affected groups during the transition period," he said.
Fundamentally, Paul agrees. He also believes that for Americans to achieve real tax reform, the government has to become more frugal.
"I think if we waved a wand today and had a sales tax implemented and the income tax removed, we really don't solve a lot of our problems because we still have the (government) spending side to deal with," he said.
Other experts say that millions of Americans are paying more than their fair share of taxes under the current system.
"The total tax burden on Americans is – and will remain – at near-record levels," says an assessment by the Heritage Foundation, a public-policy think tank in Washington, D.C. "Marginal tax rates are far too high, savings and investment are still subject to discriminatory taxation, and needless complexity in the Internal Revenue Code foments corruption and adds a hidden compliance tax on productive activity."
Rockwell says the argument for a consumption-versus-income tax rests on a few key principles.
Supporters claim "the consumption tax is at least voluntary," he said, but "actually, it is just as coercive as any tax."
"Under the income tax, if I earn income and don't pay the tax, I can be fined and jailed," said Rockwell. "Under the consumption tax, if I consume a taxed item and don't pay the tax, I get fined and jailed.
"It's true that I can choose not to consume that item. Similarly under the income tax, I can choose not to earn income," he added. "Nothing is voluntary if I am not permitted to exempt myself. There is no such thing as a voluntary tax. If there were, it would be called something else."
Meanwhile, now that Republicans are back in control of both houses of Congress, the administration will seek to make a set of tax cuts set to expire in 2010 permanent, while working on another tax-cut package to include reducing the taxation on share dividends, the Financial Times reported last week.
The new tax cuts, in addition to the Federal Reserve's half-point cut last week in the rate banks charge each other for overnight loans, will be aimed at helping consumers reduce personal debt and get their own financial houses back in order without inducing another slowdown, according to White House economists.
"If we look at the personal savings numbers, the reach for excess in the 1990s is being unwound," said Larry Lindsey, Bush's chief economic adviser. "I think that will continue, and it makes it incumbent on us to maintain real personal disposable income.
"The tax code is a luxury the economy can no longer afford," he said this week.
Others were more pointed.
"While Republicans will control Washington, they'll also be under the gun to deliver an economic turnaround," said an analysis last week in BusinessWeek magazine. "If they pull it off, they can look forward to an even giddier Election Night 2004. If not, there won't be much room for excuses."
Paul was not optimistic.
"I don't think any more will happen [on tax reform and reduction] now than happened during the Reagan administration or since Republicans took over the House in 1994," he said.
"The one thing no one should expect, despite the rhetoric, is that their taxes are going to go down, because government needs money now more than ever," Paul added. "I hope there's serious debate, but I don't see much happening."
If the average goes down by 20-30 percent, then the government revenue would go down by about the same amount. Are you planning on making the gov't 30 percent smaller? Sounds terrific to me. Now let's see you find a liberal that will go for it; ain't gonna happen in this session of Congress.
One of the features of the Reagan tax cuts of the 80's was that it was revenue-neutral. That was the only way they could get it passed in Congress.
My humble prediction is that this is the first step in a move to have a Value-Added Tax like they have in Europe ALONG with an income tax.
Ahhh! I really hate to be the one to inform you but for all practical purposes, our corporate tax is a VAT.
We've already got that, the issue comes down to how to get rid of it;
"Under the WTO definition of the term, a sales tax is an indirect tax, as is an European-style VAT. The economic equivalence of an European-style VAT and a subtraction-method VAT is well-established. A subtraction-method VAT is essentially identical to a business income tax except that all purchases of plant and equipment may be expensed, rather than depreciated as under current U.S. law."
And every man woman and child in the nation, pays federal taxes through that VAT, (i.e hidden sales tax)
DO YOU PAY YOUR INCOME TAX
AT THE SUPERMARKET?
by D. Sherman Cox J.D. L.L.M. Taxation
And how not to perpetuate the problem.
The Forbes/Armey Flat tax is still an income tax with VAT, requires an IRS, and still taxes business passing on such taxes in higher prices to consumers, lower wages to employees, and lower returns to investors/retirees.
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."
I may be wrong, but I believe the 'embedded' cost of the IRC is appr. 25%; i.e., the hamburger, the tires, the hard goods, etc., that you buy are 'inflated' due to the IRC.
European and the FarEast VATs levied on businesses exempt those country's export products, while our income/payroll tax system embeds federal taxes into the price of all goods and services.
I researched the effect of repealing all income and payroll taxes laid on business on the theory that we as individual consumers end up paying those taxes at the retail counter.
The following article covers the mechanism on how the current Federal tax system propagates and is embedded into consumption expenditure.
DO YOU PAY YOUR INCOME TAX
AT THE SUPERMARKET?
by D. Sherman Cox J.D. L.L.M. Taxation
The 24% in the article considers only those factors actually paid to government out of impositions on the business in complying with the income, payroll, excise & tariff tax laws.
I also refer you to the section of the following article about the Income/Payroll tax system and its impact on our economy "A. Hidden Upstream Taxes. " paragraph 39.
"[39] Dr. Dale Jorgenson, Chairman of Harvard University's Economics Department, believes that the price of goods and services are inflated by about 20 percent or more by upstream taxes consumers ultimately bear. In a recent paper Dr. Jorgenson estimated the built-in taxes contained in the price of goods and services. /22/ In the chart above, he quantified the hidden component of tax, estimating that producer prices would fall on repeal of upstream taxes an average of about 22 percent."
Looking at the accompanying chart, the range of values from industry to industry appears to be about 12-25%.
Economists Gary and Aldonna Robbins of the Texas-based Institute for Public Policy examined the case of dry cleaning a shirt, with a particular eye toward uncovering the hidden costs of taxes in price.
The Robbin's attributed over 33.6% of "consumer prices" to be due to federal taxation passed on to the customer.
The Federal Tax System
http://www.cbo.gov/showdoc.cfm?index=2125&sequence=0&from=1#pt1
From the Table 1 we may extract the proportionate contributions of each sector of taxes as they contribute to consumer price for the year 2000.
Those tax components which will not change prices as a consequence of enactment of HR2525
============================
Adjust for a conservative $600billion(1995 figure, AGCA '00, Payne '95, PillaBartlettNorquist '95 ) interest & cost of compliance effects.
Estimated change in consumption prices as consequence of enactment of a National Retail Sales Tax, repealing all business income and payroll taxes:
33.6*(1186.5/1945) = 20.5% in consumption prices
Which compares well with the Jorgenson empirical study of 22% fall in producer prices.
The two sources are in reasonable agreement, and I see 20-23% a reasonable value to expect prices to fall not only for customers here in the United States, but in our exports as well making them far more competitive on international markets.
The IRS will still be there to collect the NRST, don't kid yourself.
H.R.2525
SPONSOR: Rep Linder, John (introduced 07/17/2001)
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.
Refer: http://www.fairtax.org & http://www.salestax.org
Just what is your IRS going to be doing after being defunded, with the state tax authorities doing what they already do with regard to there own sales tax, and that is collect it from the business; and all Income(corporate & individual) tax, all payroll (FICA uemployment etc.) taxes and all gift/estate taxes repealed, with IRS income tax records destroyed?
Not trying to be dense here, just want to make sure I understand what you are saying.
You are saying that the NST would be revenue-neutral (i.e., we would still be raising $2+ Billion for the gov't budget) and the 25% savings would come in the form of lower prices for commodities?
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