Income tax; Flat tax; National Sales tax; No tax

TurtleDude said:

again you confuse your dislike for my philiosophy-which exalts independence and despises parasitic politicians who cater to envy and mob rule with lack of knowledge. It is common among the left to assume that disagreeing with welfare-socialist blather is due to factual mistakes rather than admitting that there is more than one world view.

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Suppose a bunch of Rich people want to promote a national sales tax to replace the Federal income tax. How do they try to persuade the public to support such a plan? Simple: Play with the arithmetic.

Earlier this month, the well-financed group Americans for Fair Taxation, based in Texas, kicked off a sales-tax campaign with a full-page advertisement in several large newspapers. It called for replacing all the main Federal taxes--personal and corporate income taxes, payroll taxes and the estate tax--with a 23% national retail sales tax.
[....]
According to the group's figures, at 1995 levels a new sales tax would have to raise $1.36 trillion to replace all Federal income taxes, payroll taxes and estate and gift taxes. Under its plan, the group says, taxable spending would be $4.6 trillion (after accounting for rebates to partly protect lower-income families). So, $1.36 trillion divided by $4.6 trillion would be the required sales tax rate. Fine, except that $1.36 trillion divided by $4.6 trillion is not 23%. It's about 30%.

It turns out that the group's purported 23% tax rate is misleading and hypothetical. It came up with that number by dividing the sales tax by the cost of a purchase plus the tax. So if the tax on a $100 purchase is $30, the group prefers to call it a 23% "tax inclusive rate" ($30 divided by $130). Ever hear of computing a sales tax like that?
The fact that the group's sales tax, even by its own figures, entails a 30% tax rate is only the beginning of the math problems.
The group's backup materials also assert that almost a third of its projected sales-tax revenue is supposed to come from taxes the Government will pay to itself.
Build a road, pay Yourself a tax.
Buy some planes for the Air Force, pay Yourself some more. And so on.

Unfortunately, that shell game won't work. Without these Phantom governmental tax payments, the sales tax rate would have to jump to 42% to break even.

A bit more digging reveals that a quarter of the remaining sales taxes are supposed to be paid on things like church services, Free care at Veterans hospitals and a variety of hard-to-tax financial services like Free checking accounts.
If we discount the taxes on these items, the sales tax rate would have to climb to an astronomical 56% to break even.

Apparently, the millions of dollars that Americans for Fair Taxation says it has spent on focus groups and polling have taught it an important lesson: giving people the real facts about a national sales tax is politically disastrous for its proponents. So the group is trying the only other available route: cooking the numbers.

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[........]Aside from the incredible complexity and intrusiveness of tracking every American's monthly income--and creating a de facto national welfare program--the FairTax does not include the cost of this rebate in the tax rate. As noted earlier, the FairTax is designed only to match current revenues and does not cover any increased spending that it may require. Since the rebate will cost at least $600 billion the first year, either federal discretionary spending would have to be cut by 60% or the rate would have to be 5 percentage points higher than advertised.

Rejecting all the Tricks of FairTax supporters and calculating the tax rate honestly--by including the higher spending that it mandates and by being realistic about what could actually be taxed--professional revenue estimators have always concluded that a national retail sales tax would have to be much, much higher than 23%. A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%.

In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed JUST to replace the income tax, Leaving the Payroll tax in place. But if evasion were high then the rate might have to rise to 49%.
If the FairTax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion).

I've emphasized problems with the FairTax rate because public opinion polls have long shown that support for flat-rate tax reforms is extremely sensitive to the proposed rate, with support dropping off sharply at a rate higher than 23%.
But there are also massive technical and administrative problems with collecting all federal taxes at the checkout counter and relying entirely on state governments to collect the federal government's revenue. - Among the problems: What possible incentive would the states have to be vigorous in their federal tax collections? What is to stop them from slacking off and giving their citizens a tax cut at federal expense? What about states with no sales taxes? What's to stop people from bypassing retail outlets and buying their goods from producers or at wholesale, tax-free?..."

Perhaps the biggest Deception in the FairTax, however, is its promise to relieve individuals from having to file income tax returns, keep extensive financial records and potentially suffer audits. Judging by the emphasis FairTax supporters place on the idea of making April 15 just another day, this seems to be a major selling point for their proposal. Yet all but six states now have state Income taxes. So unless one lives in one of those states, this promise is an empty one indeed. In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it.

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Boo Radley said:

Close loop holes in current system.

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mbig said:

This analysis 1998, but the economics are pretty much/remarkably the same in the recent analyses I will post below.

The 23 Percent Solution
NEW YORK TIMES OP-ED

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fredmertz said:

agreed. A flat tax with no loop holes. If you maintain a progressive income tax without loopholes, you will only increase the amount of tax fraud or mass layoffs (or both). The high-wage earners won't simply start paying more and give themselves a pay cut. They will compensate to maintain the lifestyle. You may disagree with their decision, but that is what will happen. And frankly, most of them have earned the position to make that decision for themselves.

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AlbqOwl said:

Honestly, to rein in a spendthrift Congress, I think we'll need a Constitutional amendment that restricts Congress's duties to a strict interpretation of what the Constitution dictates and b) otherwise prohibits any disbursement of taxpayer monies or any Federal policy that does not benefit all citizens, rich and poor alike, equally.

If we did that, we would immediately reduce the needs of the Federal government by a substantial percentage and thus reduce the amount of revenues necessary to fund it, and we eliminate 99% of the corruption that is now built into the system and that is demonstrated in those who dispense government benevolence and those who receive it.

It would require easing into it to avoid unnecessary pain and suffering, but we sure as heck could turn it around and start the process.

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haymarket said:

Do you folks really and truly believe that Congress appropriates money for things that they believe are NOT authorized by the Constitution?

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Boo Radley said:

No. No loop holes limits the ability for fraud. Fraud can be committed with any system, including a flat tax. With both, no loop holes, likely no deductions, the fraud would be in reporting income.

And the wealthy do this nayway, just as they would with a flat tax. Nothing there would change.

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haymarket said:

Do you folks really and truly believe that Congress appropriates money for things that they believe are NOT authorized by the Constitution?

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fredmertz said:

Fraud can be committed with any system. And yes, it will be more difficult with a 'no loop holes system'. My point isn't that there will be more fraud because it is easier. My point is that you are giving high income earners incentive for fraud (by cutting their pay) and incentive to lay off workers so that they maintain their net lifestyle. Which they will inevitably do. i.e. If you have 10 workers and make $150k net dollars after taxed say 25% (so a pay of $200k gross) and the government forces you to pay another 10% of your income to them, your net pay is now $130k. So your net pay has decreased 13.33% from a 10% tax hike. Ouch. So how do you make back that 13.33%? Perhaps you put more of your own sweat and blood into your job again the way you did when it first started and lay off one person. Perhaps you fire one person and distribute their work among the others. Perhaps you start asking for cash payments and keep your profits off the books, if you are so inclined. Such a drastic action as your suggestion will have consequences. The people of the US need to admit that every plan has consequences. Including mine. I know what they are. We need to discuss the consequences and figure out which is the higher priority to each of us. Denying consequences as you are will not get us any closer to finding the answer.

And your broad generalization on the wealthy committing tax fraud is indicative that you are not trying to find a reasonable answer. You're trying to bicker among partisan lines.

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Boo Radley said:

Anyone can use any reason to commit fraud. It is a lame excuse to sugegst a proggressive tax encourages the wealthy to commit fraud. And I gave no broad generalization. It is a fact that we have fraud now, and fraud committed by the wealthy. Crime is not limited to one economic class. It just seems to me you're trying to excuse crimes by those with wealth.

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haymarket said:

fredmertz (great screen name by the way)

Almost everybody sees it exactly the way you would hope they see it. Almost everyone believes that their interpretation of the Constitution is the correct one - or "straight forward" as you put it.

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fredmertz said:

I'm not saying that a progressive tax encourages the wealthy to commit fraud. I'm suggesting that your tax solution will encourage the wealthy to commit fraud. I'm speaking in relative terms. Relative to where we are now (a progressive system with loopholes) to the system you suggest (a progressive system without loopholes) will significantly impact the net income on the wealthy. The result is an incentive for fraud. In no way at all am I saying that they have an excuse for this fraud or that they are justified in committing fraud. I'm not saying that it will be easier to commit fraud. Please read what I'm writing. I'm spending more time explaining what I'm NOT writing because you're jumping to conclusions that I'm not trying to make. I'm just explaining what the consequences of your plan are.

And you did write "and the wealthy do this nayway, just as they would with a flat tax. Nothing there would change." -- when I read "the wealthy" I assumed you meant all of the wealthy since you didn't have a qualifier. This is the logical conclusion. I cannot assume your qualifiers; you must state them. If you meant 'some' so be it. Correct yourself. Don't deny what you wrote. Explain what you meant - it's fine. An honest mistake. I understand now. Just because we're on different sides doesn't mean that I'm trying to attack you. I simply misunderstood what you meant because you didn't write what you actually meant.

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Boo Radley said:

I rarely ever mean all. I merely mean that this is done now and that won't change. I see no reason that anyone should comit fraud, regardless of impact. At all levels we see an impact for anything done, but this doesn't excuse breaking the law.

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fredmertz said:

On this, we definitely agree. If it is law, then abide by it. If you want change, elect different representatives, is my opinion. But simply because we both agree that they shouldn't commit fraud doesn't mean that they won't. I'm a realist at heart. I'm not completely against a progressive tax system without loopholes, assuming that the rates are lowered. The rich are paying (I've read multiple figures, but this is the most recurring) about 18% actual federal income tax after loopholes. That's not enough, IMO. Let's take out the loopholes and drop the written tax bracket, but put it higher than the current actual rate of 18%. Also, the bottom 48% aren't paying federal income taxes at all. They need to be. It doesn't have to be a lot, even 5% would suffice. But they need skin in the game, IMO. They don't get the benefits of government for free. Nothing is free. It's my belief that we can't tax one person and not another within the same country. I have a hard time accepting progressive tax as it is. But a reformed progressive tax would be a nice compromise. But it has to be realistic. We need everyone to see the consequences of the extremes we suggest.

In my ideal world a flat tax would be in place. But moving to a flat tax from where we are now would be catostrophic. The hurt it would put on the lower classes initially wouldn't be worth the long term 'fairness' that I think it creates. And in the long term, I think the lower classes would rise again. But again, the cost short-term is people starving and I understand that. We cannot just jump into a flat tax.

We can have a compromise and we must. If we take too much from the poor, they starve (if not literally, then figuratively). Too much from the rich and they will decrease costs (wages) to maintain income and the economy starves and the long term consequences will be dire. It needs to be balanced.

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Boo Radley said:

I believe if they wouldn't now, they won't under any system. And if they would under a progressive tax without loop holes, they would under a flat tax. Either way they pay more actual dollars, and would resist doing so.

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fredmertz said:

Ahhh, I see your point. That's another reason for taxing the lower 48%. Misery loves company. I think if I made $200k and my taxes were increased, but the $15k earner who doesn't produce as much still didn't have to pay taxes, then I'd be very frustrated. But if everyone has to pay something and a little more than before, then it's more a situation that the country is in and we all need to do our part. The main objection from the folks on my side of the line is fairness. If rich folks are paying more so that the poor doesn't have to, then there will be much more objection. But if we're all paying more because the nation is in trouble, then that's what we have to do.

It won't please everyone, like you said and there will be some resistance. But this is the way of least resistance that I can think of to get to the same goal we all have: get out of debt!

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Boo Radley said:

I won't argue that some won't feel that way, but I wouldn't. I make more than some, but don't need those who make less paying what I pay. I think I'm not alone either. But I do believe logically that those who benefit most and can pay more, which includes me, should.

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fredmertz said:

In my ideal world a flat tax would be in place. But moving to a flat tax from where we are now would be catostrophic. The hurt it would put on the lower classes initially wouldn't be worth the long term 'fairness' that I think it creates. And in the long term, I think the lower classes would rise again. But again, the cost short-term is people starving and I understand that. We cannot just jump into a flat tax.

We can have a compromise and we must. If we take too much from the poor, they starve (if not literally, then figuratively). Too much from the rich and they will decrease costs (wages) to maintain income and the economy starves and the long term consequences will be dire. It needs to be balanced.

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TheGirlNextDoor said:

Any ideas and/or suggestions on how you believe this could be done without catastrophic results?

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