Sales tax in, income tax out?

Great Debates
21

Does anyone here have opinions about the “Automated Payment Transaction Tax”? It’s supposed to move the bulk of taxation to transactions both within the US and occurring with US funds in foreign countries, and essentially greatly reduce individual entity tax burdens.

Admittedly, my understanding of taxes is rudimentary, so it would be helpful to hear from the folks here who are competent in the area of federal taxes.

A couple of places to check it out -
http://apttax.com
and
http://www.nysscpa.org/cpajournal/2000/0200/f142000.html

22

IIRC, the Liberal party in Canada ran on the platform (in the 90’s) that they would repeal the GST, a 7% tax on just about everything. Of course they won and the tax is still in place.

23

It’d be too easy to use someone else’s card to make a purchase. Poor people could make a fortune charging rich people a small fee to use their card.

24

This is actually my favorite tax proposal of them all. It’s not definitively progressive, but it’s likely to be progressive. That is, the bulk of taxes would come from stock transactions, dividends, etc.

For example, poor people tend not to buy stock. Middle class people tend to buy stock and hold it for a long period of time, thereby reducing the effective tax rate. Rich people and companies tend to flip stock rapidly, thereby increasing their overall tax burden.

There’s some argument that this would decrease capital transactions, but most people who purchase stock have to pay comissions anyway, and this would simply be another fee. Also, it would tend to disfavor speculative behavior in the capital markets, which may help to fend off boom-bust cycles and monetary crises.

I have a couple of modifications to make to this proposal, though. One is that I would take a portion of the revenue and redistribute it to the states on the basis of population. So, for example, if the tax rate is set at .6%, .3% would go to the feds, and .3% to the states. This would allow states to begin undoing some of the regressiveness in their tax systems.

Another proposal I’ve heard which is kind of intriguing is to have a portion of the revenue redistributed to individuals. So, let’s say .3 for the feds, .3 for the states, and .3 for people. This would offset any potential regressiveness, and could function as a replacement for welfare, food stamps, etc. Everybody gets the same amount, so we don’t have to listen to endless bickering about how the poor are getting something for free.

Another benefit here is that we wouldn’t be able to use the tax code for subsidies. I believe that using the tax code in this manner hides the true cost of government. If we want to subsidize a certain activity, we should know exactly how much we’re paying for it.

25

:confused: Do you mean not counted as sales for the tax? I don’t know what purchases counted as income mean. Say you make $1 million, and make taxable purchases of $500K. At a 20% sales tax rate, you are paying $100K, or 10%, very likely less than what you are paying now. Say you make $25K, and make $10 K of purchases. At a 20% rate, that’s around an 8% effective tax rate. It is still somewhat progressive, but much less than now. And the tax rate has to be a lot higher to make up for lost revenue. I don’t know what the person making $25k would be paying now, but it might be less than 8%.

The more you exclude the more progressive it becomes, but the higher the tax rate on the rest - and the higher the shock value!

I do agree that the tax system should be overhauled, but I’ve heard that for 30 years, and I don’t see much progress.

26

Part of what would off set this is the $300 billion not collected today, because of loopholes, deductions and outright cheating.

One reason it would need to be phased in is to give accountants and other paper shufflers time to find another job.

We also need to get rid of money as we know it. Everyone should have something like a debit card. This would leave a trail of just what and where everyone spends their money. I’d hate to tell you how many people have given me a special price on repairs, supplies, etc. based on “payment in cash.”

27

Kevin Drum has an interesting take on this: Another cost that makes this unpalatable is for seniors, and others, living off on investment income. Essentially, their money, which was taxed once by the old income tax, is now going to be taxed by the consumption tax, creating a rather savage double taxation. Just more food for thought.

28

I don’t see the issue, MilTan. I pay tax when I buy a used car, even though it was already taxed. I pay tax on the car every year here in MA. Besides which, they’re already paying sales tax.

29

Right - but you mean to tell me you wouldn’t mind if the $20,000 you were saving to buy a Taurus now only gets you a $16,000 Geo Prizm because of the new 20% national sales tax? The problem isn’t whether there’s already a sales tax or not, it’s that there is now a very high, additional sales tax. All of a sudden, the tax burden, which didn’t apply to seniors, is being spread to them, too. Everybody else sees an advantage because at least their income tax dropped, but people who live off of investment income wouldn’t. As I linked in the above post, Kevin Drum explains it better than I can.

Heck, just look at it this way: suppose the new sales tax was perfectly neutral for everyone: their income taxes were exactly replaced by the new sales tax. For people that didn’t pay income taxes before, it’s a tax increase, plain and simple. That sucks.

30

I was about to challenge this, but then I noticed you included “loopholes” and deductions along with the cheating - so the number seems plausible. But all the deductions are thought to be important to someone. Removing all of them would cause utter chaos.

:eek: And all the data on purchases would sit in a nice safe database in Washington, where we know no Administration would ever abuse it? That’s enough to turn me into a libertarian. I don’t trust either party that much. The thing is, you are right about this being necessary to prevent a black market, but the assault on our liberties from this would be way too much.

31

What I’ve heard is that 23% is a “tax inclusive” rate - that is, of the total amount you pay for something, 23% of it will be tax.

That’s really more like a 30% rate as sales tax is calculated today: take the base price, add 30% tax, and you have the total price with tax.

32

I mean that there are a lot of purchases between business, for instance, which do not count as income for tax purposes. GDP is something like 10 trillion dollars. That does not mean that the total income of the country was 10 trillion dollars. All I am saying is that computing a notional sales tax to be revenue nuetral might not lead to a sales tax which is burden nuetral. I was making a very minor point about the complexity of comparing income tax rates to sales tax rates.

Right. But you have to consider the economy as a whole to see if a 20% sales tax rate would be revenue nuetral. It might be very detrimental to those who spend most of their money (they tend to be the poorer members of society), but be ver benificial to those who do not. At the same time, however, if you simply exclude food and rent, then you include purchase of securities, it is possible that the benifit/detriment analysis reverses. Without changing the rate at all.

But here you are assuming a person making $25k is living on 10. Can you cite any studies to justify this? Most of the stuff I’ve read suggests that most people making $25k spend much closer to $25k. The savings rate is very low at this end of the income scale.

Agreed, I know we are talking hypotheticals here.

It should be if we are limiting the talk to federal income taxes. It might not be, however, if we include payroll taxes. It almost certainly would not be this low if we include state taxes.

See, this is the assumption I am not sure is true. I think you can shift the burden around using a sales tax without changing the rate.

Yea, I know. This seems to be the case for just about every major government agency.

33

The usual objection to a sales tax is that it tends to be regressive – the less income you earn, the more of it you tend to consume and the less of it you tend to save, so more of it gets taxed. The less income you earn, the higher the effective rate of your tax.

You can tackle this in two ways.

The first is to have a graduated tax, with low or no sales tax on which the poor tend to spend more of their income, and higher taxes on the things that the rich tend to spend more on.

This can work, but it requires constant fine-tuning. It also presents all kinds of opportunities for arbitrage, and distorts consumption choices. (If I buy bread, butter and cheese and make my own lunch, I pay no sales tax, but if I buy a prepared sandwich I pay sales tax. That is obviously going to affect people’s behaviour, with consequences for the prepared sandwich industry. That may be a fairly trivial disortion, but multiply it by lots and lots of other examples).

A second problem is that there is a constant temptation to set tax rates by reference to moral preferences or ethical principles, and this can work against setting them with the objective of making the tax progressive. Two examples:

Low earners tend to spend a greater proportion of their income on tobacco than high earners do. If the sales tax is to be regressive, therefore, tobacco ought to be taxed at a low rate or not at all. That is certainly not the current policy.

Conversely, the rich (who have health insurance) tend to a higher proportion of their income, directly or indirectly, on healthcare than the poor do, so healthcare ought to be heavily taxed. But, politically, that’s not really a flyer, is it? Same goes for education, I suspect.

While you can combine the two approaches, having no tax on healthcare and education and high taxes on tobacco, but regulationg taxes on other goods and services with a view to making the tax regressive, you’ll now have to manipulate the other taxes to a much greater extent in order to offset the regressive tendencies of the choices you have made with respect to tobacco, health and education. And where do you draw the line when it comes to setting tax rates on ethical grounds? If you concede tobacco, health and education, what is your basis for refusing to take a similar stance in relation to other major areas of expenditure?

The other way of making the tax regressive (already discussed here) is to have flat rate tax plus a rebate – every month you get a cheque which represents a refund of the sales tax on, say, the first $500 of your expenditure. If you actually spent less than $500, you’re quids in. If you spent very little more than $500, your average rate of sales tax, net of the rebate, is still very low. While this makes sales tax progressive as respects expenditure (the more you spend, the greater your average rate of sales tax, at every level), it doesn’t necessarily do that as to income. At the lower end of the range of incomes, where people generally spend the bulk of their income, the sales tax will be progressive, but as you move up the range of income, the more of your income you will tend to save, and the sales tax becomes regressive again.

The sales tax also penalises those who spend more than they earn (i.e those who are spending capital, including many of the retired, the more fortunate of the disabled and those who inherit capital and spend it). And, as has been pointed out, it’s particularly unfair to those who accumulated their capital out of income which was, at the time, subject to income tax, or who inherit that capital. It penalises those who have saved, in other words.

I don’t know if there’s any developed country which has entirely replaced income tax with consumption tax. Most operate a blend of the two, if for no other reason that a diversity of revenue bases is stronger and more flexible than a single revenue base.

34

Here’s another link.

35

I would be EXTREMELY wary about tinkering with the efficiency of the market in this manner. Even tiny forces acting to slow down the flow of money can have disproportionately disaterous flow-on effects to the overall performance of an economy. Part of the reason the economy works so well is that you have a tiny group of people carefully moving huge amounts of money every which way to take advantage of any percieved inefficiency.

36

Well, of course, this requires a great deal more study, but I think it’s something we should seriously consider. We already skew markets all over the place. However, if the rate is set low enough, which it could conceivable be, it’s possible that any such inefficiency would be negligible compared to statistical market fluctuations, and as such would not impact the overall performance of the economy.

IMHO, monetary crises pose a far more significant economic threat. YMMV.

37

Got it.

I thought about what number to use here a lot. I was assuming that food and housing would not be taxed, since that would not be politically supportable. If they are, then the tax is far more regressive than my model. I should have made this explicit.

I think you would need a law requiring companies to increase salaries by the amount saved in payroll taxes. I’m considering state taxes totally seperate - they’d be added on to this, so that even a 20% federal rate would become a 30% tax at the cash register.

I’d also assume that social security is not affected by this.

I’m assuming the tax is revenue neutral. That’s easy, relatively speaking, but the real problem is how to distribute the tax across income brackets without an absurdly complicated system (HagenDaz has one rate, store brand ice cream another.) If you exclude items that make up a large proportion of retail sales, then the tax on the other items goes up to keep things revenue neutral.

And here is another problem. Things in which demand is inelastic and are necessities (like food) will be relatively untaxed to keep it progressive. That makes items where demand is elastic, like cars, have a higher tax, which might drive the demand down. Steady state this might settle down, as people get used to spending their higher paycheck, but I think there might be a shock (as in sticker shock) as someone budgeted for a $40K car sees it at $48K or higher.

Another thought - how are you going to keep the gummint from fiddling with this. Say they decide to encourage energy conservation and cut the tax on a hybrid to 15%. That would take the place of deductions today. Before you know it the tax code gets even more complicated than today, except that you have to worry about it every day, not just in April. Before you know it TurboTax will be on every laptop, with an interface to a bar code reader to tell you which of several products has which tax.

shudder We have an overly complicated tax system because of politics and interest groups, and I don’t think a sales tax will cure it.

38

I am for a national sales tax, for two main reasons:
(1) it would force people who pay NOTHING in taxes now, to contribute. Take the illegal alien who mows my brother’s lawn…he is pain in cash, and probably receives non-cash assiatance as well (food stamps, housing subsidies). He is contributing nothing in taxes, yet is getting an articficially high return for his labor.
(2) Related to o(1): it would stop the incentives for importing labor and give jobs to American citizens. People immigrate (illegally) to the US because they can get jobs here…and, as memebers of the “underground” economy, they pay little or nothing. Later, when they have choildren, they contribute to a huge social problem here. And, more than 26% of the prison population are illegal aliens.
All of the unfairness issues can be dealt with by rebates on taxes paid…to get the rebate, you HAVE to file an income tax return…so you wind up paying taxes. If you choose to remain underground, you forfeit any excess taxes you have paid…to me this is a good thing.

39

At first blush I would tend to agree, but most of the states have sales tax laws and they’re not overly complex, at least relative to the IRS code or even relative to the state’s own income tax code.

I’m just supsicious, as I said earlier, that we’d get rid of the income tax if a national sales tax were inacted. Chances are, we’d have both, as most states do.

40

It isn’t going to happen. In his interview with Larry King, President Nixon indicated that it wasn’t something being seriously considered, more just along the lines of one thing among the many things out there.