Income Tax vs National Sales Tax

  • tongun18

    Posts: 593

    Oct 26, 2010 4:43 AM GMT
    What are your guys' thoughts on replacing the US Income Tax with a national sales tax? For purposes of this discussion we'll use the sales tax as defined by the Fair Tax Act as introduced by Rep. John Linder. You can read up on it here:

    http://en.wikipedia.org/wiki/Fair_Tax_Act

    I recall seeing a study done by (I think) Princeton's School of Economics. (I'm hard pressed to relocate the study). In the study the school surveyed 500 Asian and European based companies and asked how they would respond to the US changing from an income tax to a sales tax. 400 companies said they would build their next factory in the US, 100 said they would relocate the head-quarters to the US. Right there, without altering labor/wage law, environmental law, or tort law, we've (presumably) created a huge boost to our economy by creating jobs and realigning trade imbalances. Not to mention the countless man hours and money that would be saved by not having the monitor and enforce the current convoluted system. I only see two potential problems: 1) if the sales tax is not at least revenue neutral with regard to the income tax the deficit will get worse; 2) it would take away the governments ability to offer tax incentives, which may not be an entirely bad thing but it will hurt the housing market (no more tax breaks for mortgage interest) and it would hurt charitable donations (no more tax deductions for those.)

    So really, shouldn't this be something we take a closer look at?

    I think this topic is obscure enough to keep it from devolving into petty name calling or mud slinging like some of the other politically themed posts on here but just in case: stay on topic and keep it civil and respectful!
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    Oct 26, 2010 4:57 AM GMT
    When I visited Oregon for an extended stay, I was perplexed that they had a state income tax, but no state sales tax.

    I thought it odd because here I was, a visitor, spending money, and I wasn't being taxed. But those who lived there, paid taxes.

    I thought it would make sense to have a tax on consumption, as opposed to the creation of wealth. Taxing consumption would bring in tax revenues from whomever was consuming no matter whether they were residents, citizens, or whatever.

    I would support a change to a National Sales Tax of some kind, and get rid of the Federal Income Tax.

    Update: A Value Added Tax, might also be an alternative solution as well.

  • tongun18

    Posts: 593

    Oct 26, 2010 5:16 AM GMT
    jprichva saidA national sales tax is the single most regressive tax that can be imagined. The burden falls most heavily on those who spend nearly all of their income--the working poor. The rich spend a tiny percentage of theirs.

    If you really want to know who'd benefit by it, check out who's been pushing the idea for years (Steve Forbes).


    The regressive nature of the tax would be offset by a monthly "prebate", people would get, in advance, the amount spent on the tax based on the spending habits of the lower class of the prior year. The lower classes could potentially end up not paying any taxes.

    *Edited to include excerpt from Wikipedia article*

    Under the FairTax, family households of lawful U.S. residents would receive a "Family Consumption Allowance" (FCA) based on family size (regardless of income) that is equal to the estimated total FairTax paid on poverty level spending according to the poverty guidelines published by the U.S. Department of Health and Human Services.[3] The FCA is a tax rebate (known as a "prebate" as it would be an advance) paid in twelve monthly installments, adjusted for inflation. The rebate is meant to eliminate the taxation of household necessities and make the plan progressive.[5] Households would register once a year with their sales tax administering authority, providing the names and social security numbers of each household member.[3] The Social Security Administration would disburse the monthly rebate payments in the form of a paper check via U.S. Mail, an electronic funds transfer to a bank account, or a “smartcard” that can be used like a debit card.[3]
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    Oct 26, 2010 12:50 PM GMT
    The "Fair Tax" is like Bush's Blue Sky Initiative, a complete lie that will - as J pointed out - hit poor and working poor families the hardest while the rich would get richer. Income inequality is the single greatest threat to our country, so anything that would increase it cannot be countenanced.
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    Oct 26, 2010 1:20 PM GMT
    The idea is touted by the rich and those they have paid to speak for them.
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    Oct 26, 2010 1:52 PM GMT

    We have a national sales tax - the GST and we have provincial sales tax called PST. Now our right-wing provincial governent has merged them by handing over the PST to the feds, so it is now called the HST (H for harmonized). 12% tax on everything except food.

    Electricity and natural gas have already been enviro taxed by the province so there is a partial credit to offset 7% of the 12% tax on those bills. The economy took a huge hit, as now new homes are taxed 12%. That's a lot of money.

    You have to be very very poor to get rebates for this tax, and you don't get it all back.

    -Doug

    If a national sales tax were to replace income tax I think it would have to be a lot higher than 12%, and wouldn't that mean a lot of consumers would start spending less? Since implementing the HST trips to the US and Alberta for shopping have exploded and so has the number of cars at the local Walmart parking lot. Now when we drive by it's jammed.
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    Oct 26, 2010 3:37 PM GMT
    Here in New Zealand we have had a VAT since the 1980's. At the time it was instituted a small core group opposed to the tax who were so-called "supporters of the poor." They in effect believe everyone should pay tax except the poor. Some special right I suppose.

    I truly have no basic problem with the poor not being burdened by a government tax. I do however think that everyone, even the poor, should pay some degree of tax. After all, they otherwise are liviing on the largess of those who for whatever reason have been more fortunate. What a sad state.

    It is ironic that so many whom are so focused on the poor, dont seem to give a damn about anyone else. This is what many in New Zealand see in Barack Obama. A man with a single focus who really does not give a damn about those creating that "largess." It's sad. He could have been a great President.
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    Oct 26, 2010 4:08 PM GMT
    ElysianReport saidHere in New Zealand we have had a VAT since the 1980's. At the time it was instituted a small core group opposed to the tax who were so-called "supporters of the poor." They in effect believe everyone should pay tax except the poor. Some special right I suppose.

    I truly have no basic problem with the poor not being burdened by a government tax. I do however think that everyone, even the poor, should pay some degree of tax. After all, they otherwise are liviing on the largess of those who for whatever reason have been more fortunate. What a sad state.

    It is ironic that so many whom are so focused on the poor, dont seem to give a damn about anyone else. This is what many in New Zealand see in Barack Obama. A man with a single focus who really does not give a damn about those creating that "largess." It's sad. He could have been a great President.


    Does New Zealand only get Fox "News" for their information? That's the only explanation for this bizarre screed.
  • tongun18

    Posts: 593

    Oct 26, 2010 5:29 PM GMT
    @Christian73
    I was looking for something a bit more analytical. You dismissing the entire thing as a lie is neither helpful nor productive. The article summarizes the Act as it's been submitted for consideration to the House. Where precisely is the lie? What provision do you specifically have a problem with and why?

    You're correct, Jprichva did point out a basic sales tax is regressive. But, again, as the article indicates and as I've pointed out, the Fair Tax Act takes that regressive nature into consideration and takes steps (via a monthly prebate) to make the tax progressive.

    What of the fact that the rich would no longer have any tax loop-holes to exploit for tax evasion purposes? That and their secret off-shore bank accounts would no longer serve their purpose.


    @Lostboy
    As far as I'm aware, the idea is not really being touted by anyone, save for Rep. Linder. The issue isn't being seriously discussed on a national level.

    @meninlove
    Canada has the HST on top of an income tax! Which probably contributed to the severity of the economic downturn that occurred when the HST was implemented. People's wages were being taxed and then they had to pay even more taxes in the form of a sales tax. I'm trying to explore the possibility of adopting one in lieu of the other.

    @Elysian
    You bring up a good point. VATs (while not quite the same thing as a sales tax) are implemented in countries throughout Europe, Asia, and in places like Canada, Australia, and New Zealand. If they can make it work with out grinding their poor into oblivion, why can't the US? India has VATs and they have one of the fastest growing middle classes in the world.
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    Oct 26, 2010 6:19 PM GMT
    southbeach1500 said
    Lostboy saidThe idea is touted by the rich and those they have paid to speak for them.

    I am neither rich nor do I pay anyone to speak on my behalf.


    Well, you've claimed to be rich several times, so why the change?
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    Oct 26, 2010 6:25 PM GMT
    Wow, Southbeach, you CAN stick to a subject! I was expecting you to start debating about uncut vs. cut dicks. Good job.
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    Oct 26, 2010 6:29 PM GMT
    southbeach1500 said
    Christian73 said
    southbeach1500 said
    Lostboy saidThe idea is touted by the rich and those they have paid to speak for them.

    I am neither rich nor do I pay anyone to speak on my behalf.


    Well, you've claimed to be rich several times, so why the change?


    I haven't, though I've asked what RJ members define as "rich."


    You have stated several times that the expiration of the Obama tax cuts would increase your taxes and those on your business. Based on the fact that those taxes only effect the top 2% of income earners, you've essentially said you earn more than 98% of Americans. In other words, you're rich.
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    Oct 26, 2010 6:33 PM GMT
    southbeach1500 said
    ElysianReport said
    I truly have no basic problem with the poor not being burdened by a government tax. I do however think that everyone, even the poor, should pay some degree of tax. After all, they otherwise are liviing on the largess of those who for whatever reason have been more fortunate. What a sad state.


    Yep. Believe it or not, 48% of households here in the USA pay absolutely no Federal income tax. That is just not right. At the very least, as symbolic payment of $100 should be required.


    ElysianReport said
    It is ironic that so many whom are so focused on the poor, dont seem to give a damn about anyone else. This is what many in New Zealand see in Barack Obama. A man with a single focus who really does not give a damn about those creating that "largess." It's sad. He could have been a great President.


    100% correct.


    It's not "for whatever reason", in most cases it's the result of government policies and extensive deregulation.

    And hedge fund managers pay only 15% on the vast majority of their incomes, often in the billions, because it's "capital gains." What's the greater injustice?

    Your analogy only works when you leave out all the other federal taxes even the poorest among us pay.Like cigarette taxes.
  • tongun18

    Posts: 593

    Oct 26, 2010 6:52 PM GMT
    @southbeach
    Nearly half of US house holds do not pay the Federal Income tax? You need to substantiate that, otherwise it will be regarded as BS. And when I say substantiate it I mean point to some IRS or other government document illustrating your point--no hearsay, no conjecture.

    @christian
    I'll refer you to my previous post and ask you to respond, if you're so inclined.

    @southbeach and christian
    I asked from the beginning that we stay on topic and keep things civil. I don't care if southbeach is or is not rich and I don't care if other RJ'ers have asked you about it, it's irrelevant to the topic at hand. Either offer something constructive to the thread or take whatever personal bickering you've got going on somewhere else.
  • tongun18

    Posts: 593

    Oct 26, 2010 7:50 PM GMT
    southbeach1500 said

    Here's a report from CBS news via the Associated Press - hopefully they are reputable enough for you:...


    Yes, that's good. Thank you. I would respond with two things:

    1) Those are projected numbers, the IRS has not released actual data yet and certainly would not have done so before April 15; and

    2) It would not be a stretch for a reasonable person to think you were stating that half of Americans do not pay the Federal Income Tax on a continual basis, based on the way you wrote that post, instead of it being a one-time, extreme occurrence.


    At any rate that's not really what we're discussing here.
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    Oct 26, 2010 9:26 PM GMT
    tongun18, how much would you say the sales tax should be if it replaced income tax? And how would you avoid a surge in underground markets where no sales tax would be collected?

    -Doug
  • tongun18

    Posts: 593

    Oct 27, 2010 7:06 PM GMT
    meninlove said tongun18, how much would you say the sales tax should be if it replaced income tax? And how would you avoid a surge in underground markets where no sales tax would be collected?

    -Doug


    How much would the sales tax be?
    The sales tax rate, as defined in the legislation for the first year, is 23 percent of the total payment including the tax ($23 of every $100 spent in total--calculated similar to income taxes). This would be equivalent to a 30 percent traditional U.S. sales tax ($23 on top of every $77 spent--$100 total, or $30 on top of every $100 spent--$130 total). After the first year of implementation, this tax rate would be automatically adjusted annually using a formula specified in the legislation that reflects actual federal receipts in the previous fiscal year.

    Now that sounds a bit high to me but if the market couldn't bear it, we would see sales dip for that fiscal year and the following year the tax would be adjusted to compensate. Though keep in mind, even if a household is only bringing in $35k per year, not having an income tax will free up a few thousand dollars per year (and that's not inclusive of the "prebate" that would be given).

    How would you avoid a surge in underground markets where no sales tax would be collected?
    First, lets establish what will be taxed. The tax would be levied once at the final retail sale for personal consumption on new goods and services. A good would be considered "used" and not taxable if a consumer already owns it before the FairTax takes effect or if the FairTax has been paid previously on the good. Exports and intermediate business transactions would not be taxed (which would boost US competitiveness with other countries), nor would savings, investments or education tuition expenses as they would be considered an investment rather than final consumption.

    Now, an overwhelming majority of retail purchases occur in major retail outlets which are very unlikely to evade paying the tax and risk losing their business license. The article indicates (and cites) that 85.7% of all retail sales are made by 92,334 businesses (approximately 3.6% of American companies). Pretty much every business keeps books on inventory and sales, corporations are required to do so to keep their shareholders informed. Auditing them to ensure compliance would be no different then it is now for the income tax.

    Even though it's a national sales tax, the mechanisms for enforcement can be left to the states. The legislation envisions states' own agencies would monitor and audit business within the state. .25% of the taxes collected would be retained by the state in order to create an incentive for the state to maximize collections.

    Given the above, I don't think an underground market will be too big an issue. One would likely arise, but I don't think it would be any worse then the tax evasion that occurs now with the income tax.

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    Oct 27, 2010 7:15 PM GMT
    I know this may come as a shock to many but I am against flat tax or certain so-called "fair taxes" because it actually results in being inherently unfair for the poor.

    I think people should only start paying taxes after a certain amount and that the poor should get a negative tax increase. It would remove a lot of the welfare bureaucracy and abuse.
  • tongun18

    Posts: 593

    Oct 27, 2010 7:35 PM GMT
    mocktwinkie saidI know this may come as a shock to many but I am against flat tax or certain so-called "fair taxes" because it actually results in being inherently unfair for the poor.

    I think people should only start paying taxes after a certain amount and that the poor should get a negative tax increase. It would remove a lot of the welfare bureaucracy and abuse.


    ....I'm pissing in the wind here, aren't I? No one is actually looking at the article or my posts, are they?

    Under the FairTax, family households of lawful U.S. residents would receive a "Family Consumption Allowance" (FCA) based on family size (regardless of income) that is equal to the estimated total FairTax paid on poverty level spending according to the poverty guidelines published by the U.S. Department of Health and Human Services. The rebate is meant to eliminate the taxation of household necessities and make the plan progressive.

    Not to mention the fact that the tax is also progressive on consumption--the more things you buy, the more you pay in taxes! Low income homes do not consume that much as compared with higher income homes.

    If anything, its possible the middle class (households making between $50k - $200k) will shoulder a little more of the tax burden, but that's not entirely certain.
  • Timbales

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    Oct 27, 2010 7:56 PM GMT
    I like the idea of a sales tax only, but I think it should apply across the board for anything item being purchased by individuals, businesses and not for profits.
  • tongun18

    Posts: 593

    Oct 27, 2010 8:11 PM GMT
    southbeach1500 saidWell, I've been reading everything you've posted.

    Count me in on the FairTax!


    Thanks southbeach. I didn't start out as a proponent of the Fair Tax, I wanted genuine discussion/debate about it... It's definitely something I would like us as a nation to explore further now though.
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    Oct 27, 2010 8:23 PM GMT
    tongun18 said
    mocktwinkie saidI know this may come as a shock to many but I am against flat tax or certain so-called "fair taxes" because it actually results in being inherently unfair for the poor.

    I think people should only start paying taxes after a certain amount and that the poor should get a negative tax increase. It would remove a lot of the welfare bureaucracy and abuse.


    ....I'm pissing in the wind here, aren't I? No one is actually looking at the article or my posts, are they?

    Under the FairTax, family households of lawful U.S. residents would receive a "Family Consumption Allowance" (FCA) based on family size (regardless of income) that is equal to the estimated total FairTax paid on poverty level spending according to the poverty guidelines published by the U.S. Department of Health and Human Services. The rebate is meant to eliminate the taxation of household necessities and make the plan progressive.

    Not to mention the fact that the tax is also progressive on consumption--the more things you buy, the more you pay in taxes! Low income homes do not consume that much as compared with higher income homes.

    If anything, its possible the middle class (households making between $50k - $200k) will shoulder a little more of the tax burden, but that's not entirely certain.


    Okay, I see what you're saying now...
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    Oct 27, 2010 10:10 PM GMT
    My primary problem with a "Fair Tax" is that it would inhibit consumption in an economy that is 3/4 based on consumption. The reason the economy hasnt recovered thus far is because there's been no consumer demand.

    Beyond that, I don't see how it would be progressive enough to counter the historic economic inequality that is at the root of our lack of consumer demand.
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    Oct 27, 2010 11:08 PM GMT
    Although we love to hate our GST (and its successor, the HST) it was the Conservative government of Brian Mulroney who instituted it, which allowed subsequent (Liberal) governments to balance the budget and post repeated surpluses. despite extending the social safety net.

    Although every Party pretends they would repeal it, even Paul Martin ( who was the Liberal Finance Minister) admitted the GST is essential to generating the kind of revenue stream that kept our economy strong enough to weather the recession as we did.

    Harper reduced the GST a couple of percentage points and the resulting shortfall led to immediate deficits.

    So much for the myth of the Conservative Party being better financial managers.
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  • tongun18

    Posts: 593

    Oct 27, 2010 11:52 PM GMT
    Christian73 saidMy primary problem with a "Fair Tax" is that it would inhibit consumption in an economy that is 3/4 based on consumption. The reason the economy hasnt recovered thus far is because there's been no consumer demand.


    That's true, we are a consumer driven economy and consumer demand has been lackluster since the economy collapsed. I would argue that consumer demand is down because unemployment is so high though. Some of those that do have jobs are having to work below their normal skill set/pay level, further depressing normal wages. If the study conducted by Princeton is accurate (see my initial post), a flood of manufacturing/industrial jobs would return to the US. More jobs means more income and more income means more spending.

    And don't forget, not having to pay an income tax would free up several thousand dollars per year for median US households. The additional money would make it easier to spend.

    Also, another reason for unemployment being high is that small businesses are still having a hard time accessing the credit required to expand their operations and higher more people. It's estimated that there is about $11 trillion (yes, with a T) in foreign accounts for "tax" purposes. Switching to a sales tax would render all of those off-shore accounts obsolete and could cause most, if not all, of that money to be repatriated. That money would then be available to US capital markets, melting the credit freeze while bringing down interest rates, making it easier for small business to obtain the needed credit!

    I'll grant that if the tax is too high it will definitely hurt consumer spending. This is remedied by the fact that the rate changes based on the previous years sales receipts. If spending goes down so does the tax.

    Christian73 saidBeyond that, I don't see how it would be progressive enough to counter the historic economic inequality that is at the root of our lack of consumer demand.


    I'm not sure what more I could say to show that Fair Tax makes the sales tax progressive. The more you consume the more you pay in taxes (progressive). The middle class consumes more then the lower class and the upper class consumes even more then the middle class, ergo the bulk of the tax burden would still rest with the middle and upper classes. And the "prebate" offsets the regressive nature of the tax based on income.

    I would ask that you take a moment and review what you wrote though. If the US has indeed suffered historic economic inequality, it has done so under the yolk yoke (yea, the US did it under an egg, lol) of the income tax. Why then would you not want to change that?

    **Edited to include the alterations above and include the entry below.**

    Christian, I have to clarify that I agree with you, the growing gap between rich and poor in this country is unacceptable and the US should be following policies that strengthen the middle class. A strong middle class equates to a stronger and more stable economy and a more equitable society and that benefits everyone. However, I would also say, while you have declared your disdain for regressive tax systems, you have not put forth any evidence that supports your assertion that: a) the Fair Tax as put forth by Rep. Linder is a regressive tax; and b) that the Fair Tax would exacerbate the rich/poor divide.