Sales tax in, income tax out?

http://money.cnn.com/2004/08/11/news/economy/election_bush_tax.reut/index.htm

I honestly don’t know very much about taxes, etc. so I was curious about what others thought of this idea.

I could see it happening. But I’d want it to apply to ALL purchases excepting possibly food and shelter.

Buy a car? Pay the tax. But a business? Pay the tax. Buy stocks and bonds? Pay the tax.

I don’t see a federal sales tax anytime soon, but if we do get one, the most likely scenario is that it would be **IN ADDITION TO ** the income tax. After all, how often does the government repeal a tax? Not very.

Our whole economy is geared towards the income tax. Switching over to a sales tax, even if it made sense in the long run, would probably be so disruptive to the economy in the short term that it wouldn’t make sense.

My understanding of the National Sales Tax (and I’m sure someone will be along to correct me if I’m wrong) is that it could apply only to certain types of purchases. Necessities like food wouldn’t be taxed, while luxury purchases like a new yacht would be. If the percentage is set right, everyone (read both Democrats and Republicans) will be happy, since the poor don’t get taxed and the rich do. Also there won’t be any way an accountant could find any loopholes to jump through so that the rich couldn’t pay, since the tax would be paid when the purchase is made.

FWIW, this was discussed last week:

http://boards.straightdope.com/sdmb/showthread.php?t=269463&highlight=income+sales

I’ve heard from multiple sources that to equal the revenue from the income tax, a national sales tax would need to be in the 15-20% range. No cite, though.

Well, a national sales tax would be much more subject to the changing economy than our current system.

Right now, if the economy is bad (recession) or really bad (depression) then unemployment goes up. Since those people aren’t working, they aren’t paying taxes, and government revenues go down. However, even in a really bad economic times we are only talking about swings in the number of workers of like 10% or so.

When the economy is in recession, everyone tends to spend less. This would mean that every time the economy was shaky the governments coffers would dry up. Every unexpectedly good Christmas shopping season would mean that the government suddenly has more money than it expected.

This wouldn’t exactly be catastrophic, but would certainly need to be taken into consideration in evaluating such a plan.

I am glad to hear GWBush is thinking about such things. Although this particular idea doesn’t have me feeling to excited, I do like that drastic, sweeping changes to things like the tax code are at least being thought about for a second term. Not worrying about re-election would free up Bush to overhaul the tax system, or social security. Both of these programs are so screwed up that basically and change would be an improvement at this point, IMO.

Well, there is the Fair Tax National sales tax proposal, that has exactly the same tax on all new goods sold, in order to keep things simple(for example, should lobster, a food item & a luxury be taxed?), and to stop economic distortion creating loopholes - BUT, it has a set refund level, that everyone is eligible for, that make it effectively a progressive tax.

For example, say the Fair Tax sales tax level is set at 10%, and the per person refund is set at $2,000. If you were poor, and only spent $20,000 in a year, you effectively wouldn’t be paying any taxes - the $2,000 refund would cover the 10% sales tax you paid on the 20 grand you spent. If you were richer, and spent $40,000 in a year, you would be paying the governmetn $2,000 in net taxes, a 5% tax rate. ($4000 paid on sales tax minus the refund.) The more you spend, the higher your effective tax rate is, making it progressive like the current income tax, but much simpler, and a lot less intrusive.

This is one of the key advantages I see in a national sales tax - the government doesn’t have to know how much every individual person is making, only how much each retailer(and there are a lot less retailers) is selling. This is both simplier, and allows more privacy for everyone.

Such a tax certainly won’t be 10%. Consider the average income tax rate now - say 20%. The sales tax would have to be more, since lots of people with lots of income do not spend all of it buying things. Removing items from the tax would boost it still higher. Add to local sales taxes.

I can hear the Kerry ad now - **George Bush wants to raise your sales tax to 40%. **

Heh heh. And I know very well I’m not talking economics here, I’m talking politics and sound bites.

One of the key components to a national sales tax is that the income tax amendment MUST be repealed. It’s built into the bill.

You only pay tax on the final product. So the car manufacturer does not pay tax on the steel to produce the car. You only pay tax on the car once it’s finished.

The rate will be 23%. Before you wig out, leading economists have said that’s what you’re paying now, but it’s hidden.

There will be no more payroll tax. Your gross pay will be your take-home pay.

EVERYONE, rich to poor, will get a refund check monthly designed to cover the basic necessities.

No more loopholes. No more tax evasion. You want to save on taxes, you curtail your purchases.

I’d be more interested if the tax applied to all purchases, and not just purchases of new goods for consumption. It looks to me like the fair tax proposal exempts used goods and business purchases as well as capital purchases (stocks, etc). It seems to me that if you included all of these, you could set the sales tax rate much, much lower than the fair tax organization is proposing.

I do really like the refund check idea to offset purchases of necessities, though.

Possibly, but there are also lots of purchases made which are not counted as income.

I kind of like the idea of overhauling the tax system. I’m not sure I know enough to know if a sales tax or some other tax would be better. I do like that it is being discussed though.

I like what I’ve seen on your link, ivylass. Out of sheer curiousity, what are the arguments against a national sales tax?

Apparently, Cheney doesn’t want it, because someone is jerking Bush’s chain:

White House backs off Bush’s comments on national sales tax

Can you find the specific words used by the “White House”? All that paper says is one reporters interpretation. I did not read Bush’s remarks (quoted earlier) as “Bush considering a sales tax”. I took them to mean that it is something we should look into. There is a big difference.

The one I can think of, offhand, is that even with the refund checks, the tax is, on the whole, regressive. Granted, if you only look at the amount of money spent on purchases, it appears progressive, due to the refund checks. However, that is ignoring the fact that not all of one’s income goes to spending, and the percentage of income spent on consumption drops as one’s income rises. Put simply, a person making ten times as much money is not likely to consume ten times as much stuff.

As you get to the higher ends of the income spectrum, the tax seems to become regressive. Let’s temporarily drop the idea of the rebate checks. Since consumption doesn’t scale with income (this seems obvious to me, but I might be able to dig up some cites on savings rate as a function of income, if necessary), leaving out the rebates makes the tax obviously regressive. How does refunding a fixed amount back make the tax progressive?

And to tackle ivylass’s point about taxing only the final goods (EuroDopers and Canadians, is this how the VAT works?), rather than the intermediate steps, doesn’t this effectively drastically reduce corporate taxes?

(Caveat: I wasn’t able to get to fairtax.org for some reason, so I have not yet read the site; if my above post is based on misconceptions as to how the tax would work, please feel free to correct me :))

This is the part of the idea I don’t get. Why not just exempt the necessities – supermarket food, bus passes, clothing, etc. – from the tax in the first place? A refund check involves a lot more moving parts, and does not account for cost-of-living variances in different areas.

No matter how much debate you wish to have, converting the largest economy in the world from a federal income tax system to a federal sales tax system is a lot of work. Just getting the federal tax bureaucracy to change is a whole other ballgame by itself.

Assuming Bush supports the idea, is re-elected and begins the process shortly thereafter, it will not be accomplished within his final four-year final term. Whomever comes in after the 2008 election will most certainly have a different agenda. (Of course, the 2006 bi-election could be the litmus test and end the process just that much earlier.) We will be stuck with a partially torn down income tax structure and a partially constructed sales tax structure.

It ain’t gonna happen. It’s too partisan, too hard, and there are too many other items on the front burner taking precedence, like this war thingy.

Indeed. Obviously, the devil is in the details and the rebate or exemption aspect can make it progressive at least at the bottom end of the scale. However, it is hard to envision ways to make it progressive (or even, not regressive) at the top end of the scale. This means, that overall the tendency will be to shift the tax burden off of the rich and onto the middle class. (Depending on how things are structured will determine who gets socked with the higher taxes…e.g., if it is the lower middle class or the upper middle class.) In this regard, it will continue the trend of the Bush tax cuts (and, which David Cay Johnston would argue proceded the Bush tax cuts too) of lowering taxes on the very rich at the expense of everyone else.

Who knows…Maybe someone can come up with a way to make it fair from the perspective of maintaining progessivity in the tax code. (I know there is a left-wing professor at Cornell who proposes some sort of consumption tax that he argues would be fair.) But, color me skeptical of both the idea and the motives of some of the people behind it.

Forgive my rambling, but this has just come to me and I’m not sure where its going.

I have a problem with the refund idea. I understand the desire not to exempt specific items. This would simply replicate a complex tax code with another. But I think that a refund would be harder to take for very poor people than for richer people. Someone living on $20,000 a year needs that $2,000 all through the year, not simply at the end.

My thought was this. What if we simply issue cards, or numbers which exempt people rather than items. What I mean is that a person with a $20,000 a year income would have a number (similar to a business’ tax exempt number) which allows them to not pay sales taxe at all.

jshore’s post got me thinking that we could simply extend this up the income scale. We could issue numbers which alter the federal sales tax rate an individual pays on purchases.

I realize this introduces another layer of complexity, but it might address the “fairness” issue. I am posting it more to find out if any of you more familiar with the sales tax proposals out there know if such an idea has been floated or debunked.

there are several general problems with a national sales tax that i can’t overlook.

first, people have more money, and goods are more expensive. this recipe does not a stable economy make. by this i mean, the transition would be incredibly damaging in the short term.

second, a sales tax is a disincentive to buy, especially costly items such as houses and cars. if we look at the luxury tax, which was aimed at the rich, we can see that the people who were hurt the most by it were the people who sold the taxed items, as people simply bought other and fewer things. another ingredient in the recipe for economic disaster.

next, tax evasion wouldn’t go away, and might even become easier. it is much easier, in my mind, to sell someone something off the books than it is to pay them to work for you off the books. a sales tax could cause an increase in black market dealings which avoid the tax altogether, causing everyone else to bear the burden of a higher rate.

and lastly, it is terribly regressive. i can see that this has already been addressed, but it is true that consumption does not scale linearly with income.

incidentally, i don’t know why anyone should be opposed to a progressive income tax. granted, right now, there are too many loopholes and the tax code is far too complex, but in general shouldn’t the goal be to equalize the tax burden rather than equalize the tax rate?