I think this would count as a tariff, and as such probably get us into trouble with the WTO.
What’s more, I think a sales tax would actually increase the current trade imbalance. Firstly, it would create a huge impetous for people to buy things over seas to avoid the tax. Even if we taxed imports in theory, this would be hard to enforce. If I buy something overseas and have it shipped over, will the gov’t open all of my mail to tax me on everything. It’s even harder if I buy services overseas, how would you tax that?
Also, if I’m a manufacturer of, say, chairs, if I buy my lumber in the states I’ll have to pay a tax on it and pass that cost onto my consumers, who will also have to pay a sales tax on the completed chair. If I go to Canada, buy tax free lumber and assemble my chairs up there, then ship them back to the states for sale, my consumers will only have to pay tax on the finished product, not absorb the cost of my paying tax on the components. With a 25% sales tax, this difference will be large enough to make many US made products uncompetitive.
I too think a national sales tax is a good idea. It will force the very rich (who currently pay little or nothing) to contribute. The reason a NST is NOT popular:
the “old Money” doesn’t like paying taxes…they escape income taxes by putting their assets into tax-free mmunicipal bonds (this is a favorite tax dodge of cheats like the Kennedy family)
-the very rich escape estate taxes by buying hugely expensive life insurance policies (life insurance benefits are not taxed)
-they conduct many of their financial transactions under the guise of the “corporate veil”-the reason the rich drive those huge Merecedes and Cadillacs? Smple-their corporations BUY them for them! The sales taxes are paid by the corporations they control.
-they hide income in real estate transactions: that is why Theresa Heinze-Kerry owns multiple estates in different states-they have no fixed residence in which they could be taxed.
Considering that the folks in that tax bracket were either the employers or management, I don’t think any comparison between them (and their high salaries) and the labor force at large can be realistically made. The subject of discussion is the total elimination of income taxes, not a change in marginal rates, anyway. You can’t expect molehills to scale into mountains.
Employer: “Attention employees: your take-home pay will remain the same. Actually, since the price of retail items is expected to rise 3%, according to some economist, I’ll even raise your take-home pay by 3%. Sound fair?”
Non-unionized workforce: “Yes!!!”
End result: Salaries are cut by twenty-something percent to take into account the payroll and income taxes that are no longer paid by employer and worker.
I just don’t believe for two seconds that businesses, as a whole, would not take the opportunity to save fifteen to thirty-something percent of their payroll costs if it could be argued that employees would still have the same amount of take-home pay. As I said before, I think the guy who wrote that article is in fantasyland.
So, you have no citations, no data to back up your contention, yet I’m to accept a hypothetical “announcement” based upon your beliefs as proof?
[q]I don’t think any comparison between them (and their high salaries) and the labor force at large can be realistically made.[/q]
Why not? The DOL keeps figures like these, as does the IRS. If you look here (Excel file!) you will note that one had to make $118,000 in taxable income to be considered among the top 1% of wage earners in 1986, the year that Reagan passed a tax relief bill that cut the top marginal rate from 50% to 28%. According to your theory, their paychecks should be cut by a similar amount… but they’re not. Instead, they rise 20% over the next two years. The bottom rates were lowered a bit too… but still, income levels rose.
The fairtax proposal before Congress calls for the elimination of the IRS and the IRC. All state taxing agencies are already set up to collect sales taxes, so it would be duplicitous to keep the IRS, since it is a collection agency. It would just be a matter of adding another line on the computer for the Federal governments share.
From what I can see the fair tax is designed to do four things: A. Provide the Federal Government with the same amount of revenue it currently gets from corporate and individual income taxes; B. Spread the tax burden more evenly among the population; C. Provide additional revenue the income tax fails to provide, e.g., from non-filers (estimated at about 20 million); foriegn visitors; illegals, etc. D. Stops government intrusion into the private affairs of citizens by providing a taxing system that is in harmony with the Constitution and the Bill of Rights.
Funds from savings and investment are the life blood of new business creation. The United States has one of the lowest savings rates in the free world. The reason for this is it doesn’t pay to save under the income tax system. With a National retail sales tax, for every dollar saved (not spent) the saver not only accrues all the interest on the savings, but saves another 23% (the proposed NTS rate) he/she didn’t pay by consuming instead of saving. That is an incentive to save!
Among the higher income tax brackets, the progessive income tax drives conspicious consumption, and tax shelter investments in things that don’t help economic growth, e.g. real estate and land investment. With marginal tax rates at 90%+, there is great incentive to put the money into non-productive tax shelters, and little or no incentive to save it, or put in income producing investments.
The economy will do better for this reason: Individuals–knowing with absolute certainty what there tax burden will be (all they have to do is tabulate their annual expenditures, minus their rebate, and multiply times .23)–will be far more likely to long term plan, than they do under the present system. Furthermore, by moving away from debt financing of purchases in the private sector, we will see a movement away from the governments debt financing of it’s operations, and see a reduction of the massive National debt, which all economist agree is necessary to ending boom and bust cycles, and sustaining long term economic growth.
This is silly. Don’t put words in my mouth. I did not say that cuts in marginal rates leads to reductions in pay. I don’t even believe that. What I said was, “The subject of discussion is the total elimination of income taxes, not a change in marginal rates, anyway. You can’t expect molehills to scale into mountains.”
As Malodorous has done, but I shall expand upon here, let’s follow the line of thinking as posited by Neil Boortz:
22% of retail item’s cost is the “embedded cost” of retail items, arising from “the payroll taxes and corporate business and income taxes paid by every manufacturer, shipper, wholesaler, merchandiser and retailer having any connection whatsoever with the product you have purchased. These taxes are all added to the cost of consumer goods.” (see link in OP for cite for the quoted material in these premises.)
“As soon as these taxes vanish, economists agree that competitive market pressures will immediately cause prices at the retail level to fall.” That means, once businesses stop paying payroll taxes, and presumably cut worker pay by the same amount at which workers had been paying income taxes, the price of retail items will be reduced by around 20%.
“The prices decrease by over 20 percent, and you start paying a 23 percent sales tax. Remember, though. You brought home 100 percent of your paycheck, and every dollar you don’t spend at the retail level remains untaxed.” One might be misled into believing that workers would enjoy the full amount of their pre-NST salary, which I gather is what you, JohnT, are arguing. But the author did not actually say that. He only said that workers wouldn’t pay income tax, which is true, but he does not actually promise that worker pay would remain the same. You read something that doesn’t exist in the text.
Conclusion: If businesses want to cut the cost of their products by 20%, they have to eliminate the expenses that force up the price of retail products by 22% because of “embedded taxes.”
Corollary: Ergo, if businesses do NOT get rid of “embedded taxes,” (ie, stop paying payroll tax and cut the “extra” salary that workers under the current system then pay to the government through the income tax) they CAN NOT reduce the price of retail items by 20%. QED.
Honestly, there’s no need for statistics to illustrate a logical argument.
Ravenman, I’m confused. In your point number two there’s a presumption that worker pay will be cut. In point number 3, you are saying that the employee is keeping 100% of their salary.
Well, I suppose that if you devolve responsibility for collecting taxes to the state, you would indeed get rid of the IRS, but this would lead to more problems. For starters, part of the purpose of tax reform is to simplify things. Do you really think anything would be simplified by basically breaking the IRS into 50 seperate agencies. Also, I have a seriously hard time beliving this system will function without some sort of central gov’t control for things like interstate transactions, international transactions, collection from state agencies, etc. etc. etc.
The majority of taxes are paid by the upper class. It’s dubious we can squeeze the poor for much more money, so “spread the tax burden more evenly” is equivalent to raising taxes on the middle class.
No doubt lots of people manage to avoid paying a lot of the income tax. But this will be true of a sales tax as well. People will trade, smuggle, stretch deffinitions, etc, as a 25% sales tax gives people a lot of impetous to find ways around paying it. Business’s will set up virtical monopolies so they can produce their own raw materials rather then purchase it from another entity. Loopholes and cheats are something that we’ll need to solve under any system, and I don’t see how a sales tax will be any easier to control this sort of thing under. If anything, it seems to me to be easier to make unnoticed sales and purchases then it is to earn untracked income.
How would the gov’t monitoring your every sale and purchase make it less intrusive. You might still have to report income as well, so that they can make sure no one is cheating. Also the current tax system is expressly allowed by the 16th amendment, and thus in accord with the constitution.
Japan has one of the highest savings rates in the world, and their economy is in the dumper because of it. People need to consume to keep the economy going. Witness the letter that came with everyones tax cut telling them to spend the money. Also, I’ve never heard of anyone in the US complaining that their isn’t enough investment capital floating around. In fact, during the dot-com boom, the complaint was that their was too much capital, and not enough worth while businesses to spend it on.
I wasn’t arguing from, or about the text. I was discussing what you said, especially in regards to the original post that I responded to. However, since you did quote the Bootz site, please note the following:
As a business owner and somebody who has to retain employees, I find that presumption to be preposterous. Oh, some idiots will try it, hoping to save their teetering companies, but most would realize that cutting current employee’s wages by the same amount as their expected tax windfall* is just begging for a lawsuit and a walkout.
Especially since the reduction in income taxes is going to be accompanied by a corresponding rise in sales taxes.
Sorry, but your argument is based upon a faulty assumption of what people on my side of the aisle would do in such a situation, not upon any actual data, logic, or understanding of what it takes to run a company or retain employees.
*Wait. According to something you said earlier, only employees in union shops are smart enough to realize that the elimination of the income tax means more money in their take-home pay. :rolleyes:
When a company purchases an item for use in producing another item, the company will not bear the cost of tax. This relieves the pressure for vertical integration. In a sales tax system, businesses are generally exempt from the tax on raw materials. This can become complex. For example, are the paper bags at the grocery store part of the product? Someone will need to write the rule. In VAT, the company only pays the difference between the VAT it collects and the VAT it pays.
In order to get the low rate boasted by the supporters of the sales tax, the base of taxable items is pretty broad. As I recall, the proposal in the early 1990’s included sales tax on housing. Anyone want to buy a $200,000 house and pay $50,000 in sales tax? How about tax on rent?
Sales tax and VAT exclude financial services. No tax for depositing your paycheck in the bank. Purchasing stocks would be exempt. The alternative would be the destruction of the US financial services industry. Cash would be king for most people. Anyone with more substantial holdings would run to London, Frankfurt, Hong Kong, Tokyo etc.
Regarding the incentive for exports, there is no WTO problem with VAT. It is used in every major country except the US. I believe India may have been the last major hold out. Generally, a company not only does not collect VAT on an export, the VAT paid to produce the item is often refunded. In the WTO dispute, the US argued that the Europeans subsidize exports through VAT. Nothing came of the argument.
The IRS (or its replacement) will exist. It may be a bit smaller because most of the audit and compliance duties will fucus on business that collect the tax. The intrusiveness will remain but will probably be less noticable to most people.
Abolising the income tax may create headaches for US based multinational companies. The US has a network of income tax treaties that allows payments between the US and major trading partners to be taxed at lower rates than would otherwise be required. If the US dropped the income tax, our trading partners could drop the treaties. Their multinationals would not be subject to US income tax so there would be no need for the trade off of lowering taxes on US based multinationals.
NurseCarmen, the contradiction you point out is actually the point of Ravenman’s post. He’s showing that the Bootz article contradicts itself in an effort to make it seem like the rise in prices under a sales tax will be compensated by a rise in pay.
His arguement is based on the article in the OP. I agree Bootz (I note he is a radio talkshow guy and not an economist) may not be the best spokesperson for a national sales tax as this seems to be a fairly obvious logical flaw, so if you want to post a better article on what a national sales tax is, please do.
But Bootz uses his flawed logic to try and compensate for the fact that prices will, of course, rise dramtically. If we use your presumption that pay will stay the same, then we have to deal with how employees will deal with a large increase in the price of goods. Note that the average income tax was 16% as of 2000, and I would imagine that Bush tax cuts have driven this lower. So prices will rise to 23% and employees will make 16% more. Whats more, as I pointed out in a previous post, consumers will have to absorb the sales tax on raw goods that go into making the finished products, so actual prices will rise more then this. jshore also provided a seperate reason prices will be more then 23% higher.
So, you would agree that if companies A, B, and C held the line on employee pay, the price of retail goods, without an addition of the NST, would stay constant? So if A, B, and C all produce widgets today at a cost of $100 per box, and they kept the pay of their staff constant after the NST went into effect, a box of widgets would then cost $100 PLUS $23 in sales tax. Right?
So, what happens if company D and E cut their employee pay by 22%, as I expect they might do? Do you really think that companies D and E would go out of business because they couldn’t find workers for that lower wage? My expectation is that they’d eventually find workers, and that their boxes of widgets would cost $80 each, plus $18 in sales tax. Market pressures would certainly mount on companies A, B, and C to do SOMETHING to better compete with D and E.
My mind is open on this point, but I think that the wholesale eliminiation of income taxes in favor of an NST would DRAMATICALLY shift the market pressures on businesses to cut the cost of labor. I do not say this because I think businesses are mean, I say this because they must remain competitive with each other.
Those quotes are from the guy who is proposing one version of the NST. He argues that goods will be cheaper because businesses will no longer pay “embedded taxes” after the elimination of payroll taxes, income taxes, etc. In my view, this means that employers would cut pay for workers. However, after an NST is instituted, it is of course true that workers would keep 100% of their paycheck, by in my view, that paycheck would be smaller because companies would reduce worker compensation by the amount that the workers had been paying in taxes.
Perhaps an illustration would clarify. (Numbers are illustrative only) Scenario 1 (what NST proponents seem to be saying will happen)
Before NST:
Worker salary, pre-income tax: $30,000 per year
Worker actual take-home pay, after income tax: $24,000 per year
After NST:
Worker salary: $30,000 per year
Worker actual-take home pay: $30,000 per year, BUT all retail goods and services more expensive by some undeterminable amount (could be 3%) because of NST
Scenario 2 (What I think would happen)
Before NST:
Worker salary, pre-income tax: $30,000 per year
Worker actual take-home pay, after income tax: $24,000 per year
After NST:
Worker salary: $24,000 per year
Worker actual-take home pay: $24,000 per year, BUT all retail goods and services more expensive by some undeterminable amount (could be 3%) because of NST
I think scenario 1 is preposterous. There is no such thing as a free lunch. Workers cannot get a 20 percent increase in take-home pay, have retail prices increase by only a small amount despite a 23% sales tax, and have government coffers fully funded without SOMEONE paying for it. In my view, workers’ salaries will decline because SOMEONE has to pay for all of this stuff.
I will say, there is also a Scenario 3, in my estimation:
Before NST:
Worker salary, pre-income tax: $30,000 per year
Worker actual take-home pay, after income tax: $24,000 per year
After NST:
Worker salary: $30,000 per year
Worker actual-take home pay: $30,000 per year, BUT all retail goods and services MUCH more expensive by the total rate of the NST amount, likely 23%.
That doesn’t seem very attractive at all. Who on earth wants a 23% tax on their groceries?
I don’t understand the difference between scenario 1 and scenario 3. Why would retail goods only go up by 3% in scenario 1, but 23% in scenario 2?
I kinda understand your scenario 2. I’m making 100k. My taxes are 30%. So really, I’m making 70k. So in scenario 2, I only get paid 70k. All other things remaining equal, I shouldn’t notice a difference. But. All other things aren’t equal.
Several assumptions have to be made for all other things to remain equal.
Production costs of retail goods will drop 23%. This is a bit of a false assumption. labor costs will drop by 23%. Raw materials will remain mostly unchanged, because the labor costs of raw materials are a comparatively minor part of the price. Infrastructure costs will remain the same, or even increase. No more write offs on capital expenditures. Sure the capex would be decreased, but it couldn’t be spread out over a number of years. How will these issues be dealt with in the transition?
In scenario 1, because labor costs dropped, the price of goods dropped by 20% (according to one NST proponent’s calculations). Add 23% National Sales Tax to that reduced price, and you’re looking at a rather small increase in the cost of goods.
In scenario 3, labor costs are not cut, so the price of goods is NOT reduced by 20%. Add 23% National Sales Tax to the continued price of items, and you get a 23% increase in the cost of goods.
Coupla things. It’s obvious, to me at least, that when you have a tax rate of 70% combined with loopholes that lower that, versus a lower tax rate that yields the same amount of revenue, on average, the economy will prosper since people are not making suboptimal economic decisions based on tax rather than economic utility.
However this is not what is commonly referred to as Reaganomics. The idea there was that lowering the tax rate will both help the economy and increase tax revenue. It’s counterintuitive, and like most counterintuitive ideas, was not borne out by reality. As evidence of this, we are now in the hole to the tune of over$25,000 per person.
That said, if we really did stick with the 70’s era 70% rate structure but closed the deductions anyway, I believe in THAT case we would have taken in perhaps less than we did in this situation, since the disincentives to make and invest money would be so great. So perhaps we needed a bit of Reaganomics but not $7 trillion worth!
For the benefit of those who aren’t familiar with the 16th amendment (the constitutional mandate the IRS claims as its authority to lay and collect the income tax), here it is:
"The Congress shall have power to lay and collect taxes on incomes, from whatever sources derived, without apportionment among the several States, and without regard to any census or enumeration."
Actually, there is no proof that the 16th amendment was ever properly ratified. There is only documentation of a handful of States haveing ratified it. But even if it was, the intent of the Congress that wrote it was not to create any new taxing authority, but to assure that “sources” of “income” would not be taxed. “Income” was defined, in four landmark Supreme Court decisions closely following the inseption of the 16th amendment, as corporate profit. If this is the case, no individual or individually owned business could have an income. The tax the IRS lays and collects from individuals is therefore a tax on sources, or gross revenues, which the 16th does not authorize.