Various kinds of Tax reform: Bush's 2nd term

[Malodorous]

@Sam

I would have thought that all sales tax plans would have a way to credit back producers for intermediate products, or else you get all kinds of distortions in pricing, depending on the exact mix of labor, number of steps in construction, etc.

They do have a way to credit back producers. The NST does this simply by not taxing anything but the end product, so intermediate products aren’t taxed at all.

The VAT does this by taxing backproducers for only the value they added to the product, not the entire value of the product when it leaves their hands (as you have in your first example). The backproducer then presumably passes this tax to the person who buys the intermediate product from him. The end result is the tax collected by the gov’t and the tax paid by the final buyer are the same as it would be if they had just used a NST of the same rate.

Say a product goes through one back producers and a retailer before it gets in your hands. Each producer and the retailer adds a constant amount J to the value of the product.
The enters the chain at price A.

Without a tax the value of the final produt will be:
A+J+J=A+2J
And the gov’t gets nothing

With a national sales tax, the final value will be
A+J+J+Tax
Where the tax is simply 10% of the final value of the product, that is:
(A+J+J)*.1
So we get a final cost of
(A+J+J)+.1(A.+J+J) = 1.1(A+2J)
The end consumer ends up paying 10% extra, which the retailer passes to the gov’t.

For the 10% VAT, the price paid by the back producer is:
A+Tax where the Tax is 10% of A, or .1A
the guy that provided A passes the tax on to the gov’t and this first producer adds a value J.

The retailer pays:
A+.1A+J+Tax
where the tax is 10% of the value added, or .1J, giving us
A+.1A+J+.1J
and the first producer passes the .1J to the gov’t and keeps the .1A to reimburse him for the tax he paid on the original product (A).

Finally, the retailer adds his value J and charges the extra tax .1J to the final consumer for the value he’s added, meaning the final consumer pays.
A+.1A+J+.1J+J+.1J = 1.1(A+2J)
and the retailer passes on .1J in VAT to the gov’t, and gets to keep the .1A+.1J to reimburse him for the cost of the taxes the first producer (and indirectly, the person that produced A) charged him.

Also notice that the gov’t gets .1(A+2J), the same amount as if we had a simple NST, the final buyer ends up paying for all this tax, and all the backproducers are reimbursed.

[Malodorous]

Sorry about that hideous double posting. I seemed to have managed to post a half finished, un-edited version of what I wanted before posting the correct version

[DrDeth]

@Sam Stone

Man, all these horror scenarios about a vat… I guess the people talking about all these ‘problems’ haven’t noticed that most of the world has a VAT already. Why not simply look to see what their experience has been?

1. Administering the tax is not hard at all. As a business owner, I would simply keep track of all the tax I paid out for expenses, and the tax I collected. Subract expenses from collections, and send the rest to the government. I found it easier to keep track of than income tax.

2. The underground economy is a problem. Especially in the services industry. Often, when you hire a private contractor to work on your home, you’ll get two prices - a ‘cash price’, and a price if the transaction has to go on the books. If you have a 25% VAT, you’ll see a LOT of tax avoidance in industries where accounting is shoddy, like construction. But then, they avoid income taxes now by doing the same thing. But what a VAT would stop would be the massive tax avoidance that goes on everywhere else.
   Another problem with implementing a VAT in the U.S. is that it would be a shock to the economy, because the economy is already distorted by tax loopholes and incentives. Remove them all at once, and you’ll create problems. For example, in the U.S. mortgage interest on a private residence is tax deductible.

Therefore, the way to implement a VAT would be on a gradual basis.

. A truly flat tax with no loopholes would make the tax system more efficient and remove the distortions created by a complex tax code.

Although keeping track of the tax doesn’t seem that difficult, in CA the BoE and it’s regulations & enforcement is a problem. The enforcement is worse that anything you could dream about with the IRS.

Underground economy is a problem there with a Vat or only 7%. Imagine if that tax was 30%? The problem would increase tenfold.

Shock to the economy? Damn straight- it would drive many homeonwers here in Silicon Valley into bankrupty.

I more or less agree with you about you last comments- if the USA insitiutued a VAT, they could use that the replces the Income tax of Families with income under $50000. In other words, they could increase the “Standard deduction” and the exemption allowance so that those in the lower Middle class would have a postcard-sized Tax return, and owe nothing. Much less would be taken out of your paycheck by with-holding. We could get rid of that stupid Earned Income Creidt, perhaps also. Note, yes, under this system, basicly the first "x’ amount that everyone pays in income tax would be replaces by a Sales tax. So, yes, rich people woudl pay less- but the working poor would pay nothing in Income Tax.

But back to your first line- there is something telling there. Sure, I agree that cutting off the bottom of the Income Tax and replacing that with a Sales or VAT woudl be disruptive. But no industrialized “Western” nation has completely REPLACED it’s income tax with a VAT or similar. The huge complaince problems with making the Sales tax 30% is something we really can’t forsee. I think that a complet change-over woudl be disasterous. For one thing- it would hemmorrage retail cash out of the nation as dudes crossed the border to shop. Then- Foriegn Tourism to America would dry up in a flash. A whole industry- dead.

As to that figure of “The fair tax proposers estimate that the total cost of complying with the filing of income tax returns to the private sector is in excess of $250 billion annually*”- that’s bushwa. First of all, part of that cost is simply keeping the sort of GAAP books and records that every Corporation needs to have to satisfy non-tax regulators and it’s shareholders. Next- most States have an Income tax- which would NOT be replaced by the “Fairtax”. Thus the cost of tax compliance would be the same. There would be no savings. And no - they couldn’t drop the STate Income tax and replace THAT with an even higher sales tax- that would make the sales tax burden almost 40%!! :eek:
The “Fairtax” is a really, really stupid idea.

[bup]

@Sam Stone

Man, all these horror scenarios about a vat… I guess the people talking about all these ‘problems’ haven’t noticed that most of the world has a VAT already. Why not simply look to see what their experience has been?

Most of the world has a VAT and an income tax. Bush wants a national sales tax to reduce or eliminate income tax. Somebody who wants lower taxes in the US (why do you care, anyway?) shouldn’t invite everybody to look at how the rest of the world does it - most of the world has higher taxes than the U.S.