The National sales tax debate

[GrantDawg]

Who is for it and why? Reports are saying Dennis Hasserts' new book is going to outline the Republican tax agenda after the election: dismantle the IRS. Several of the canidates locally running for congress are for a national sales tax. I am not against radically reforming tax laws, but I've got to say I don't like the idea of a national sales tax. I can have my mind changed on the issue though, so please those who support it give agruements on why this would be the best tax solution.

[Buzzbee]

GDawg - In the thread I link below, there is a lot of discussion about taxation and various policies/methods etc. Around the middle of page two the discussion turns towards flat vs. progressive sales tax and eventually meanders onto the subject of the national sales tax.

IIRC, I posted several things about the NST that you might find beneficial. I really don't care to re-hash when I can re-link.

SkyDog's thread regarding estate taxes (http://dynamic2.gamespy.com/%7Efof/forums/showthread.php?t=23007&highlight=national+sales+tax)

[Crapshoot]

well, on the one hand, us economists would love a purely consumption based taxation system- one that by not taxing savings and investment, provides a greater incentive to do just that, which should lead to a more efficient system and a more productive one- you simply work with a GST, so to speak.

The arguements against it is that it would be horribly regressive in nature, especially if it were applied wholeheartedly in basic foodstuffs and clothing, for example. India right now for example, is trying to implement a general sales tax system that cuts through the red tape, but is looking for a way (Im not certain on this) to reduce its impact on certain items, which is what gives way to the red tape itself- its a delicate balance. Im fairly right wing as economics go, but even I believe that a basic "progressive" income taxation system makes sense- albeit at lower rates. I think a general sales tax based system would never have a prayer in hell of passing.

[sabotai]

I can have my mind changed on the issue though, so please those who support it give agruements on why this would be the best tax solution.

Well, in theory, rich people would pick up more of the slack. I doubt Paris Hilton pays income tax (at least before the FOX show, if they paid her). Yet she buys very expensive things. Part of the cost of those expensive luxeries will now go in a tax for the federal government. CEO's who dodge income tax, and buy expensive homes and boats will not put money into the federal government.

That way, families with 2 kids and make a combined income of $40,000 will probably not spend much towards the government seeing as they are likely to buy mostly things that go under "necessity".

In a way (in theory mind you), it's a more liberal solution than conservative, since it seems to push the burdon onto rich people more than the middle-class and lower. Rich people who buy things, anyway.

[QuikSand]

The simplest argument for it goes something like this:

Taxes, among other things, create a change in incentives.
Tax something heavily, and you reduce people's incentive to do it.
Current tax system depends heavily on taxing income, especially earned income.
All things being equal, we'd rather not weaken the incentive to earn income.
A tax system based on consumption would take some burden off income taxes.
A tax system based on consumption would also provide more incentive to save and invest.

That's the nutshell version, I think.


At its core, though, the most challenging argument is that of tax incidence -- who pays the taxes. Income-based taxes allow a much greater degree of either neutrality (where all people pay taxes as roughly the same share of their income/ability to pay) or progressivity (where higher income people pay a greater share of their income/ability to pay) than do consumption-based sales taxes. There is debate as to whether this is a good thing... but many would argue that this is the biggest problem with consumption taxes, that they fall disproportionately on the backs of lower and middle class citizens (who almost universally spend a greater share of their income on taxable goods than other income strata).


Hope that's a fair starting point.

[sabotai]

(who almost universally spend a greater share of their income on taxable goods than other income strata).

Really? Well, I guess proportional to their income they would, but there are a lot of things that are not taxed, like food. Don't you thin that lower and middle class people are spending more of their wealth, proportional to their income, on food and other untaxable things as well?

Considering that rich people could easily afford to throw a lot of their earned income into a bank account while low and middle class people basically need to spend most of their money on things to support their family and survive, I guess low and middle class people spend more than rich people, proportional to income, on everything. Tax and untaxed items.

[duckman]

Really? Well, I guess proportional to their income they would, but there are a lot of things that are not taxed, like food. Don't you thin that lower and middle class people are spending more of their wealth, proportional to their income, on food and other untaxable things as well?

Considering that rich people could easily afford to throw a lot of their earned income into a bank account while low and middle class people basically need to spend most of their money on things to support their family and survive, I guess low and middle class people spend more than rich people, proportional to income, on everything. Tax and untaxed items.
Just for correction, most states don't tax their food items. Oklahoma on the hter hand.........:rolleyes:

[Ksyrup]

When I lived in Georgia, the state taxed food items. I'm not sure if they still do or not (I moved in 1990).

[sabotai]

Once again I learn that other states operate like foreign countries sometimes...

They tax food!? Why is rioting not occuring?

[Ksyrup]

I just looked it up, and it appears that Georgia phased their food tax out in the late 90's.

[QuikSand]

There are still a handful of states that tax food under their sales taxes - but it's a distinct minority anymore. (Additional variability occurs with things liike prescription and non-prescription medications, and even clothing - which some states actually exempt) All in an effort to try to reduce the obvious regressivity of these taxes. (Yes, I know there are fans of regressivity in our midst - but there is something close to a public consensus that it is bad public policy)

[sabotai]

Well, all taxation is bad policy... (I HAD to say it, ok? :D)

But taxing things that people NEED is VERY bad policy.

[kcchief19]

I think supporters of a national sales tax will say what Quik said -- higher sales taxes leading to lower sales taxes will result in higher savings and investment. I think they would also say that high-income earners would pay a larger share and it would eliminate the vagarities of a complicated tax system.

Personally, I don't see the upside. Sales taxes are still regressive, in the sense that if two people buy the exact same items, the person with the lower income would pay a higher share of their income than the peson with the higher income. I understand the argument that the person with the higher income will buy more and thus more in actually taxes, but the percentage in many cases will actually be lower.

And as much as I think people should invest and save, the sad fact is that consumption drives economic growth faster than savings and investments do. If you put your money in the bank or buy stock, it won't do you any good if everybody else does the same thing, meaning that your return on your savings or your stock will be lower.

By and large, I do think a flat tax exempting say the first $10k to $15k is probably the best system, the cynic in me suggests that any tax reform that would dismantle the IRS will be dead on arrival -- call it the power of the "tax industrial complex." Too many people are employed by the "tax industry," from IRS workers to CPAs, lawyers and any other number of tax experts. If we displace these workers, where would they go?

Also, a national sales tax would have to be pretty hefty generate the same revenues as the current system. Sales taxes in metro KC are already hitting 8 percent plus -- would people be willing or prepared to pay 10-15 percent in sales tax?

On a slightly related topic, is anyone familiar with destination-based sales taxes? This may be one of the most unwieldly tax structures I've ever heard of. As you probably know, sales taxes are normally based on where the business collecting the tax is located, and taxes on interstate sales are normally not taxed unless the business has a physical presence in the state. In an effort to capture the coming bonanza in Internet sales taxes, states are moving to destination-based sales taxes that require business to charge sales tax based on where items are shipped or delivered.

If you're buying something at Wal-Mart, it would be taxed as normal based on the rate of where the store is located. However, if you order FOF5 from Jim, he would be required to collect sales tax from you based on where you live. Now let's think -- that means Jim has to know the sales tax for EVERY tax jurisdiction in the country. It gets even more confusing when you have a city like Kansas City that covers three counties and has tax improvement districts -- Kansas City, Mo., has a number of different sales tax rates based on where you live.

The funny thing is that the propponents of this tax system call it a "streamlined" sales tax system. It's got to be pretty f-ed up if it puts me and the Heritage Foundation on the same side of an argument.

[kcchief19]

He-he ... the state of Missouri does not sales tax food, but municipalities in Missouri do. Retailers that sell both groceries and non-grocery items must tax those items separately.

I won't even get into the sales tax holiday we have coming up for back to school items. You can buy a computer tax free, whether you are going "back to school" or not.

[QuikSand]

On a slightly related topic, is anyone familiar with destination-based sales taxes? This may be one of the most unwieldly tax structures I've ever heard of. As you probably know, sales taxes are normally based on where the business collecting the tax is located, and taxes on interstate sales are normally not taxed unless the business has a physical presence in the state. In an effort to capture the coming bonanza in Internet sales taxes, states are moving to destination-based sales taxes that require business to charge sales tax based on where items are shipped or delivered.

Actually, I do know a thing or two about all this.

First of all -- most states already have their sales taxes structured in two parts: sales and use taxes. Sales is a tax on a transaction that happens within the bounds of the state, of course -- the seller collects and remits the tax to the government. A corresponding use tax is due on a transaction taking place outside the state, when the purchased items are intended to be used primarily within the state.

In practical application -- the use tax generally only applies to major purchases by big interstate companies. A Maryland railroad buys equipment in Pennsylvania, ships it into Maryland, and uses it there -- they wouuld then self-report the tax in Maryland, and then claim those taxes paid against the taxes they would have paid in Pennsylvania, thereby avoiding double taxation.

Maryland has made some token efforts to try to apply this tax to residents who travel to North Carolina to make major furniture purchases -- but that's a relative rarity. In general, tax collectors understand that these transactions, by and large, go untaxed, period. (Nobody makes an effort to clip you for the $0.86 you technically should have paid to your home state on that tee-shirt from Myrtle Beach)

So - if you buy something from an internet retailer and have it shipped to you in your home state, you (probably) technically owe taxes on that purchase. The thing is -- the sales tax is one that is collected by sellers, at the state's behest. If the seller has no presence in the destination state (a complicated issue of nexus is relevant here), then the destination state cannot force the sellere to do a damned thing, the federal courts have been clear on this. So, as much as states might like the concept of "destination taxes" -- they are practically unenforcable right now for this reason. Maryland cannot force Jim Gindin and Solecismic software to charge its tax when they sell me software, that's the law.

If anything ever breaks with this (a less than even-money proposition), then it will almost certainly be with some kind of streamlined system -- something that would have a nationwide interstate compact of some sort allowing some simplified sates to apply to these internet and catalog sales. There are efforts underway to do this sort of thing by enterprising tax collectors right now -- but it certainly requires an act of congress to happen, and I judge that to be fairly unlikely to happen.

[GrantDawg]

Personally, I don't see the upside. Sales taxes are still regressive, in the sense that if two people buy the exact same items, the person with the lower income would pay a higher share of their income than the peson with the higher income. I understand the argument that the person with the higher income will buy more and thus more in actually taxes, but the percentage in many cases will actually be lower.

And as much as I think people should invest and save, the sad fact is that consumption drives economic growth faster than savings and investments do. If you put your money in the bank or buy stock, it won't do you any good if everybody else does the same thing, meaning that your return on your savings or your stock will be lower.

That is pretty much how I see it. I know some are suggesting a "tax rebate" were a certain amount would be sent back to people monthly, quarterly or annually to offset the regressiveness of the tax. How screwed up will that be? I still don't get how that would work.

BTW, Buzzbee I knew that we had discussed this before but I wanted a fresh start on the subject.

[Kodos]

The funny thing is I work at the top tax law publisher in the country, yet I know exactly nothing about tax law. :P

[Arles]

A few problems with this idea:

1. What to do about charitable contributions? With no writeoffs, numerous charities will suffer.

2. Business (esp small business) spending will probably go down, prob in the tech sector. When the government is allowing you writeoffs, it makes sense to upgrade equipment. Now that not only will you not have the writeoff but also this "consumption tax" on top of it, a lot of business will probably be very stingy with their upgrades/purchases.

3. What happens to the hundreds of thousands of CPA and tax preparing jobs? With a system like this, no one needs CPAs which means you have potentially 500,000 people unemployed.

In theory, this isn't all that bad an idea. But, in practice, it would strangle the economy as people would draw back their purchases (because of the increased cost of items via tax), roll back their charitable contributions and take away a big incentive for businesses to spend and help the economy.

[stevew]

I understand all the drawbacks of this tax system, but really, it cannot be any worse than the current POS IRS system.

[Crapshoot]

Well, in theory, rich people would pick up more of the slack. I doubt Paris Hilton pays income tax (at least before the FOX show, if they paid her). Yet she buys very expensive things. Part of the cost of those expensive luxeries will now go in a tax for the federal government. CEO's who dodge income tax, and buy expensive homes and boats will not put money into the federal government.

That way, families with 2 kids and make a combined income of $40,000 will probably not spend much towards the government seeing as they are likely to buy mostly things that go under "necessity".

In a way (in theory mind you), it's a more liberal solution than conservative, since it seems to push the burdon onto rich people more than the middle-class and lower. Rich people who buy things, anyway.

Have to disagree with the last line- its a far more conservative thought, since it encourages investment and penalizes consumption, thus being more likely to act regressive in nature. Rich people are far more likely to be able to invest, and the goal is to spur on the investments with the now lower cost of capital associated with the project...

[stevew]

Is this the "Fair tax" we are talking about?

[Crapshoot]

The simplest argument for it goes something like this:

Taxes, among other things, create a change in incentives.
Tax something heavily, and you reduce people's incentive to do it.
Current tax system depends heavily on taxing income, especially earned income.
All things being equal, we'd rather not weaken the incentive to earn income.
A tax system based on consumption would take some burden off income taxes.
A tax system based on consumption would also provide more incentive to save and invest.

That's the nutshell version, I think.


At its core, though, the most challenging argument is that of tax incidence -- who pays the taxes. Income-based taxes allow a much greater degree of either neutrality (where all people pay taxes as roughly the same share of their income/ability to pay) or progressivity (where higher income people pay a greater share of their income/ability to pay) than do consumption-based sales taxes. There is debate as to whether this is a good thing... but many would argue that this is the biggest problem with consumption taxes, that they fall disproportionately on the backs of lower and middle class citizens (who almost universally spend a greater share of their income on taxable goods than other income strata).


Hope that's a fair starting point.


as always, quik's explanation is a lot more in depth as to what I was trying to say earlier...

[Crapshoot]

Fundementally, in the near future, a sales tax based system carries benefits for the future. the dollar, as we know it, is generally overvalued, and primarily being propped up by Asian central banks who are in effect, subsidizing their exporters by keeping their currencies artificially low. That being said, weaning the American public of the teat of large swathes of private debt and record consumption requires that America continue to be percieved to have a higher potential rate of return than other opportunities, despite its "developed" status. At some point, a reduction in corportate and investment taxes (matched by a consumption system as described) may help America continue to get away with attracting more foreign capital than one would imagine, as it would act as a mechanism to lower the effective cost of capital for American investments (especially for multinationals).

[Crapshoot]

Fundementally, in the near future, a sales tax based system carries benefits for the future. the dollar, as we know it, is generally overvalued, and primarily being propped up by Asian central banks who are in effect, subsidizing their exporters by keeping their currencies artificially low. That being said, weaning the American public of the teat of large swathes of private debt and record consumption requires that America continue to be percieved to have a higher potential rate of return than other opportunities, despite its "developed" status. At some point, a reduction in corportate and investment taxes (matched by a consumption system as described) may help America continue to get away with attracting more foreign capital than one would imagine, as it would act as a mechanism to lower the effective cost of capital for American investments (especially for multinationals).

[clintl]

If Republicans want to lower the cost of capital, they should work on the budget deficit first.

[Shkspr]

Ultimately, I suspect that if the IRS is dismantled, then once reforms are put into place the net change in the system will end up being...the dismantling of the IRS.

I believe that the distribution and level of the tax burden in society is more or less controlled by market forces, the market being the electorate's choices at the polls. Tax cuts are motivated when the sitting lawmakers see the need to shore up their constituency, and tax increases are enacted when the overall job performance of lawmakers makes them feel as though they have some political capital to spend. (There are enough things out there that need to be funded that the motivation to raise taxes when you can do so isn't greed, but desire to effect change - a major reason to go into politics.)

I don't see the tax burden changing all that much - though sales tax is regressive, you'll see other changes occur in where money goes and comes from that will mitigate the net effect on those with smaller incomes. At the same time, different types of taxes will be enacted to continue to ensure that those who see their tax burden reduced with these changes wind up paying their share.

Practical example: here in Texas we don't have income tax. A nice little fillip. So when I went to look into buying my first house this last week, I got a rather nasty little surprise - the house I'm interested in has a payment of just under $750 a month, but the tax and insurance burden on the home raises my monthly payments to almost $1300. My father, who lives in Arizona, pays less property tax on a house three times as expensive (despite living in the highest property tax-burdened county in the state). Ultimately, whether it's through income taxes, sales taxes, VAT, or newly created investment taxes, the government is going to get their money.

At that level, the question becomes, how efficient is the IRS at tax collection, and how does its performance affect the public's opinion of government? The abolishment of the IRS would likely remove a major source of antagonism towards the government from most Americans and replace it with daily minor exasperation as we immediately experience a slight increase in our day to day living expenses. I can see this as a decent tradeoff in the minds of politicians. I see it as a net positive for purveyors of goods in the $100+ range, as you don't think about the effect of sales tax once you've decided on a purchase that big, and abolishing income tax will leave enough Americans with the illusion of more money in their wallets that such purchases will become more common. I think it will hurt places where inexpensive consumer goods are sold because the person with $5 in his pocket will still have $5 in his pocket, and an item that cost $4.80 after tax will now cost more than his $5.

You'll eventually see more property taxes, road taxes, etc. as Congress puts the cash they lost by abolishing the IRS back into public coffers. And, you'll see an increase in welfare rolls, because that first $10-15,000 that didn't get taxed at all before is now going several percentage points less far. You might even see people at or below a living wage signing up for exemption cards through social security to allow them to avoid paying the national sales tax.

And wouldn't THAT be an interesting database the government would have access to?

[Desnudo]

I like the idea of a flat sales tax, in theory. It would have to be part of a larger consumption based tax system, e.g. things like tolls on highways, etc., but I'd love to see the federal government move towards such a system. The freedom to choose would be ground breaking and would get us away from the Euro-Socialism track we seem to be on right now.

[Samdari]

A few problems with this idea:

1. What to do about charitable contributions? With no writeoffs, numerous charities will suffer.

I am not sure about this. Even with the deductions, donating to charity is a money losing proposition. You get a ~30% rebate, but in the end are still giving money away.

[QuikSand]

I am not sure about this. Even with the deductions, donating to charity is a money losing proposition. You get a ~30% rebate, but in the end are still giving money away.

If you're going to buy the argument that a 5% or 10% or 25% tax on something makes a big deal in terms of incentive -- then you have to buy the other side as well.

Right now, if you want to give $100 to a bona fide charity, it costs you $60-70. Take away the federal "subsidy" (using the pejorative word that some would use for the same tax deduction in other settings) and the same $100 contributions now costs you $100.

Of course it would mean a significant reduction in charitable giving.

[GrantDawg]

A few problems with this idea:

1. What to do about charitable contributions? With no writeoffs, numerous charities will suffer.

2. Business (esp small business) spending will probably go down, prob in the tech sector. When the government is allowing you writeoffs, it makes sense to upgrade equipment. Now that not only will you not have the writeoff but also this "consumption tax" on top of it, a lot of business will probably be very stingy with their upgrades/purchases.

3. What happens to the hundreds of thousands of CPA and tax preparing jobs? With a system like this, no one needs CPAs which means you have potentially 500,000 people unemployed.

In theory, this isn't all that bad an idea. But, in practice, it would strangle the economy as people would draw back their purchases (because of the increased cost of items via tax), roll back their charitable contributions and take away a big incentive for businesses to spend and help the economy.
1. I'm for doing away with writeoffs, period. That is one of the many places were their are abuses in the current system.

2. That makes some sense, BUT wouldn't the complete removal of income tax still end up a net gain for small business? Also, shouldn't an increased incentive in saving open the door for more people to start their own businesses?

3. A CPA has how many years of college behind them? We ask guys with hardly a highschool diploma to up and retrain all the time after layoffs and such. Somehow I don't think these highly educated people will have a hard time finding a new sector for their employment (not to mention a huge increase in investment plus no payroll tax would encourage huge job growth).


Of course I'm just playing devil's advocate. The huge regressiveness of the system and plus the negative impact on consumption are my two big drawbacks.

[GrantDawg]

If you're going to buy the argument that a 5% or 10% or 25% tax on something makes a big deal in terms of incentive -- then you have to buy the other side as well.

Right now, if you want to give $100 to a bona fide charity, it costs you $60-70. Take away the federal "subsidy" (using the pejorative word that some would use for the same tax deduction in other settings) and the same $100 contributions now costs you $100.

Of course it would mean a significant reduction in charitable giving.

But your giving away $100 to get $30. I get that it will decrease the amount given if people actually figure in this "subsidy" (and imagine larger donors do to some extent), but if people have more money in their pocket wouldn't that possibly offset that loss (as many will have more to give than they did before)?

[QuikSand]

But your giving away $100 to get $30. I get that it will decrease the amount given if people actually figure in this "subsidy" (and imagine larger donors do to some extent), but if people have more money in their pocket wouldn't that possibly offset that loss (as many will have more to give than they did before)?

Well, think that through. The only way that the charity comes out even is if every single person continues to donate the full $100, rather than te $60-70 it currently costs to give $100. So every single dollar of that "money in their pockets" has to go directly to charity for that to work out. Inconceivable.

I'm not arguing that there would be a dollar-for-dollar drop in charitable giving (that we'd immediately lose 30-40%) but I suspect the drop would be at least half that much.

[wade moore]

If Republicans want to lower the cost of capital, they should work on the budget deficit first.

I RARELY jump into these political decisions... for many reasons...

But this statement is just assinine.

[Buzzbee]

Personally, I don't see the upside. Sales taxes are still regressive, in the sense that if two people buy the exact same items, the person with the lower income would pay a higher share of their income than the peson with the higher income. I understand the argument that the person with the higher income will buy more and thus more in actually taxes, but the percentage in many cases will actually be lower.

Here's the problem that I have with this line of thinking. You are taking a tax that is based on consumption and comingling it with a person's income. A sales tax on a computer would cost the same amount to EVERY SINGLE PERSON in the country, regardless of income. Whereas, with a progressive tax it could be likened to a poor person paying $0.03 tax on an apple, a middle class person paying $0.05 tax on an apple, and a high income earner paying $0.10 tax on an apple.


And as much as I think people should invest and save, the sad fact is that consumption drives economic growth faster than savings and investments do. If you put your money in the bank or buy stock, it won't do you any good if everybody else does the same thing, meaning that your return on your savings or your stock will be lower.

The theory is that the reduction in costs to businesses (not having to pay corporate income taxes, not having to keep track of how much to withhold for employees, etc.) will allow companies to reduce prices enough to offset the NST, and still have extra capital to re-invest in the business. In addition, the reduction in overall price will drive new consumption. Furthermore, consumers will have more money in their pocket since they don't have to pay income taxes which will also drive consumption.


By and large, I do think a flat tax exempting say the first $10k to $15k is probably the best system, the cynic in me suggests that any tax reform that would dismantle the IRS will be dead on arrival -- call it the power of the "tax industrial complex." Too many people are employed by the "tax industry," from IRS workers to CPAs, lawyers and any other number of tax experts. If we displace these workers, where would they go?

I agree wholeheartedly and firmly believe this is the main reason this will never happen. The existing system is too ingrained. As for the displaced workers, the expectation is that there will be a large increase in job openings as businesses crank up to meet new demand. Also, with more money in their pockets, it may spurn the growth of mom and pop shops.


Also, a national sales tax would have to be pretty hefty generate the same revenues as the current system. Sales taxes in metro KC are already hitting 8 percent plus -- would people be willing or prepared to pay 10-15 percent in sales tax?

The estimate is around 22-23% I beleive, but as I stated, the expectation is that prices would fall enough to offset the amount of the sales tax. Therefore prices would either remain constant, or actually decrease.

[Buzzbee]

A few problems with this idea:

1. What to do about charitable contributions? With no writeoffs, numerous charities will suffer.

That is one of the issues with this proposal. It would remove the incentive to donate.


2. Business (esp small business) spending will probably go down, prob in the tech sector. When the government is allowing you writeoffs, it makes sense to upgrade equipment. Now that not only will you not have the writeoff but also this "consumption tax" on top of it, a lot of business will probably be very stingy with their upgrades/purchases.

Not true. Business will have increased funds to use on capital investment (that they were paying in corporate income tax before). Also, the expectation is that with the reduced expense of doing business (no more income tax and no more supporting infratructure) prices will fall enough to offset the national sales tax, and in many instances lead to lower prices than before.


3. What happens to the hundreds of thousands of CPA and tax preparing jobs? With a system like this, no one needs CPAs which means you have potentially 500,000 people unemployed.


The belief is that due to lower exenses for businesses, combined with consumers having more in their pocket that prices will drop and consumption will increase leading to job growth. Also, CPA's will still be needed, just not as many. Taxes aren't the ONLY thing CPA's do. Also, there would need to be some infrastructure to manage the national sales tax, but it would be significantly less than the current IRS.


In theory, this isn't all that bad an idea. But, in practice, it would strangle the economy as people would draw back their purchases (because of the increased cost of items via tax), roll back their charitable contributions and take away a big incentive for businesses to spend and help the economy.

As mentioned the expectation is an actual INCREASE in consumption due to LOWER prices and INCREASED disposable income.

[Huckleberry]

The simplest argument for it goes something like this:

Taxes, among other things, create a change in incentives.
Tax something heavily, and you reduce people's incentive to do it.
Current tax system depends heavily on taxing income, especially earned income.
All things being equal, we'd rather not weaken the incentive to earn income.
A tax system based on consumption would take some burden off income taxes.
A tax system based on consumption would also provide more incentive to save and invest.

That's the nutshell version, I think.

Yes, but the logical extension of that is that an increase in sales tax would weaken the incentive to spend, which will certainly lead to cries of an economic slowdown as businesses see less patronage.

[Buzzbee]

My biggest issues with a national sales tax, and why I don't think it will ever happen.

1) The current system is too ingrained. It would simply be too huge of a task to move from where we are to replacing it with a national sales tax. It would probably also be very expensive to communicate the changes and to prepare for it. It isn't something that can easily be phased in.

2) Charitable donations. The theory is that with more disposable income, individuals will help pick up the corporate slack. Also, the belief is that companies will still donate, but probably not as much.

I say hogwash. That may hold true initially, but if a company has to slash expenses at some point, what will be the first thing cut out of the budget? Donations.

3) The transition would be brutal. I think that for a large number of goods, the theory would hold. Primarily for low cost, high volume items. Where I think the theory would fail would be on higer priced items and on items which are somewhat monopolistic.

Think about it. A houseboat manufacturer will see reduced expenses, but there isn't as much incentive for them to reduce their prices. There aren't that many manufacturers, and there isn't a tremendous amount of competition. Therefore, there isn't as much incentive to lower prices. Prices would drop some, but not enough to offest the sales tax, resulting in higher prices. For common items such as food, clothes, paper, etc. the prices would probably fall below what they are today, but not for high priced items or items with little or no competition.

4) I'm not sure how this would affect services. I'm sure it is something that has been considered, but I can't remember the pros and cons.

[Buzzbee]

Yes, but the logical extension of that is that an increase in sales tax would weaken the incentive to spend, which will certainly lead to cries of an economic slowdown as businesses see less patronage.


The inverse would happen. The reduction in corporate expenses would lead to lower prices. Increased disposable income for consumers would lead to INCREASED consumption.

In my opinion, those items where competition is heavy would see prices fall below current levels, whereas items where competition isn't heavy would see prices fall, but not enough to offset the sales tax.

[clintl]

I RARELY jump into these political decisions... for many reasons...

But this statement is just assinine.

If you think it's assinine, then either you don't know anything about macroeconomic theory, or you don't believe it. Just think about it for a minute - what drives up the cost of capital? High interest rates. And government borrowing drives up interest rates more than anything else, because it creates competition between the government and private sectors for available capital.

[Huckleberry]

The inverse would happen. The reduction in corporate expenses would lead to lower prices. Increased disposable income for consumers would lead to INCREASED consumption.

In my opinion, those items where competition is heavy would see prices fall below current levels, whereas items where competition isn't heavy would see prices fall, but not enough to offset the sales tax.

I agree that is what should happen, but it greatly overestimates two things:

1.) The intelligence of American people

and

2.) The benevolence of corporations

Re: 1.) - Even if price plus tax is lower with higher tax rates, a huge percentage of our nation will spend less because "taxes are too high", "i don't want to give all that money to the government", etc. Lots of the same people that are currently whining about their income taxes.

Re: 2.) - Corporations are used to selling things at certain prices right now. You will have a hard time convincing me that corporations would lean more to the dropping prices decision than the pocketing the difference decision. To most corps, this will signal an effective reduction in cost, which has never been a reason to lower prices, simply a way to increase profits.

[albionmoonlight]

Would there be a problem with a "black market" developing in the presence of a large sales tax? Would it be any more or less of a problem than that of people trying to cheat the current system?

[wade moore]

If you think it's assinine, then either you don't know anything about macroeconomic theory, or you don't believe it. Just think about it for a minute - what drives up the cost of capital? High interest rates. And government borrowing drives up interest rates more than anything else, because it creates competition between the government and private sectors for available capital.


Let me clarify...

The assinine part is the "Republicans" portion...

EVERYONE is driving up the deficit, not just the Republicans...

[Huckleberry]

Not horribly asinine. Republicans spend just as much and right now more than Democrats, yet they lower taxes. The question is whether lowering income taxes actually lowers revenue. Unproven.

[QuikSand]

Here's the problem that I have with this line of thinking. You are taking a tax that is based on consumption and comingling it with a person's income. A sales tax on a computer would cost the same amount to EVERY SINGLE PERSON in the country, regardless of income. Whereas, with a progressive tax it could be likened to a poor person paying $0.03 tax on an apple, a middle class person paying $0.05 tax on an apple, and a high income earner paying $0.10 tax on an apple.

I believe this is misguided.

Ideally, when discussing tax fairness, we'd want to pin it to someone's "abiliity to pay." But that's an admittedly elusive concept -- so more often than not, we have determined that income is a pretty good proxy for "ability to pay." It doesn't do a perfect job (ignores people with wealth, but not income) but it's the most frequent basis for the assessment of fairness.

The argument of regressivity of sales taxes resides not in the amount of tax that anyone pays on a $10 book. Instead, it resides in the fact that two typical people from different income strata might have this kind of tax burdens:

A has income of $20,000, and spends $12,000 on taxable items. At 25%, he pays $3,000 in taxes, or 15% of his entire income (ability to pay).

B has income of $50,000, and spends $20,000 in taxable items. At 25%, he pays $5,000 in taxes, or 10% of his entire income (ability to pay).


It is nearly universally true that the base of consumption taxes represents a bigger share of income for lower income people, as in teh example above. Even when you exempt necessities like food, utilities, and such -- it's just a demonstrable fact.

That is the best explanation for regressivity that I can put together. And almost no matter what you use as a proxy for "ability to pay" (whether it's total income, disposable income, or some combination of income and current wealth) you arrive at the same basic result -- the poorer you are, the worse you do.

[QuikSand]

The estimate (for a national sales tax) is around 22-23% I beleive, but as I stated, the expectation is that prices would fall enough to offset the amount of the sales tax. Therefore prices would either remain constant, or actually decrease.

I think that's a load of hooey -- it's nearly inconceivable that prices woudl remain constant. Sure, we'd see some drop in consumer demand, and therefore some resultant drop in prices... but it's ridiculous to suggest that the price drop would offset the tax increase.

A much more likely scenario would be that a previously $100 item, after the market adjusted, would become something like $98 or $99 plus the $22-23 in taxes. That's a much more defensible quantification, even if you concede that there would be real changes in consumer decision-making.

You can make economic arguments about cause and effect (and I'm glad that people do in a debate liike this) but it's irresponsible to do so without a decent sense of the magnitudes. (And Buzzbee, I'm strongly inclined to believe that you read this somewhere, and are reiterating that argument, rather than making this up yourself -- I blame the source for the misleading conjecture, not you)

[QuikSand]

The question is whether lowering income taxes actually lowers revenue. Unproven.

More cocktail napkin economics. Wonderful.

There once might have been a case to be made that we actually were taxing income so highly as to provide such strong disincentives that higher income people just stopped working. It would have been a stretch to make that claim even back when ouur top marginal tax rate was far higher than 50%.

But now? With tax rates well under 50%? The mathematics of such a claim are so absurd as to be laughable. Still believeing in the whole Laffer Curve argument is just indefensible at this point.


There are plenty of ways to soundly argue for tax cuts, and even for reductions in marginal tax rates, which I think is a prefectly healthy debate. But arguing that they will increase tax revenues (or even that there remains some doubt abouut this) is just pointless.

[clintl]

Let me clarify...

The assinine part is the "Republicans" portion...

EVERYONE is driving up the deficit, not just the Republicans...

I'll give you that. Both sides are making their contributions. :) What I mostly meant was this national sales tax idea is being driven by Republicans, and that they should put their efforts into solving a real problem first, before pushing for something that would radically restructure the economy, probably with a whole bunch of unforseen consequences.

[clintl]

Dola...

By the way, I think QuikSand is doing an excellent job of explaining why a national sales tax would be a regressive tax.

[Huckleberry]

More cocktail napkin economics. Wonderful.

There once might have been a case to be made that we actually were taxing income so highly as to provide such strong disincentives that higher income people just stopped working. It would have been a stretch to make that claim even back when ouur top marginal tax rate was far higher than 50%.

But now? With tax rates well under 50%? The mathematics of such a claim are so absurd as to be laughable. Still believeing in the whole Laffer Curve argument is just indefensible at this point.


There are plenty of ways to soundly argue for tax cuts, and even for reductions in marginal tax rates, which I think is a prefectly healthy debate. But arguing that they will increase tax revenues (or even that there remains some doubt abouut this) is just pointless.

You know, that might have hurt my feelings if it were my opinion I posted. :D

I know it's hard to believe in the age of "internet debates", but I was posting an opinion held by others as a counterargument to a posted statement. I happen to disagree that lowering tax rates can possibly increase revenue. Yet my post stands as I haven't seen my opinion proven.

[Buzzbee]

I believe this is misguided.

Ideally, when discussing tax fairness, we'd want to pin it to someone's "abiliity to pay." But that's an admittedly elusive concept -- so more often than not, we have determined that income is a pretty good proxy for "ability to pay." It doesn't do a perfect job (ignores people with wealth, but not income) but it's the most frequent basis for the assessment of fairness.

The argument of regressivity of sales taxes resides not in the amount of tax that anyone pays on a $10 book. Instead, it resides in the fact that two typical people from different income strata might have this kind of tax burdens:

A has income of $20,000, and spends $12,000 on taxable items. At 25%, he pays $3,000 in taxes, or 15% of his entire income (ability to pay).

B has income of $50,000, and spends $20,000 in taxable items. At 25%, he pays $5,000 in taxes, or 10% of his entire income (ability to pay).


It is nearly universally true that the base of consumption taxes represents a bigger share of income for lower income people, as in teh example above. Even when you exempt necessities like food, utilities, and such -- it's just a demonstrable fact.

That is the best explanation for regressivity that I can put together. And almost no matter what you use as a proxy for "ability to pay" (whether it's total income, disposable income, or some combination of income and current wealth) you arrive at the same basic result -- the poorer you are, the worse you do.

Quik - Everything you said is true. A progressive tax is unfair since you are taxing people at different rates. How is that fair? A regressive tax is also unfair. You are taxing those with lower incomes a greater portion of their income. That's unfair to them. Neither system is "fair", but because of the notion of "ability to pay" the progressive tax is generally seen as being "more fair".

I would imagine that one's perspective generally changes with income level. High income earners see a progressive tax as being unfair because it is unfair to them. Low income earners see the evils of the regressive tax because it is unfair to them.

I understand your point that the comingling of consumption and income is relevant because the regressivity DOES affect the low income earner more than the high income earner. But if that is the argument, it also can be applied in a progressive system, since it affects the high income earner more (since they pay a higher rate). Of course it all boils down to "ability to pay" since you can make the argument that it doesn't affect the high income earner more because of their "ability to pay".

[QuikSand]

You know, that might have hurt my feelings if it were my opinion I posted.

My goal is/was not to hurt your feelings, but rather to dispel a silly argument -- whether yours or someone else's.

I cna make an argument that I can jump to the moon. You can't prove that my argument is false. Who rightfully has the burden here? The person with the ridiculous claim, or the person claiming it's ridiculous?

The only way that a tax cut yields more revenue is if people are, in fact, so completely responsive to tax rates that they aree consciously not working en masse because of the oppressive tax rates, and that by lowering the taxes they woudl not only work more and earn more, but they would ridiculously overcompensate for the tax change by a multifold factor. Then, and only then, would there be an argument that we could raise revenues by lowering tax rates.

If I claim I can jump to the moon, you're going to at least demand an explanation of how it would happen, in the face of the obvious evidence you hold otherwise. My evidence is just some common sense mathematics, described above. What is there to support the other side?

[Buzzbee]

I think that's a load of hooey -- it's nearly inconceivable that prices woudl remain constant. Sure, we'd see some drop in consumer demand, and therefore some resultant drop in prices... but it's ridiculous to suggest that the price drop would offset the tax increase.

A much more likely scenario would be that a previously $100 item, after the market adjusted, would become something like $98 or $99 plus the $22-23 in taxes. That's a much more defensible quantification, even if you concede that there would be real changes in consumer decision-making.

You can make economic arguments about cause and effect (and I'm glad that people do in a debate liike this) but it's irresponsible to do so without a decent sense of the magnitudes. (And Buzzbee, I'm strongly inclined to believe that you read this somewhere, and are reiterating that argument, rather than making this up yourself -- I blame the source for the misleading conjecture, not you)

As I have stated in other posts in this thread, I think the actual impact will vary from product to product and industry to industry. In highly competitive industries with low margins, like grocery stores, I would anticipate that the level of competition would force prices to be significantly lower. In industries where there isn't as much competition, or where the price isn't as much of a factor in the buying decision (luxury items would probabl fit pretty well in this segment) then I don't see the savings of having no income tax being passed on to the consumer. You might see a slight drop in price, but I don't think it would be significant. I think your $98 to $99 example probably applies very well in this category.

And no, I'm not making this up as I go along, and I appreciate you realizing that I am repeating things I have heard or researched, and that I'm not really sold on the idea either. I guess it's just fun to be able to debate something and possibly educate people in the process (which doesn't happen too often around here).

[QuikSand]

Quik - Everything you said is true. A progressive tax is unfair since you are taxing people at different rates. How is that fair? A regressive tax is also unfair. You are taxing those with lower incomes a greater portion of their income. That's unfair to them. Neither system is "fair", but because of the notion of "ability to pay" the progressive tax is generally seen as being "more fair".

I would imagine that one's perspective generally changes with income level. High income earners see a progressive tax as being unfair because it is unfair to them. Low income earners see the evils of the regressive tax because it is unfair to them.

I understand your point that the comingling of consumption and income is relevant because the regressivity DOES affect the low income earner more than the high income earner. But if that is the argument, it also can be applied in a progressive system, since it affects the high income earner more (since they pay a higher rate). Of course it all boils down to "ability to pay" since you can make the argument that it doesn't affect the high income earner more because of their "ability to pay".

For the record, I am really just trying to illustrate the facts of the matter. Sales taxes simply are regressive, placing a disproportionate burden onto the poorer classes. The best we cna do with them is to mitigate the regressivity. Income taxes can be structured in many ways, including both regressive and progressive.

Many would argue that a "fair" tax system is a progressive one, placing a higher proportion of the burden on higher income/wealth individuals. I have not made that argument here.

[Buzzbee]

Would there be a problem with a "black market" developing in the presence of a large sales tax? Would it be any more or less of a problem than that of people trying to cheat the current system?

Most definitely. Avoiding a 4% or 5% sales tax doesn't give much incentive, considering the penalties if you get caught. Avoiding a 22% tax creates much more incentive to cheat the system. So, yes, a black market could emerge, or corporations could simply try to understate their sales. As with any system people will try to find ways around the system or to abuse it. I have no idea if it would be a bigger problem. I would guess that since the system would be simpler, it would be easier to monitor, but I could be naiive in that belief.

[Buzzbee]

Dola...

By the way, I think QuikSand is doing an excellent job of explaining why a national sales tax would be a regressive tax.

ANY sales tax is a regressive tax. But when it is "only" a few percent, people don't seem to care as much.

[wade moore]

I'll give you that. Both sides are making their contributions. :) What I mostly meant was this national sales tax idea is being driven by Republicans, and that they should put their efforts into solving a real problem first, before pushing for something that would radically restructure the economy, probably with a whole bunch of unforseen consequences.


Ah... did not know it was driven by Republicans... as I said, there is a reason I stay out of these...

[QuikSand]

In highly competitive industries with low margins, like grocery stores, I would anticipate that the level of competition would force prices to be significantly lower.

And this is exactly the wrong example to use.

Food, and most other things sold at grocery stores, is teh sort of thing that is a purchase of necessity, not just convenience or whim. As a result, we would imagine that most people wouldn't react all that much to a change in prices -- after all, you have to eat. If for reasons other than a tax change, the price of all the groceries you eat suddenly went up by 25% ... would you stop shopping for groceries? Of course not. You might be a little more prudent in shopping for bargains, and you might even cut back some... but you're not going to stop buying. All in all, a product liek groceries ought to have what we call inelastic demand -- the response to a price change (our reduced demand) ought to be less than the price change itself. A 25% increase in prices might yield something like a 5% shift in consumer demand.

With a lowered demand, yes -- we would expect some adjustment in market prices. But if the demand curve shifts by 5%, that would be diffused into two results -- a reduction in price, and also a reduction in quantiy demanded. It's practicall unfathomable that the price reduction wouold be as much as the overall shift in demand -- maybe we'd see prices go down by 1 or 2 or 3%... but almost certainily not by anything even close to 25%. It's just the common sense of the marketplace.


There might be some products where the consumer response is very, very high -- and that a price increase woudl bring about a very large consumer response. That's the only case where you might imagine the proce dropping bny anywhere near the amount of the new tax -- but just imaging such a completely weird product is hard. Imagining that the entire economy would work that way is just a step on beyond silly.

[QuikSand]

ANY sales tax is a regressive tax. But when it is "only" a few percent, people don't seem to care as much.

That's the hidden allure of sales taxes -- since the bill doesn't arrive in one big chunk, politicians are sold on the idea that the sheep they govern won't care about it. And truth be told, they are mostly right. Any survey of people's attitudes about taxes tells us that people hate property taxes (one big bill) and income taxes (taken out of paycheck, and that year-end reckoning) far more than they hate sales taxes.

[QuikSand]

I'm certainly not defending the current tax code, but the short answer is a progressive tax is fair in the sense that everybody pays the the same percentange on dollars earned. E.g. the first A-B thousand is untaxed. The next B-C thousand is taxed at X%. The next C-D thousand is taxed at Y% etc. In other words, a billionaire pays the exact same taxes (earned income) on his first 40K as a middle class drone. You only get a "different rate" on dollars earned above a certain amount. And it's not different from anyone else. It's just different from what you pay on the first X-thousand dollars, which is the same rate everyone pays.

And the "fairness" of a such a system (which is more or less how the federal and most state income taxes currently work) is certainly a matter of debate.

[Buzzbee]

I'm certainly not defending the current tax code, but the short answer is a progressive tax is fair in the sense that everybody pays the the same percentange on dollars earned. E.g. the first A-B thousand is untaxed. The next B-C thousand is taxed at X%. The next C-D thousand is taxed at Y% etc. In other words, a billionaire pays the exact same taxes (earned income) on his first 40K as a middle class drone. You only get a "different rate" on dollars earned above a certain amount. And it's not different from anyone else. It's just different from what you pay on the first X-thousand dollars, which is the same rate everyone pays.

Valid point, yet those in higher income brackets are still paying a higher percentage than those in a lower income bracket (assuming that the rates increase from bracket to bracket). Yes, the tax at the various levels is the same, but when you compare a higher bracket to a lower bracket, the higher income earner will pay a higher percentage. While it may mitigate the difference, it doesn't eliminate it as your post seems to indicate.

[Buzzbee]

And this is exactly the wrong example to use.

Food, and most other things sold at grocery stores, is teh sort of thing that is a purchase of necessity, not just convenience or whim. As a result, we would imagine that most people wouldn't react all that much to a change in prices -- after all, you have to eat. If for reasons other than a tax change, the price of all the groceries you eat suddenly went up by 25% ... would you stop shopping for groceries? Of course not. You might be a little more prudent in shopping for bargains, and you might even cut back some... but you're not going to stop buying. All in all, a product liek groceries ought to have what we call inelastic demand -- the response to a price change (our reduced demand) ought to be less than the price change itself. A 25% increase in prices might yield something like a 5% shift in consumer demand.

With a lowered demand, yes -- we would expect some adjustment in market prices. But if the demand curve shifts by 5%, that would be diffused into two results -- a reduction in price, and also a reduction in quantiy demanded. It's practicall unfathomable that the price reduction wouold be as much as the overall shift in demand -- maybe we'd see prices go down by 1 or 2 or 3%... but almost certainily not by anything even close to 25%. It's just the common sense of the marketplace.


There might be some products where the consumer response is very, very high -- and that a price increase woudl bring about a very large consumer response. That's the only case where you might imagine the proce dropping bny anywhere near the amount of the new tax -- but just imaging such a completely weird product is hard. Imagining that the entire economy would work that way is just a step on beyond silly.

Quik - Been a decade or so since I took an economics class, and since you teach one, you are far more qualified to discuss supply/demand and economic theory. I do have a question though. Wouldn't competition help drive prices down? Since demand would be inelastic, not changing much with a change in price, wouldn't Kroger want to undercut Publix to get a larger chunk of the market?

[QuikSand]

Since demand would be inelastic, not changing much with a change in price, wouldn't Kroger want to undercut Publix to get a larger chunk of the market?

There are two questions here, as I see it:


First is: Isn't it possible that one competitor in a market would want to undercut its competition to increase market share?

Answer: Of course, that sor of thing happens all the time.



Second is: Would a substantial new sales tax, applied to everything, suddenly bring about this kind of activity?

Answer: I'm at a loss to imagine why it would.

[Buzzbee]

I'm certainly not defending the current tax code, but the short answer is a progressive tax is fair in the sense that everybody pays the the same percentange on dollars earned. E.g. the first A-B thousand is untaxed. The next B-C thousand is taxed at X%. The next C-D thousand is taxed at Y% etc. In other words, a billionaire pays the exact same taxes (earned income) on his first 40K as a middle class drone. You only get a "different rate" on dollars earned above a certain amount. And it's not different from anyone else. It's just different from what you pay on the first X-thousand dollars, which is the same rate everyone pays.

An my point was that it IS different from anyone else.

Example:

Up to $10,000 lets say the rate is 5%. Then from $10,000 to $20,000 the rate is %10. For the first $10,000 everybody pays 5%. Simple enough.

Person A earns $5,000. They are taxed at a rate of 5%.

Person B earns $15,000. So for the first $10,000 they are taxed at 5%. That's $500. For the next $5,000 they are taxed at 10%. That's another $500.

Person A has an effective tax rate of 5%.

Person B has an effective tax rate of 6.6%. ($1,000 in tax divided by $15,000 in income).

So, my point is that while the rates within a bracket are the same, to say that You only get a "different rate" on dollars earned above a certain amount, and it's not different from anyone else is misleading because a person in a higer bracket IS charged differently than those in a lower bracket. That was all I was saying.

[Buzzbee]

There are two questions here, as I see it:


First is: Isn't it possible that one competitor in a market would want to undercut its competition to increase market share?

Answer: Of course, that sor of thing happens all the time.



Second is: Would a substantial new sales tax, applied to everything, suddenly bring about this kind of activity?

Answer: I'm at a loss to imagine why it would.

Shouldn't the second question be:

Would a significant reduction in the cost of doing business bring about this activity?

[QuikSand]

Shouldn't the second question be:

Would a significant reduction in the cost of doing business bring about this activity?

Even so, it still applies to everyone. It's very hard to imagine that this market would suddenly see an antirely different sort of behavior than before.

Now, some products that are extremely labor-intensive might be different. We might expect to see the cost of something like haircuts to come down. If the employees were making $10 an hour abd paid taxes on them, but now make $8 an hour without paying taxes (assuming the laabor market allowed this switch, which is pretty shaky ground in itself) then you might expect to see the price of such a product come down -- maybe in an amount that approached the amount of the new sales tax (assuming this would be a taxable sale -- and if your rate is only 23%, you're almost certainly taxing services like this). But again - that's an extreme example. The whole economy isn't so labor-dependant as that extreme case.

[QuikSand]

If you think the guy making 10K should pay the same % on all his income as the guy making a million then welcome to Dennis Hastert-land.

Welcome to Hastert-land, population plenty. (At least plenty of FOFCers)

[Buzzbee]

Yeah, I don't think this is any great insight. If you think the guy making 10K should pay the same % on all his income as the guy making a million then welcome to Dennis Hastert-land. Hell, maybe we should cap taxable income at 100K. That would be fair, right? No one has to pay taxes after their first 100K earned. I like it!

Delebar, it is simply a difference of opinion. No reason to go insulting me by calling me a Hastert lover. :p

Actually, I'm NOT opposed to a guy making 10K paying a smaller percentage on his income than a guy making a million. However, what I might PREFER, is that the government gets it revenue based on consumption as opposed to income, and I'm not totally sold on that. Sorry to submarine your accusation.

But since you brought it up, yes I would be in favor of a flat tax percentage with an exemption for lower income earners. How much that exemption should be, I have no idea as I am not an economist. People such as Quik might be better suited to identify a level where "ability to pay" is comfortable enough to establish that threshhold.

[Buzzbee]

Even so, it still applies to everyone. It's very hard to imagine that this market would suddenly see an antirely different sort of behavior than before.


I guess this is where you are confusing me. Using the example of grocery stores - as I understand it, they pretty much operate on razor thin margins. I think in the neighborhood of 1-2% net profit. Wouldn't they eventually return to that level? Yes, prices might be a little inflated initially, but wouldn't that attract more competitors trying to get a piece of the more profitable pie?

Would airline deregulation or the break-up of Ma Bell be suitable or relevant 'case studies'?

I guess we could go around and around all day on this, and I'm not trying to play point-counter point with you. It seems you feel the idea that prices would drop by any significant amount is absolutly preposterous, and I'm not quite certain I understand why. It seems to me that for certain items they would, for other items they wouldn't, or if they did, they wouldn't drop much.

[Jesse_Ewiak]

Here's a simple fact...a guy making 150k after taxes still makes more than the guy who makes 100k who still makes more after taxes than the guy making 50k.

After all, I seem to have missed this epidemic of people turning down raises because they'll pay a higher tax _on a portion of it_. Or people choosing lower-paying jobs so they won't pay as much in taxes.

"No, really, I'd rather take the $50k job and clear $35k instead of that $100k job where I take home $70k. Income taxes man. I sure wouldn't want to take home another $35k if it means paying another $15k in taxes! That's just illogical! Why, the income tax has sapped me of my will to work."


Here's a few ideas I actually support, but I'm an avid liberal, so YMMV.

* Although it would not be an issue of federal policy, one such promising avenue would be a general left-wing call to abolish the sales tax. As both a flat tax and a tax on everyday consumables, sales taxes are highly regressive. While they are a significant form of revenue for local governments, competing local sales, property and business taxes inevitably work to the detriment of lower income communities. Because they need more revenue, poorer communities tend to impose higher sales taxes, which ultimately work to hurt the people in those communities because of the regressive nature of such taxes. Instead, it would be better if states and the federal government filled the gap created by the abolishment of local sales tax in the form of increased monetary aid.

* Make the federal income tax more progressive. Restore the 39.6% tax bracket of the Clinton years, and maybe even increase it by 2-3%. This could be done while simultaneously making the first 20-30 thousand dollars of income federal tax free, thus maintaining a similar (if not a greater) level of revenue from income taxes while providing tax relief disproportionately to lower income households. According to every recent poll conducted on federal income tax, a plan such as this would be very popular nationwide.

* Make all income, not just the first $90,000 or so, subject to the Social Security tax. This should be pretty popular. Most people are convinced that the wealthy do not pay enough taxes and that Social Security is in danger of bankruptcy. Considering this, to point out that people making more than $90,000 a year do in fact pay a smaller percentage of their income in Social Security than the middle class will surely be a winner. Further, although it would be more difficult to pass and require a large restructuring of the program (which is never popular), it might even be popular to argue that the Social Security tax should become a progressive rather than a flat tax.

* Increase taxes on businesses with more than 15 employees, but simultaneously offer significant tax breaks for companies directly based on how well they treat their workers. Large federal tax breaks can be given to companies who allow their workers to unionize, have a low ratio of executive pay to average worker pay, provide all workers with stock ownership in the company, provide good health care, overtime, vacation and family leave benefits, etc. I have never seen any polling on this subject, but providing incentives that empower workers and encourage owners to treat employees well strikes me as a winning issue.

[CentralMassHokie]

I just wanted to jump in late and offer this to the argument:

One of the most oft mentioned problems with the tax code today isn't the rate of taxation, but the complexity of the tax code.

Does anyone think that, when all the debate and lobbying is done, that a national sales tax would be any less complex than our current tax code?

[albionmoonlight]

Jesse--I like most of your ideas except for the last one. Even though it would put a lot of my lawyer friends out of work, I find myself supporting taxes as revenue generators and not as the engine behind social engineering.

The tax code could be made a lot simpler if it were only about making and spending money and not about encouraging and discouraging behavior.

[Jesse_Ewiak]

Yeah, the last one is basically the result of being a liberal and living in an area where unions still have some power, thus I'm predeposed (sp?) to favoring the workers.

[QuikSand]

* Make the federal income tax more progressive. Restore the 39.6% tax bracket of the Clinton years, and maybe even increase it by 2-3%. This could be done while simultaneously making the first 20-30 thousand dollars of income federal tax free, thus maintaining a similar (if not a greater) level of revenue from income taxes while providing tax relief disproportionately to lower income households. According to every recent poll conducted on federal income tax, a plan such as this would be very popular nationwide.

There's a math problem here -- there are just FAR more people earning that $30,000 than there are earning $200,000 or a million or wherever your top bracket would start. By losing all the revenues we currently get from the lower middle class on down, we'd have to really hike the top tax rates to break even.

This is superficially appelaing, and I have no doubt it would do well in polling of the general populace, but the devil's in the details. To exempt $30,000 per individual (even family) would require a pretty huge rate hike on top.

[albionmoonlight]

There's a math problem here -- there are just FAR more people earning that $30,000 than there are earning $200,000 or a million or wherever your top bracket would start. By losing all the revenues we currently get from the lower middle class on down, we'd have to really hike the top tax rates to break even.

This is superficially appelaing, and I have no doubt it would do well in polling of the general populace, but the devil's in the details. To exempt $30,000 per individual (even family) would require a pretty huge rate hike on top.
Thanks for the insight.

I guess that, almost by definition, if a proposed system will save lots of people money, it will cost lots of money to pull off. The less people you affect, the less money you lose, but the less popular appeal your proposal will have.

[cartman]

I haven't seen the point thrown out yet, and that's what's to say the income tax isn't brought back after this is put in place? We are arguing one or the other, but our European friends are, in most cases, getting hit with both.

I know that in Italy the average VAT is 18%. And they are also taxed heavily on their income, top rate of over 50%.

This is a case of the grass looking greener on the other side of the fence (VAT vs. Income tax), but remember that the fertilizer gets spread on both fields. I can easily see that if the income tax is abolished and a sales tax implemented, that 10 or 20 years down the line the income tax is reintroduced at a low rate, and steadily built back up to it's present levels.

[Buzzbee]

I haven't seen the point thrown out yet, and that's what's to say the income tax isn't brought back after this is put in place? We are arguing one or the other, but our European friends are, in most cases, getting hit with both.

I know that in Italy the average VAT is 18%. And they are also taxed heavily on their income, top rate of over 50%.

This is a case of the grass looking greener on the other side of the fence (VAT vs. Income tax), but remember that the fertilizer gets spread on both fields. I can easily see that if the income tax is abolished and a sales tax implemented, that 10 or 20 years down the line the income tax is reintroduced at a low rate, and steadily built back up to it's present levels.

That is always a possibility. However, I imagine that if it were to come back, there would be opposition, and if it creeped back up that the opposition would increase as the rate increased.

Along the lines of what albion said, those who pay the most are going to bitch the most.

[GrantDawg]

Well, think that through. The only way that the charity comes out even is if every single person continues to donate the full $100, rather than te $60-70 it currently costs to give $100. So every single dollar of that "money in their pockets" has to go directly to charity for that to work out. Inconceivable.

I'm not arguing that there would be a dollar-for-dollar drop in charitable giving (that we'd immediately lose 30-40%) but I suspect the drop would be at least half that much.
Sorry, gone for a while. This was some time ago. First, I admitted there would be some drop, so I wasn't saying it would be completely even. A drop of 15% is possible, even feasable. Yet, what I was saying was that if people have more income left in hand to save or invest, isn't it possible that some would actually increase charitable contributions? Some people give a certain percentage of their income based on what they take home. If their take home increased, wouldn't their giving also likely increase? A tax break is not the only reason indiviuals give, nor is it the only reason businesses give (many businesses use charitable contributions as a type of advertising).

This is much like the arguements that come from the mortgage lobby. They claim doing away with the tax-deduction on home ownership will drive people away from owning. Really? How many people buy a house solely for the tax break? As nice as it is, there are much more complelling reasons to own. Plus, if there is no sales tax on homes, that is at least as good an incentive to put your money in a investment that is almost guarenteed to gain value. (Of course, it will do away with the need to keep a loan on the house for tax break, so that might hurt them personally).

A second question I have for QS (since he is as close to a super-computer as they come), what if the proposal was to not tax "necessities" and give a "rebate" on a regular bases to everyone. I have heard numbers in the range of $15,000 per a household of four given in check form quarterly. Now, that seems like a mail thiefs dream, but would that allow a major offset for the regressivity of a sales tax?

[Buzzbee]

So, GrantDawg, has this achieved it's purpose? Any new thoughts/opinions/leanings?

[GrantDawg]

So, GrantDawg, has this achieved it's purpose? Any new thoughts/opinions/leanings?

Some. I still don't know enough to say I'm comfortable with the idea. I still lean toward a true flat tax, but I can see some benefits to a sales tax. Income tax vs. sales tax both have good and bad points, so the question really is not whether one would be good for this group but not that group, but whether it would be best for all. I still don't know which one would be.

[JonInMiddleGA]

Why, the income tax has sapped me of my will to work."

Actually, the combination of corporate & personal income tax hasn't sapped me of my will to work ... but it definitely impacts my willingness to work any harder.

In our current company situation, it wouldn't be particularly difficult to add another secondary-level client or two, maybe generate an additional 20%-25% in revenue each year.

But considering the amount of tax that's taken from that additional revenue + the incredible PITA that goes with adding another employee or two, and then looking at what's left over that eventually winds it way to me ... well, the difference in what I can do/have/enjoy with my current income X vs the increased do/have/enjoyment of 110% X simply isn't enough to motivate me to take on the additional client(s).

[Arles]

I am not sure about this. Even with the deductions, donating to charity is a money losing proposition. You get a ~30% rebate, but in the end are still giving money away.
A lot of people use charitable deductions to reduce their AGI as well. That has to figure in. Plus, 90% of good organizations that aren't mainstream (rare illnesses, school donations, certain charities) use the deduction to get people to even listen to them. Without that, many people won't give them the time of day.

So, while major charities will probably still be OK, numerous research and otherwise important midlevel charities may cease to exist.

[randal7]

Jon has provided the best argument for lowering taxes on the wealthy and on corporations: the people who suffer for it are the middle class (those two poor schmucks Jon can't afford to hire now, for example). If Donald Trump gets a $10 million tax cut, he's not going to stuff that money in his mattress. He's going to invest it somewhere; you don't get to be wealthy by being the kind of person who ever is satisfied with how much money you have. Either The Donald will hire more folks to make him more money, or will buy stuff/build something for his business, allowing the manufacturer/builder to hire some more folks. It may feel good to say the rich can afford higher taxes and don't need the money, but like it or not, the rich are the ones who provide jobs to the not-rich (unless you are a socialist). A 5% tax break to me means I can put a few hundred away for my daughter's college; a 5% tax break for The Donald means hundreds if not thousands of jobs for folks like you & me. Conversely, raise Donald's taxes and those jobs don't get created, and some more may vanish.

Question to Quik: isn't this the argument for why lower taxes= higher tax revenue, IE because the private sector is far more efficient at circulating money thru the economy and spurring growth than the bloated beaurocracy that is our government?

[Arles]

Not true. Business will have increased funds to use on capital investment (that they were paying in corporate income tax before). Also, the expectation is that with the reduced expense of doing business (no more income tax and no more supporting infratructure) prices will fall enough to offset the national sales tax, and in many instances lead to lower prices than before.
Here's the problem. First, while corporations may not pay income tax, they will be paying higher taxes on all their supplies and materials. Suddenly, a business may be paying 20% more for their wood, or 15% more for its metal, etc. Then, combine that (with the tax) a computer system that was $10,000 before may be $12,000 now. Is a company that just saw its raw materials go up 20% want to go out and spend 15-20% more on "non-essential" computer upgrades? I doubt it.

One reason many companies did a lot of tech upgrades in the past two years is because of the income tax savings. Without that and a higher price on the systems, I just don't see many companies upgrading unless absolutely required to.

The belief is that due to lower exenses for businesses, combined with consumers having more in their pocket that prices will drop and consumption will increase leading to job growth.
But the tax increase on everyday goods will sap the purchasing power of money. Remember, most people get a standard deduction or itemize to significantly reduce the federal income tax. For the lower income people (15-25K), they often get paid back via the earned income credit.

If you make 25K in the current system, you would pay little taxes and may actually get money back via the EIC. In other words, you make close to 25K in net money (outside of FICA). In the consumption tax system, everything you buy is taxed about 20% more. So, in essence, that 25K becomes 20K. This type of system would hurt the middle class as well. A family of four making 50K has a million deductions (esp if they own a house). In this new system, not only do they lose those deductions, but all their goods increase in price via the taxes.

In fact, really the only benefit would be to people that make 250-400K a year and don't buy a lot of items. And, I don't think that's the group many would target to benefit in a new tax system.

Also, CPA's will still be needed, just not as many. Taxes aren't the ONLY thing CPA's do. Also, there would need to be some infrastructure to manage the national sales tax, but it would be significantly less than the current IRS.
I'm not talking about the IRS. I'm talking about the tens of thousands (if not hundreds of thousands) of people that work for public accounting firms like Delloite and Touche doing taxes, H&R Block and Jackson Hewitt, and the thousands of small business CPA firms everywhere in the US. Most of them would be out of a job if this passes.

As mentioned the expectation is an actual INCREASE in consumption due to LOWER prices and INCREASED disposable income.
Yes, but the taxes increase the price. Quiksand put this the best in his posts. While the consumer price may go down slightly (which is debatable when you figure the taxes on supplies and raw materials), the addition of the consumption tax takes that away.

I would bet that most families pay between 15 and 20% of their gross pay in federal income taxes. Many pay less (esp those with kids). You essentially hand that 15-20% back to them but then take 20% back on everything they buy. Guess what that does? Make them buy fewer things.

And, how does that help the economy?

[clintl]

Question to Quik: isn't this the argument for why lower taxes= higher tax revenue, IE because the private sector is far more efficient at circulating money thru the economy and spurring growth than the bloated beaurocracy that is our government?

The effect is not big enough to increase revenues. And do you know what most of that government money goes to? Salaries of employees, who spend it back into the economy just as fast as private sector employees do, and purchases of goods and services provided by the private sector.

[randal7]

The point is not where the money goes, but how efficiently it is used and circulated. If government was equally as effective as the private sector, then the idea of a socialist economy wouldn't be discredited.

[QuikSand]

Question to Quik: isn't this the argument for why lower taxes= higher tax revenue, IE because the private sector is far more efficient at circulating money thru the economy and spurring growth than the bloated beaurocracy that is our government?

That is essentially a supporting argument on behalf of a different result. What you're suggesting is that a tax cut, putting money into hands of private interests rather than public hands, causes that money to be used more efficiently. The natural result woudl be that there would be some growth in the overall economy as a result. Many would agree with that.

It's another matter entirely to suggest that not only will the entire economy grow from a tax cut, but that it will grow by such leaps and bounds that it overcomes the reduction in the tax rate to cause tax revenues to actually increase. Remember - marginal tax rates are between 30 and 40% in this country -- meaning that if you cut taxes by 1%, you'd need the income-producing economy to grow by something like 3% just to break even. That suggests a perverse set of economic incentives are in play regarding earned income -- which is just counterintuitive.

[QuikSand]

This is much like the arguements that come from the mortgage lobby. They claim doing away with the tax-deduction on home ownership will drive people away from owning. Really? How many people buy a house solely for the tax break? As nice as it is, there are much more complelling reasons to own. Plus, if there is no sales tax on homes, that is at least as good an incentive to put your money in a investment that is almost guarenteed to gain value. (Of course, it will do away with the need to keep a loan on the house for tax break, so that might hurt them personally).

But you can't have it both ways. You can't rail against taxes because of the incentives they cause (for good or ill) by marginally reducing the attractiveness of some kind of economic activity, and then simultaneously say that "well, nobody would change their behavior because of this other change." If you reduce or eliminate the tax advantages of home ownership, fewer people would buy homes. Nobody is saying that all homeowers would sell and start renting -- but of course there would be a reaction.

People do react to economic incentives. When we oversimplify and say "well, will this one guy do anything differently?" we miss the fact that there are lots and lots of guys in lots and lots of situations, some of whom are right on that "margin" of decision-making, and who will behave differently when we change the rules. Shift his $1,000 mortgage that comes with a $300 tax write-off into a $1,000 mortgage with no offset ... and he might not be able to afford it any longer. Many others would be able to, of course, but some people will change their behavior.

[QuikSand]

A second question I have for QS (since he is as close to a super-computer as they come), what if the proposal was to not tax "necessities" and give a "rebate" on a regular bases to everyone. I have heard numbers in the range of $15,000 per a household of four given in check form quarterly. Now, that seems like a mail thiefs dream, but would that allow a major offset for the regressivity of a sales tax?

Sure, this would certainly mitigate the regressivity.

But think it through, and you have a math problem again. If you are going to give back something like $5,000 per person from this new tax to everyone, that simply means that you need to raise an extra $1,400,000,000,000 each year in taxes - that's 1.4 TRILLION. That means, in all likelihood, that the tax rate would have to go up a good deal -- so instead of talking about a 22% tax or something like that, maybe it's a 40% tax, or maybe a 50% tax.

There's no free ride here.

[albionmoonlight]

Just throwing this out there:

A lot of proponents of a flat income or flat sales tax advertise the idea by, in part, putting the US Tax Code, regulations, etc. on a forklift and claiming that we need to "simplify" the Code.

Of course, the complexity of the Code really has nothing to do with it's progressive structure. We could have a 1 page Code that maintains the current progressive structure; we could also have a 5000 page flat tax Code with thousands of deductions and penalties and depreation tables, etc.

I think that the flat tax folks have done a good job of equating flat with simple, which has been a great marketing tool for them.

As I stated above, I am for a much simpler Code, but one that retains the current progressive structure. I understand that there are real benefits to the government encouraging certain behaviour (like investment in new equipment, saving for college & retirement, home ownership, etc.) through the Code. I just think that, from my perspective as a lawyer who has worked on the edges of the tax field, the pros of massive simplification outweigh the cons.

[Buzzbee]

Here's the problem. First, while corporations may not pay income tax, they will be paying higher taxes on all their supplies and materials. Suddenly, a business may be paying 20% more for their wood, or 15% more for its metal, etc. Then, combine that (with the tax) a computer system that was $10,000 before may be $12,000 now. Is a company that just saw its raw materials go up 20% want to go out and spend 15-20% more on "non-essential" computer upgrades? I doubt it.

If I tell .400 Studios that I will reduce their expenses by removing the income tax on any games they sell, would that be a good thing? Now, lets say I offset that good news with some bad news that I'm going to charge .400 Studios customers an extra 20% on the game they purchase, what is .400 going to do? Are they going to keep their price the same and expect their customers to pay that higher price? Or will they drop their price, since they can due to reduced expenses, to offset the increase due to the tax.

IF (and that's a big IF) the reduction in expense is enough to offset the increase in tax then (theorectically) it shouldn't adversely affect .400. So, the idea that a business will be paying 20% more for their supplies isn't very realistic.


One reason many companies did a lot of tech upgrades in the past two years is because of the income tax savings. Without that and a higher price on the systems, I just don't see many companies upgrading unless absolutely required to.

Tax savings is a VERY small reason. Improvements in technology, aging systems, improvements in the economy, companies outgrowing their systems, and loosening of IT budgets played a much greater role in justifying upgrades than tax savings. The tax savings were just gravy, not the meat.


But the tax increase on everyday goods will sap the purchasing power of money. Remember, most people get a standard deduction or itemize to significantly reduce the federal income tax. For the lower income people (15-25K), they often get paid back via the earned income credit.

If you make 25K in the current system, you would pay little taxes and may actually get money back via the EIC. In other words, you make close to 25K in net money (outside of FICA). In the consumption tax system, everything you buy is taxed about 20% more. So, in essence, that 25K becomes 20K. This type of system would hurt the middle class as well. A family of four making 50K has a million deductions (esp if they own a house). In this new system, not only do they lose those deductions, but all their goods increase in price via the taxes.

In fact, really the only benefit would be to people that make 250-400K a year and don't buy a lot of items. And, I don't think that's the group many would target to benefit in a new tax system.


Which is why there would be an exemption for low wage earners. Not sure where that threshold would fall, but as GrantDawg said, I think the number that has been tossed around was $15,000.


I'm not talking about the IRS. I'm talking about the tens of thousands (if not hundreds of thousands) of people that work for public accounting firms like Delloite and Touche doing taxes, H&R Block and Jackson Hewitt, and the thousands of small business CPA firms everywhere in the US. Most of them would be out of a job if this passes.

I'm know which people you are talking about. The people who support the existing infrastructure. I'm one of them. Sure there would be some transitional unemployment. However, the theory is that the increased disposable income individuals have would lead to increased spending, resulting in business growth and new jobs. That's the theory anyway.


Yes, but the taxes increase the price. Quiksand put this the best in his posts. While the consumer price may go down slightly (which is debatable when you figure the taxes on supplies and raw materials), the addition of the consumption tax takes that away.


Manufacturers are consumers too. So, the cost of supplies and raw materials would likely see similar results as finished goods.


I would bet that most families pay between 15 and 20% of their gross pay in federal income taxes. Many pay less (esp those with kids). You essentially hand that 15-20% back to them but then take 20% back on everything they buy. Guess what that does? Make them buy fewer things.

And, how does that help the economy?

You hand them between 15-20% of their gross pay, but the overall price of goods doesn't change, or may even go down. Guess what that does...allows them to spend, save or invest (or all three) that extra 15-20%.

[clintl]

The point is not where the money goes, but how efficiently it is used and circulated. If government was equally as effective as the private sector, then the idea of a socialist economy wouldn't be discredited.

The other point is that a lot of the stuff government spends money on are things that are needed by society, but the private sector either cannot provide at a price that people needing the service can pay, or would be inefficient to provide by the private sector. Things like education, roads and highways, police and fire protection, prisons, national defense, public health, environmental protection, etc. Sure, government wastes a good chunk of money. But a lot of what it does is necessary. FWIW, I think government has a record of doing some things more efficiently than the private sector. Utilities for example. At least around here, public sector electric companies have consistently provided better service at a lower price than the private sector, for-profit utilities. In the Sacramento area, there have been numerous cases of communities wanting to be annexed by the Sacramento Municipal Utility District, for example. I can't think of a single instance where a community wanted to leave SMUD, and be served by the dominant private sector utility in the region, Pacific Gas & Electric. And that's because SMUD has lower rates, better infrastructure, and more reliable service.

[GrantDawg]

But you can't have it both ways. You can't rail against taxes because of the incentives they cause (for good or ill) by marginally reducing the attractiveness of some kind of economic activity, and then simultaneously say that "well, nobody would change their behavior because of this other change." If you reduce or eliminate the tax advantages of home ownership, fewer people would buy homes. Nobody is saying that all homeowers would sell and start renting -- but of course there would be a reaction.

People do react to economic incentives. When we oversimplify and say "well, will this one guy do anything differently?" we miss the fact that there are lots and lots of guys in lots and lots of situations, some of whom are right on that "margin" of decision-making, and who will behave differently when we change the rules. Shift his $1,000 mortgage that comes with a $300 tax write-off into a $1,000 mortgage with no offset ... and he might not be able to afford it any longer. Many others would be able to, of course, but some people will change their behavior.
Again, this doesn't take into effect the increased money people would have toward investment. If homes have no sales tax and people have more money to invest, wouldn't it make sense that people would put more money into their homes?

[GrantDawg]

Sure, this would certainly mitigate the regressivity.

But think it through, and you have a math problem again. If you are going to give back something like $5,000 per person from this new tax to everyone, that simply means that you need to raise an extra $1,400,000,000,000 each year in taxes - that's 1.4 TRILLION. That means, in all likelihood, that the tax rate would have to go up a good deal -- so instead of talking about a 22% tax or something like that, maybe it's a 40% tax, or maybe a 50% tax.

There's no free ride here.
That is why I'm asking the Supercomputer. Again, that is the number I heard discussed. Of course this wouldn't be an "extra." This would be giving back the money raised on the lowest income earners (you remember. The ones that are being tax in sales tax system and are not in the current system). I have no idea what the numbers would actually look like or how it would work (which was one of the reasons I started this thread. I figured someone who was strongly for the sales tax would explain this kind of thing).

[clintl]

Again, this doesn't take into effect the increased money people would have toward investment. If homes have no sales tax and people have more money to invest, wouldn't it make sense that people would put more money into their homes?

What you're arguing there is that housing prices will go up.

Actually, though I think QS is right that less people will be able to afford homes, because when you first buy a home, if you have a 30-year mortgage (which most people do), almost all of your mortgage payment is deductible interest. This amounts to a huge write-off for new homebuyers, right at the time they need it most because they probably bought a house pretty close to the limit of their affordability.

[GrantDawg]

What you're arguing there is that housing prices will go up.

Actually, though I think QS is right that less people will be able to afford homes, because when you first buy a home, if you have a 30-year mortgage (which most people do), almost all of your mortgage payment is deductible interest. This amounts to a huge write-off for new homebuyers, right at the time they need it most because they probably bought a house pretty close to the limit of their affordability.
I'm about as tight as I can be, but the tax deduction entered about 0% into how much home I could by. Again, if you have more money to invest wouldn't people be incouraged to buy homes just as much as they are now?

[gstelmack]

I'm with the handful of people who have spoken up for "I don't care if it is a sales tax or an income tax or whatever as long as the code is simple enough for me to understand".

[clintl]

I'm about as tight as I can be, but the tax deduction entered about 0% into how much home I could by. Again, if you have more money to invest wouldn't people be incouraged to buy homes just as much as they are now?

I guarantee you that your mortgage company figured it into how big a loan they would give you.

[QuikSand]

If homes have no sales tax and people have more money to invest, wouldn't it make sense that people would put more money into their homes?

I think that's a perfectly sensible argument. It's tough to say which movement would prevail -- there would be two countervailing incentives for people to alter their home-ownership decisions.

My point was simply that one can't just dismiss the effect of losing the current tax incentive.

[GrantDawg]

I think that's a perfectly sensible argument. It's tough to say which movement would prevail -- there would be two countervailing incentives for people to alter their home-ownership decisions.

My point was simply that one can't just dismiss the effect of losing the current tax incentive.
I wasn't. I said there was a counter-incentive.

[clintl]

Personally, I do not see that these Schedule A tax deductions are all that complicated. They are pretty simple, in fact, and add very little complexity to the average person's tax return. It's mostly a matter of keeping the right records and receipts, and some of it (like state income tax) can simply be transferred to the return from a single piece of paper. And, on the whole, I think they reasonably target behavior that should be encouraged. It's the more esoteric stuff that makes the tax code complicated.

[GrantDawg]

I guarantee you that your mortgage company figured it into how big a loan they would give you.
And they also deducted the amount of income tax I should pay. If you take that out of the equation, I guarentee you'll have more to spend than you did when you only got a mortgage interest deduction.

[clintl]

Don't count on it. If you are a middle class taxpayer, you are probably going to get screwed by the new sales tax.

[QuikSand]

I'm about as tight as I can be, but the tax deduction entered about 0% into how much home I could by.

How is this possible?

Let's say you eventually decided that you could afford a home with a $1,500 mortgage. And at the end of the year, you are getting to write off 80% of that -- maybe that gets you a net deduction of $4,000 per year.

Are you honestly saying that you absolutely don't care whether you get that $4,000 back? That sounds like nonsense to me -- you're plenty smarter than that, aren't you? (Our common spelling crises notwithstanding, I'd certainly think so)

Getting a $1500 mortgage payment while paying only $1200 of it yourself is a big deal. If you didn't get that incentive (with nothing else changing) of course you would have adjusted the "how much I could buy" decision -- and presumably you'd have something like a $1200-1300 mortgage payment (and a lesser home).

[QuikSand]

I wasn't. I said there was a counter-incentive.

Okay, I see your point.

When I read your initial posting (separated for illustrative purposes):

This is much like the arguements that come from the mortgage lobby. They claim doing away with the tax-deduction on home ownership will drive people away from owning. Really? How many people buy a house solely for the tax break? As nice as it is, there are much more complelling reasons to own.

Plus, if there is no sales tax on homes, that is at least as good an incentive to put your money in a investment that is almost guarenteed to gain value. (Of course, it will do away with the need to keep a loan on the house for tax break, so that might hurt them personally).

I read the word "Plus" as a transition -- essentially starting a new thought, basically saying "all the preceding is true... and here's yet another argument."
I saw you making a refutation of the statement that "doing away with the tax-deduction on home ownership will drive people away from owning," and then following it up with more argument about the specific case at hand regarding the potential for a sales tax.


I see your initial point - and it's fine by me. Losing the deduction would tend to reduce home ownership, while its being untaxed by the new sales tax might make it more attractive than some other things.

[GrantDawg]

How is this possible?

Let's say you eventually decided that you could afford a home with a $1,500 mortgage. And at the end of the year, you are getting to write off 80% of that -- maybe that gets you a net deduction of $4,000 per year.

Are you honestly saying that you absolutely don't care whether you get that $4,000 back? That sounds like nonsense to me -- you're plenty smarter than that, aren't you? (Our common spelling crises notwithstanding, I'd certainly think so)

Getting a $1500 mortgage payment while paying only $1200 of it yourself is a big deal. If you didn't get that incentive (with nothing else changing) of course you would have adjusted the "how much I could buy" decision -- and presumably you'd have something like a $1200-1300 mortgage payment (and a lesser home).

Interest deduction is not a tax credit. You do not "get all of it back." It is a deduction that lowers you taxable income. So, your only getting the percentage equal to your tax rate. On top of that, that number lowers every year. And of course this is discussing me who pays nothing in income tax, so I actually get nothing back. If you added that amount to my taxable income, I may have to pay $300 dollars in income tax.

So the answer is no, I did not add that $300 to the amount I can pay on the house for a year.

[clintl]

You aren't doing the math right, GrantDawg. Almost all of that $1,500 a month is interest in the beginning. So really, you are getting something like a $16,000 a year tax deduction, which is probably going to save you $3000-$4000 a year in taxes paid, depending on your income. (Could be less if you are in a lower tax bracket.) That's $300 a month, not a year.

[Buzzbee]

Sure, this would certainly mitigate the regressivity.

But think it through, and you have a math problem again. If you are going to give back something like $5,000 per person from this new tax to everyone, that simply means that you need to raise an extra $1,400,000,000,000 each year in taxes - that's 1.4 TRILLION. That means, in all likelihood, that the tax rate would have to go up a good deal -- so instead of talking about a 22% tax or something like that, maybe it's a 40% tax, or maybe a 50% tax.

There's no free ride here.

This is one area of the issue that I am admittedly not well versed on: the effect on revenues to the government. According to what I've heard/read revenues to the govt. would be stable, or would increase. I have heard/read nothing about why this is the expectation, so it is something that I pretty much leave alone. However, your post above piqued a little curiousity and as GD said, since you are the resident SuperComputer (and because of your economic background and relationship to govt.) I'm hoping you might fill in some of the cracks.

First, point of clarification: Above you mentioned a $5,000 "rebate". I believe it would be more along the lines of $3,500. ($15,000 exemption threshold X .23 tax rate = $3,450). Not a major difference, but when talking about multiplying that by the population of the US, it adds up. Although there may have been other things included in that $5,000 that I'm not aware of, so correct me if I'm wrong.

I'm assuming that the estimated revenues to the govt should be fairly easy to calculate based on gross national product or gross domestic product or some other existing measure. Do you have any idea how that would compare to the existing revenue to the govt from income taxes? I have no idea where to start looking for these figures and thought you might know, or know where to easily look it up.

[clintl]

Dola...

That's why people can save so much per month when they refinance - because the interest they're paying is so much.

[GrantDawg]

I'm reading the house bill that Linder/Peterson put forward this year. It says that everyone would get back every month in the form of a "rebate" an amount equal to the poverty level. The rate of sales tax would be 22% and that would include all Social Security and Medicare taxes (ie. do away with all payroll taxes). Just so we know where they are pointing.

[GrantDawg]

You aren't doing the math right, GrantDawg. Almost all of that $1,500 a month is interest in the beginning. So really, you are getting something like a $16,000 a year tax deduction, which is probably going to save you $3000-$4000 a year in taxes paid, depending on your income. (Could be less if you are in a lower tax bracket.) That's $300 a month, not a year.
I'm talking personally, and I do my own taxes. It would be affectively $300 dollars a year. It would take a good percentage of that money just to take me into the taxable range. :)

[gstelmack]

So the answer is no, I did not add that $300 to the amount I can pay on the house for a year.
I'm in the same boat, but for a different reason. Most of that $4000/year you guys are talking about goes right back into the house to fix leaky faucets, gas for the lawn mower, tools, lumber, miscellaneous hardware, ladders, wheel barrows, and all the other junk I have to buy / pay for because I own the house instead of renting and letting someone else fix it.

[clintl]

OK. Your situation must be pretty unique, then, because for most people, it's a savings of at least a few hundred dollars a month when they first buy a house.

[QuikSand]

I guess this is where you are confusing me. Using the example of grocery stores - as I understand it, they pretty much operate on razor thin margins. I think in the neighborhood of 1-2% net profit. Wouldn't they eventually return to that level? Yes, prices might be a little inflated initially, but wouldn't that attract more competitors trying to get a piece of the more profitable pie?

Sorry I missed this earlier.

Okay, let's take as a given your assertion (true, I believe) that grocers operate on a razon-thin margin.

So, a can of greenbeans that currently sells for $1.00 costs them something like $0.98 -- leaving a very modest margin of profit for them. Agreed.

Make this giant tax switch. No income taxes, only sales taxes at 25%.

Your theory, it seems, is that the costs of providing the merchandise will come down. Okay -- it's not hard to explain that perhaps worker salaries would drop, since their take-home share is so much greater. Assuming this happens seamlessly (a bold assumption) then the labor components of things shoudl drop in price. What is the labor component of a can of green beans? I have no earthly idea... but it almost cannot be 100% -- there's too much equipment involved. There is the cost of farm equipment, transportation equipment, canning and packaging equipment, more transportation equipment, and all sorts of other overhead built ino that can of green beans. If labor represents 50% of that cost (just a stab) and the cost of labor dropped by a very healthy 20% overall... then we might expect to see a 10% drop in the costs of a can of green beans. Those are pretty favorable assumptions, in my view, but I'm trying not to seem biased. So, if all that happens -- what do we have?

Previously: 98 cents + 2 cents profit = $1.00 sale price
Afterward: 88 cents + 2 cents profit + 23 cents tax = $1.13 sale price

Sure, we might not see an absolute increase in all consumable costs due to the taxes -- but even with some very favorable assumptions, the best I can muster here is that half of the new tax's effect gets washed out. And there are plenty of segments of the overall market where labor probably represents an even smaller share of the costs involved, providing even fewer opportunitites to contract costs downward.

My best guess, and that's all it is, is that we wouldn't see much change in labor costs at all -- people would want to retain their curent level of salaries, it's just too hard to get someone to agree that making 10% less than before is better than where they were, regardless of the tax consequences. As a result, we'd just see salaries stay about the same, and people would then pay the tax man a different way than before -- paying 25 cents at a time with every can of green beans, rather than in a big bite out of thieir weekly paychecks.

[clintl]

I'm in the same boat, but for a different reason. Most of that $4000/year you guys are talking about goes right back into the house to fix leaky faucets, gas for the lawn mower, tools, lumber, miscellaneous hardware, ladders, wheel barrows, and all the other junk I have to buy / pay for because I own the house instead of renting and letting someone else fix it.

And you wouldn't have that $4000 to spend if the mortgage deduction were eliminated.

[GrantDawg]

OK. Your situation must be pretty unique, then, because for most people, it's a savings of at least a few hundred dollars a month when they first buy a house.
It is. In truth, a sales tax would affect me more negatively than most other people. So, though I used a personal illustration which I regret, I'm really not trying to find what would be "best for me." If that was the basis, then I would want to keep the current system. I'm trying to figure out what would be best for all. I'm not convinced it is a sales tax, but I'm not totally unconvinced either.

[GrantDawg]

And you wouldn't have that $4000 to spend if the mortgage deduction were eliminated.
But he would have much more than that to spend if all payroll taxes were eliminated. :)

[QuikSand]

I'm assuming that the estimated revenues to the govt should be fairly easy to calculate based on gross national product or gross domestic product or some other existing measure. Do you have any idea how that would compare to the existing revenue to the govt from income taxes? I have no idea where to start looking for these figures and thought you might know, or know where to easily look it up.

Your comment about estimating the actual "rebate" amount is fine by me -- my number was a stab in the dark, only. If it's $3,500 instead of $5,000 - okay. The point is largely the same, but I defer to more accurate figures as need be.

(I now see the correction in figures is of a pretty different magnitude. I'd stick with the obvious assertion, though, that by giving people some kind of "rebate" designed to reduce progressivity, you're just driving up the tax rate we all pay. If the 22% rate is built around this system of rebates, then it probably could have been 12% or 16% or something else like that without the rebates.)


As for coming up with a figure to determine how much revenue is needed -- I'm not sure. I went quickly ot the IRS web site, and found their total collections for 2003 to be something just a shade under $2 trillion (about 1.95T, actually). That includes income taxes, FICA, estate taxes, and a few cats and dogs. Just the individual income tax and FICA adds to about 1.68T, and corporate income is another 0.19T, for what it's worth. So -- maybe the amount to be replaced from there is properly about $1.9 trillion.

http://www.irs.gov/pub/irs-soi/03db06co.xls

Not sure what might be missing from that picture, though. It's a start.

[clintl]

But he would have much more than that to spend if all payroll taxes were eliminated. :)

Probably not, because he would be giving it all back on sales taxes, and more, if he was a middle class taxpayer.

[Buzzbee]

Sorry I missed this earlier.

Okay, lets' take as a given your assertion (true, I believe) that grocers operate on a razon-thin margin.

So, a can of greenbeans that currently sells for $1.00 costs them something like $0.98 -- leaving a very modest margin of profit for them. Agreed.

Make this giant tax switch. No income taxes, only sales taxes at 25%.

Your theory, it seems, is that the costs of providing the merchandise will come down. Okay -- it's not hard to explain that perhaps worker salaries would drop, since their take-home share is so much greater. Assuming this happens seamlessly (a bold assumption) then the labor components of things shoudl drop in price. What is the labor component of a can of green beans? I have no earthly idea... but it almost cannot be 100% -- there's too much equipment involved. There is the cost of farm equipment, transportation equipment, canning and packaging equipment, more transportation equipment, and all sorts of other overhead built ino that can of green beans. If labor represents 50% of that cost (just a stab) and the cost of labor dropped by a very healthy 20% overall... then we might expect to see a 10% drop in the costs of a can of green beans. Those are pretty favorable assumptions, in my view, but I'm trying not to seem biased. So, if all that happens -- what do we have?

Previously: 98 cents + 2 cents profit = $1.00 sale price
Afterward: 88 cents + 2 cents profit + 23 cents tax = $1.13 sale price

Sure, we might not see an absolute increase in all consumable costs due to the taxes -- but even with some very favorable assumptions, the best I can muster here is that half of the new tax's effect gets washed out. And there are plenty of segments of the overall market where labor probably represents an even smaller share of the costs involved, providing even fewer opportunitites to contract costs downward.

My best guess, and that's all it is, is that we wouldn't see much change in labor costs at all -- people would want to retain their curent level of salaries, it's just too hard to get someone to agree that making 10% less than before is better than where they were, regardless of the tax consequences. As a result, we'd just see salaries stay about the same, and people would then pay the tax man a different way than before -- paying 25 cents at a time with every can of green beans, rather than in a big bite out of thieir weekly paychecks.

But isn't the income tax a corporation pays also built into the price of the commodity? So shouldn't we not only see a reduction in labor expense, but a reduction in overhead? It seems like you are omitting that factor and that it could affect the $1.13 price enough to bring it back down toward the $1.00 mark. Those suppliers to the green bean manufacturer would have reduced labor expense* but they would also have reduced overhead, further reducing the price at which they COULD sell raw materials and services to the Jolly Green Giant, thus reducing the cost of a can of green beans from your example.


*(possibly, I think you are right that it is unreasonable to expect Americans to take a "pay cut" - also, with a pay cut it would remove/reduce any benefit they would get from the elimination of income taxes)

[QuikSand]

But isn't the income tax a corporation pays also built into the price of the commodity?

Certainly, but we started with your assumption that these are razor-thin profit margins in this industry. Corporations pay taxes on their profits. So, if you think they would kindly pass on all these tax savings to their customers -- fine. We can deduct something like 1/2 of a cent from each can of green beans for the unburdening of the old corporate income tax regime.

I'll edit above if that seems necessary. It doesn't to me.

[QuikSand]

also, with a pay cut it would remove/reduce any benefit they would get from the elimination of income taxes

Of course it would... that's why I keep coming back to the notion that there is no free ride to be had here.

If you're discussing how to reform tax policy in order to generate the same amount of revenues in some different way -- then there really is only one set of taxpayers. It's us.

You can change the incidence -- making some groups of taxpayers pay more or less than before. And you can change the visibility of the taxes -- perhaps if people don't actually see the taxes they are paying, they won't notice them as much, right? But it still comes down to this: we pay them.

[GrantDawg]

This is what Linder/Peterson says on rebates:


`Each qualified family shall be eligible to receive a sales tax rebate each month. The sales tax rebate shall be in an amount equal to the product of--



`(1) the rate of tax imposed by section 101, and




`(2) the monthly poverty level.

(so it is not poverty level, but the product of povery level*tax percentage)

The 2003 Federal poverty level for a family of four was $18,400. So, the rebate for a family of four would be $4,234 dollars. So, it was a lot less than I stated before.

[QuikSand]

As I noted above (via edit) -- my initial argument stands, it's just a matter of noticing that the 22% rate has been inflated by this rebate system. Without the give-back, we'd only need a 15% or 18% rate, or something like that.

[gstelmack]

And you wouldn't have that $4000 to spend if the mortgage deduction were eliminated.
But I wouldn't need to spend it if I hadn't bought the house. That $4000 is a wash, in other words. All it does is help me maintain the home, it does not give me extra cash to spend on something else.

[Buzzbee]

Probably not, because he would be giving it all back on sales taxes, and more, if he was a middle class taxpayer.

Actually, that is what Quik and I are discussing. Chances are the consumer wouldn't be giving it ALL back on sales taxes, and it is possible that prices might remain somewhat stable. Basically, the OVERALL price would remain the same, but the components that make it up would be shifted. In other words a $1.00 can of beans would move from $1.00 price and no tax to $0.75 price and $0.25 tax. Still a dollar, just differing components.

However, that scenario wouldn't apply accross the board. Some goods would see slight overall increases, other goods (such as luxury items) might see the full amount of the tax added to the overall price, and some goods might actually see a reduction in overall price.

[Buzzbee]

Certainly, but we started with your assumption that these are razor-thin profit margins in this industry. Corporations pay taxes on their profits. So, if you think they would kindly pass on all these tax savings to their customers -- fine. We can deduct something like 1/2 of a cent from each can of green beans for the unburdening of the old corporate income tax regime.

I'll edit above if that seems necessary. It doesn't to me.

Profit margins of the suppliers may not be razor thin, but point taken.

[GrantDawg]

Ok, on further review of Linder/Peterson:

ALL goods and services would be taxed. Only "used property" sales would not be. I would take that to mean everything (food, housing, utlities, etc) would be included. That would in essence raise taxes considerably on the lower and middle classes. A few thousand dollars a year would not offset the regressive nature of that tax that I can see. It would essentially be a huge tax increase on the lower incomes. That is not good.

[QuikSand]

Chances are the consumer wouldn't be giving it ALL back on sales taxes...

I know that there are different types of consumer out there (the caviar consumer is going to fare differently than the Cheerios consumer) but the taxes are going to get paid by somebody. We can't just magic that away.


The very rich, under any kind of consumption taxation system, are going to do better. Typically far better. If this is a revenue-neutral system, as purported, that means that the rest of thje taxpayer classes are going to be picking up the slack. This kind of tax reform will not lower the tax burden for middle class and lower class people. It may be superficially appealing to those who simply don't understand how it would really work, it may be apealing to those who don't really pay attention to how those sales raxes really do add up, and it may be appealing to people on ground other than distributional (such as incentives) -- but this is an unabashed money loser for the family of four making $80,000.

[QuikSand]

Ok, on further review of Linder/Peterson:

ALL goods and services would be taxed. Only "used property" sales would not be. I would take that to mean everything (food, housing, utlities, etc) would be included. That would in essence raise taxes considerably on the lower and middle classes. A few thousand dollars a year would not offset the regressive nature of that tax that I can see. It would essentially be a huge tax increase on the lower incomes. That is not good.

As I have said previously, if the tax rate is that low, then the base has to be very wide (much wider than current sales tax bases).

There is no free ride here.

[Buzzbee]

Of course it would... that's why I keep coming back to the notion that there is no free ride to be had here.

If you're discussing how to reform tax policy in order to generate the same amount of revenues in some different way -- then there really is only one set of taxpayers. It's us.

You can change the incidence -- making some groups of taxpayers pay more or less than before. And you can change the visibility of the taxes -- perhaps if people don't actually see the taxes they are paying, they won't notice them as much, right? But it still comes down to this: we pay them.

I hope I haven't come accross as anticipating a free ride, because that is certainly not the case. There are advantages and disadvantages either way.

As for generating the same revenues, no, but I was curious if the national sales tax would generate more, less, or about the same.

To your last point, yes, it is simply a matter of right pocket vs. left pocket. The main purpose for this mental masturbation was to explore if changing the tax policy could have benefits that would lead to things being better overall. As I stated early on in this thread, I'm not sold on the idea of a national sales tax, and don't believe it will come to fruition in the next few decades. My main purpose of playing devil's advocate was to present that side of the idea so that people who haven't been exposed to the idea could see some of the positive (and negative) aspects.

I've enjoyed the discussion Quik. I'm glad there are people around here who can back up their opinions with facts and reason, rather than just blind faith, and who are open-minded enough to listen to what others have to say (even if I am a tad persistent and annoying).

[QuikSand]

Even without gigantic offiicial data from the government, we can think this through just fine.

Right now, the tax rates on our income are around 30% (just round numbers). Some people pay more, some less. Add in our payroll taxes, and it's maybe 40% in total, or something like that. Wghen you allow people deductions and exemptions, liek we do, it brings down everyone's effective tax rate to perhaps as low as 25% or so. That's 25% on all the earned income in the country.

If you want to replace all that -- you've got to do one of two things. Either find a base that's even broader than all the income in the country... or tax something at a higher rate than what we currently tax income. Simple math.

If these clowns (and I use here the term of proper respect for members of the USHOR) want to switch to a simple sales tax -- fine. If 22% is enough to make up all the same revenue we get from our current income tax schemes... then that's got to be a very, very broad tax base. You're probably right - this would be a tax on everything including food, medicine, and housing -- which sounds a lot less appealing. But you can't pay for everything by just taxing Twinkies and speedboats.

It's possible that the "rebate" system described would make this particular proposal somewhat fair to the very low income strata -- but that only means that the true "middle class" will end up with a royal screwing. That might be desirable public policy, in the eyes of some... but it's also the explanation why this is a total back-bencher idea, that properly hasn't really caught on. Maybe the swarthy charisma of Denny Hastert can get this thing rolling... who can say? ::snicker::

[QuikSand]

I hope I haven't come accross as anticipating a free ride, because that is certainly not the case. There are advantages and disadvantages either way.

As for generating the same revenues, no, but I was curious if the national sales tax would generate more, less, or about the same.

To your last point, yes, it is simply a matter of right pocket vs. left pocket. The main purpose for this mental masturbation was to explore if changing the tax policy could have benefits that would lead to things being better overall. As I stated early on in this thread, I'm not sold on the idea of a national sales tax, and don't believe it will come to fruition in the next few decades. My main purpose of playing devil's advocate was to present that side of the idea so that people who haven't been exposed to the idea could see some of the positive (and negative) aspects.

I've enjoyed the discussion Quik. I'm glad there are people around here who can back up their opinions with facts and reason, rather than just blind faith, and who are open-minded enough to listen to what others have to say (even if I am a tad persistent and annoying).

I enjoy the discussion, and take no offense from questions or contrarian advocacy.

[Bee]

I think we should do away with taxes and run the government with volunteers. :D

[GrantDawg]

Reading even more, I still can't find whether real-estate is taxed or not. Somethings suggest not. Still, with everything including services taxed, there is no doubt that the middle class will take the brunt of this. I'm not crazy about the current system, but I don't see a system that increases the burden on the middle class as "good."

BTW, I found one website that had cases-study examples on how the middle class would end up "better." Let me show you there examples:

A family of four, with one wage earner making 2X minimum wage and one making minimum wage

(Assumes consumption spending at 100% of income)

How do they fare now? How do they fare under the FairTax?

Current FairTax system system

Gross income...................................................$32,136 $32,136

Less payroll taxes..............................................-4,915 0.00

Plus EITC and child credits...................................+987 0.00

Cost of hidden taxes & compliance........................-6,206 0.00
Add the prebate family allowance...........................0.00 +5,745

Spendable income..............................................20,028 37,881

Federal sales tax.................................................0.00 -8,713

True after-tax purchasing power.........................$20,028 $29,168




The vast majority of the supposed "savings" comes under the heading of cost of taxes and hidden compliance. That number could be easily exaggrated. The amount tax by the sales tax also counts a 22% drop in prices because of all the savings in the system. I doubt seriously we'd see that big a price drop.
Notice for a family at $100,000:

A family of four making $100,000 per year

How do they fare now? How do they fare under the FairTax?

Current FairTax system system2

Gross income......................................................$100,000 $100,000

Less payroll taxes.................................................-12,863 0.00

Less federal income taxes......................................-7,905 0.00

Total taxes ........................................................-20,768 0.00

Add the prebate family allowance..............................0.00 +5,575
Spendable income................................................79,232 105,575

Mortgage payment..............................................-19,960 -16,566

After mortgage spendable income........................... 59,272 89,009

Cost of hidden taxes & compliance.........................-13,040 0.00

Federal sales tax....................................................0.00 -20,561

True after-tax purchasing power............................$46,232 $68,448



Again, the savings mostly come from the supposed 22% decrease in the cost of goods, the huge hidden taxes and compliance costs, and a cheaper mortgage payments (because they argue on at least a 2% drop in interest rates will occur).

All of this confirms to me this isn't the best system. If we want to save money on tax compliance etc. the best system I can see is a flat-tax.

[GrantDawg]

Sorry if that looks bad, but I couldn't get it to format any better.

[randal7]

Let's say you eventually decided that you could afford a home with a $1,500 mortgage.

I knew real estate was somewhat cheaper where I live than in much of the country, but... wow! My mortgage, insurance, and taxes total about $600/month. For a $1500 payment I could buy something in the 3000-4000 square foot range. Where do you people live that this is a normal payment? (And what do you do for a living that allows you to pay that much?)

[GrantDawg]

I knew real estate was somewhat cheaper where I live than in much of the country, but... wow! My mortgage, insurance, and taxes total about $600/month. For a $1500 payment I could buy something in the 3000-4000 square foot range. Where do you people live that this is a normal payment? (And what do you do for a living that allows you to pay that much?)
Where the heck do you live? I could deal with a $600 house payment.

[QuikSand]

I knew real estate was somewhat cheaper where I live than in much of the country, but... wow! My mortgage, insurance, and taxes total about $600/month.

In my area (the DC-Baltimore metro corridor) $600 a month will buy you a rathole.

[QuikSand]

Again, the savings mostly come from the supposed 22% decrease in the cost of goods, the huge hidden taxes and compliance costs, and a cheaper mortgage payments (because they argue on at least a 2% drop in interest rates will occur).

All of this confirms to me this isn't the best system. If we want to save money on tax compliance etc. the best system I can see is a flat-tax.

I think you snooped that one out pretty well. Almost everyone out there who claims that their system is good for everyone (and plenty of them do) have some B.S. smoke-and-mirrors involved, like the "costs of hidden taxes and compliance." I can't even fathom what they are counting there to make it amount fo that higha figure for these families, but to assume that whatever it is would just suddenly disappear into vapor is specious accounting, I reckon.

It's like the oldest political argument in the book: We'll cut government by eliminating the waste, fraud, and abuse. Nearly every "outsider" party who doesn't have any say in government policy claims this, and always says they can save staggering sums by doing so -- but when they actually get into power, they suddenly find that it's not so easy after all. (We're seeing this now in Maryland, with our first real Republican administration in anyone's memory)

[gstelmack]

I knew real estate was somewhat cheaper where I live than in much of the country, but... wow! My mortgage, insurance, and taxes total about $600/month. For a $1500 payment I could buy something in the 3000-4000 square foot range. Where do you people live that this is a normal payment? (And what do you do for a living that allows you to pay that much?)
My current mortgage is around $1350/month (including equity payments for property tax, etc) on a 2500 sq ft home. The key that allows us to afford it is not what I do, but that my wife does the same thing (and if you think the mortgage is bad, you should see the cost of daycare for our daughter...).

[clintl]

I knew real estate was somewhat cheaper where I live than in much of the country, but... wow! My mortgage, insurance, and taxes total about $600/month. For a $1500 payment I could buy something in the 3000-4000 square foot range. Where do you people live that this is a normal payment? (And what do you do for a living that allows you to pay that much?)

I think the median price for a house in the Sacramento area is approaching $400,000 (it's over $400,000 here in Davis). Based on what I'm paying and what I bought my house for, I'd say that the typical payment for a new home buyer here is above $2,000 a month.

[Buzzbee]

Where the heck do you live? I could deal with a $600 house payment.

He lives in Alaska. It's an igloo.

[judicial clerk]

$600 per month would not pay for my daughter's three days per week of daycare. It also wouldn't pay may student loan nut. Give me a moment while I wipe away a tear. There, thats better.

In evaluating these competing tax systewms, it is important to look at the amount of taxes actually collected under each system. Does anyone know what percentage of taxes owed are actually collected under our income tax system versus what should be owed? My thought is that a national sales tax may be easier to collect than income taxes and therefore could lead to a highertax revenue. Maybe this is not true.

Also, it seems that a national sales tax would increase the amout of taxes businesses pay. I believe businesses pay a small amount of taxes because their income is drastically reduced by deductions. Making business pay a consumption tax would seem to generate more tax revenue.

[Castlerock]

I knew real estate was somewhat cheaper where I live than in much of the country, but... wow! My mortgage, insurance, and taxes total about $600/month. For a $1500 payment I could buy something in the 3000-4000 square foot range. Where do you people live that this is a normal payment? (And what do you do for a living that allows you to pay that much?)

$600... Wow. It is simply not possible to own for that kind of money here.

There are parking spaces in a garage down the street that routinely go for over $100,000. As high as $167,000 last spring.

[Buzzbee]

Give me $100,00 and I'll LIVE in the parking space.

[randal7]

He lives in Alaska. It's an igloo.

:D

Actually I live in sunny, humid southern Illinois. In exchange for giving up the pleasures (?) of city life, I can afford over 2000 sq feet and a yard it takes me 1 1/2 hours to mow.

Clintl: $400 grand here would buy an entire block in some of the older parts of town... In fact, back before the baby came along, I had considered trying to get someone to go in with me on 4 four-plex apartments that the asking price was $575,000.

[clintl]

:D

Actually I live in sunny, humid southern Illinois. In exchange for giving up the pleasures (?) of city life, I can afford over 2000 sq feet and a yard it takes me 1 1/2 hours to mow.

Clintl: $400 grand here would buy an entire block in some of the older parts of town... In fact, back before the baby came along, I had considered trying to get someone to go in with me on 4 four-plex apartments that the asking price was $575,000.

What is even more remarkable is that by California standards, Sacramento is one of the cheapest of the major metropolitan areas to buy a house in. A lot of people buy houses here and commute to the Bay Area because they can't afford Bay Area house prices.

[randal7]

That is essentially a supporting argument on behalf of a different result. What you're suggesting is that a tax cut, putting money into hands of private interests rather than public hands, causes that money to be used more efficiently. The natural result woudl be that there would be some growth in the overall economy as a result. Many would agree with that.

It's another matter entirely to suggest that not only will the entire economy grow from a tax cut, but that it will grow by such leaps and bounds that it overcomes the reduction in the tax rate to cause tax revenues to actually increase. Remember - marginal tax rates are between 30 and 40% in this country -- meaning that if you cut taxes by 1%, you'd need the income-producing economy to grow by something like 3% just to break even. That suggests a perverse set of economic incentives are in play regarding earned income -- which is just counterintuitive.

You are only considering the first year of lower taxes. In year 1, govt revenue prior to the tax cut (R) is reduced by 1% (.99R) and the economy will grow by an extra amount, of which the government's share is (x), for a total revenue that year of .99R + x. The second year there is additional extra growth and total govt revenue is .99R + 2x. Over N number of years, the revenue for a given year is .99R + Nx. (I realize this is oversimplified; x will not be constant, and there will be compounding effects on each year's extra growth from year to year, and probably several things I haven't thought of). At some point, .99R + Nx = R. In year N, revenue is back where it was, and the economy is larger than it would have been without the tax cut. Much like investing your profits back into your business, you give up cash now for more, and a bigger base, later.

The question becomes, is N a small or large number, and at what point does the delay in revenue outweigh the increased economic growth.

[QuikSand]

You are only considering the first year of lower taxes. In year 1, govt revenue prior to the tax cut (R) is reduced by 1% (.99R) and the economy will grow by an extra amount, of which the government's share is (x), for a total revenue that year of .99R + x. The second year there is additional extra growth and total govt revenue is .99R + 2x. Over N number of years, the revenue for a given year is .99R + Nx. (I realize this is oversimplified; x will not be constant, and there will be compounding effects on each year's extra growth from year to year, and probably several things I haven't thought of). At some point, .99R + Nx = R. In year N, revenue is back where it was, and the economy is larger than it would have been without the tax cut. Much like investing your profits back into your business, you give up cash now for more, and a bigger base, later.

The question becomes, is N a small or large number, and at what point does the delay in revenue outweigh the increased economic growth.

Oh, dear.

[Shkspr]

If it turns out that someone has managed to make Quiksand's eyes glaze over with mere algebra, my worldview will be shattered. Please, Quik - fight f(n) with f(n)! :p

[randal7]

Quik, I hoped for a more detailed response ;) . I'm learning a few things here (when I can follow the conversation, anyway), and I hoped you'd tell me where I was off base (or at least where you thought I was :p ).

[QuikSand]

No, it's not that my eyes glazed over... it's just that this sends us down a very different track. But I'll give the detailed response... it's my solemn duty.

Okay... randal7's algebra is perfectly fine. In concept, there is truth to the notion that over a long period of time, the compounded growth in the economy would result in an overall gain in revenues.

I put together an example that I would judge to be reasonable, just to show how this works out. (I won't give you the year by year data - just the relevant results) Here are the assumptions:

-All monetary terms are in real dollars, so we can wash out simple inflation

-The current tax rate is a simple 30% of all income-producing activity (simplifed for obvious reasons, but not that off the mark)

-We would proposes to reduce the tax rate by 1%

-People would then respond to this new tax rate by expanding their supply of income-producing activity, because the net "price" for it has increased (this is the inverse of the tax rate -- moving from 70% to 71% here)

-The elasticity of response here is a reasonable 0.25 (In a model with no competing alternatives, I suspect that is probably too high a ratio, but I'm trying to be fairly reasonable here)

-Therefore, the approximately 1.4% increase in the effective wage rate translates to about a 0.35% increase in income-producing activity


With all these assumptions (specifics are debatable, but again I'd assert they are pretty realistic), we can see two things:

#1 -- In the immediate sense, the government loses money, of course. The amount of money lost is just a shade under 3% of total revenues. You may think of it this way: going from 30% tax to 29% tax would have caused about a 3.3% revenue drop, but the resulting edge up in the overall economy mitigated that to only about 3.0% drop instead.

Note: Please don't misunderstand, the entirety of the "Laffer Curve" supply-side economic theory is that this simple, immediate calculation will indeed result in a positive result. We are not even close to that, by any stretch. You can tinker with my variables, but we con't get close until you're making an ass of yourself.

#2 -- Over time, we would expect to see the eventual incremental tiny growth in the economy result in a greater base for taxation, which would eventually catch up to where we were to start off. This much is a mathematical necessity.

Using the assumptions above, the annual revenues catch up with the baseline in year ten, and the cumulative revenues catch up in year eighteen. So, yes -- conceptually, we are making a current dollar investment in some future base growth down the line, but the horizon is a pretty distant one just to get back to zero.

What is missing from this, however, is any recognition of the time value of money (even after adjusting for inflation, which I have already done). My model, for obvious simplicity's sake, doesn't include any reckoning there. It would be a lot harder to justify my "reasonable" assumption there -- how much do you discount the value of future payments? But any realistic weighing of current investment versus future return absolutely needs to consider this.

Let's say I offer you a guaranteed deal-- you give me $1,000 right now, and I'll promise (in the most absolute way possible) to give you back $10 a year forever. You can do the math, you will come out ahead over time, right?

Wrong. The time value of money tells us that I can ovsiouly invest the $1,000 and gain a return on it of more than $10 per year -- meaning that the stream of $10 payments, while nominally adding up to something more than the original $1,000. Even when we're talking about ignoring inflation itself -- there still is a time-based discount involved, and it's very meaningful.

Would the stream of added revenues many, many years down the line make it a "good investment" to the government to make reductions now? It might be impossible to say.


But back to the original points. There is (well, mostly there was) a school of thought that The United States could realize an immediate gain in revenues by simply lowering tax rates, because the resulting booming economy would cause enough tax base growth to wash out the rate drop. That assertion, given present tax rates and any sort of reaosnable understanding of worker and corporate behavior, is positively laughable.

A hypothetical, algebraic claim can be made that there are net gains to be had in the long, long run -- but the ability to quantify the decades-long impact of marginal tax rate reductions will almost certainly keep this solely in the realm of the hypothetical. Besides, nearly anything that lies outside the effective political frontier (i.e. the next election) is pointless for decision-makers in a representative democracy like ours -- who wants to bite the bullet now, so the guy in office twenty years from now makes out like a bandit?

[judicial clerk]

No, it's not that my eyes glazed over... it's just that this sends us down a very different track. But I'll give the detailed response... it's my solemn duty.

Okay... randal7's algebra is perfectly fine. In concept, there is truth to the notion that over a long period of time, the compounded growth in the economy would result in an overall gain in revenues.

I put together an example that I would judge to be reasonable, just to show how this works out. (I won't give you the year by year data - just the relevant results) Here are the assumptions:

-All monetary terms are in real dollars, so we can wash out simple inflation

-The current tax rate is a simple 30% of all income-producing activity (simplifed for obvious reasons, but not that off the mark)

-We would proposes to reduce the tax rate by 1%

-People would then respond to this new tax rate by expanding their supply of income-producing activity, because the net "price" for it has increased (this is the inverse of the tax rate -- moving from 70% to 71% here)

-The elasticity of response here is a reasonable 0.25 (In a model with no competing alternatives, I suspect that is probably too high a ratio, but I'm trying to be fairly reasonable here)

-Therefore, the approximately 1.4% increase in the effective wage rate translates to about a 0.35% increase in income-producing activity


With all these assumptions (specifics are debatable, but again I'd assert they are pretty realistic), we can see two things:

#1 -- In the immediate sense, the government loses money, of course. The amount of money lost is just a shade under 3% of total revenues. You may think of it this way: going from 30% tax to 29% tax would have caused about a 3.3% revenue drop, but the resulting edge up in the overall economy mitigated that to only about 3.0% drop instead.

Note: Please don't misunderstand, the entirety of the "Laffer Curve" supply-side economic theory is that this simple, immediate calculation will indeed result in a positive result. We are not even close to that, by any stretch. You can tinker with my variables, but we con't get close until you're making an ass of yourself.

#2 -- Over time, we would expect to see the eventual incremental tiny growth in the economy result in a greater base for taxation, which would eventually catch up to where we were to start off. This much is a mathematical necessity.

Using the assumptions above, the annual revenues catch up with the baseline in year ten, and the cumulative revenues catch up in year eighteen. So, yes -- conceptually, we are making a current dollar investment in some future base growth down the line, but the horizon is a pretty distant one just to get back to zero.

What is missing from this, however, is any recognition of the time value of money (even after adjusting for inflation, which I have already done). My model, for obvious simplicity's sake, doesn't include any reckoning there. It would be a lot harder to justify my "reasonable" assumption there -- how much do you discount the value of future payments? But any realistic weighing of current investment versus future return absolutely needs to consider this.

Let's say I offer you a guaranteed deal-- you give me $1,000 right now, and I'll promise (in the most absolute way possible) to give you back $10 a year forever. You can do the math, you will come out ahead over time, right?

Wrong. The time value of money tells us that I can ovsiouly invest the $1,000 and gain a return on it of more than $10 per year -- meaning that the stream of $10 payments, while nominally adding up to something more than the original $1,000. Even when we're talking about ignoring inflation itself -- there still is a time-based discount involved, and it's very meaningful.

Would the stream of added revenues many, many years down the line make it a "good investment" to the government to make reductions now? It might be impossible to say.


But back to the original points. There is (well, mostly there was) a school of thought that The United States could realize an immediate gain in revenues by simply lowering tax rates, because the resulting booming economy would cause enough tax base growth to wash out the rate drop. That assertion, given present tax rates and any sort of reaosnable understanding of worker and corporate behavior, is positively laughable.

A hypothetical, algebraic claim can be made that there are net gains to be had in the long, long run -- but the ability to quantify the decades-long impact of marginal tax rate reductions will almost certainly keep this solely in the realm of the hypothetical. Besides, nearly anything that lies outside the effective political frontier (i.e. the next election) is pointless for decision-makers in a representative democracy like ours -- who wants to bite the bullet now, so the guy in office twenty years from now makes out like a bandit?


Yeah! Go back to the shire randal7 where houses only cost 1000 bucks and take your algebra and national sales tax with you.



just kidding. I actually find the idea of a sales tax appealing because I don't necessarily agree with the assumption that the "fairness" of a tax is determined by comparing individuals ability to pay. Or maybe that is John Gault talking.

[GrantDawg]

Where is JG?

[Buccaneer]

I didn't read beyond the first half page, so sorry to interject here. I think from a libertarian point of view, the focus is not on the method of taxation but on (reducing) spending of what revenues do come in. Instead of trying to change the tax code, I would propose to put forth the effort to substantially cut govt waste, pork and bureaucracy. Once that is achieved, then it really doesn't matter how it taxes (I don't think any method is perfect, they all have flaws).

[gstelmack]

just kidding. I actually find the idea of a sales tax appealing because I don't necessarily agree with the assumption that the "fairness" of a tax is determined by comparing individuals ability to pay. Or maybe that is John Gault talking.
I go back and forth on this as well. Sure, lower-income people get hit harder on food, etc, but now the rich get nailed when buying those million-dollar yachts.

On the other hand, I'm not sure about the rebate system that lets the government give out money to people. Now we're back to "how much income did you earn?" that makes the current tax system so complex.

[GrantDawg]

I go back and forth on this as well. Sure, lower-income people get hit harder on food, etc, but now the rich get nailed when buying those million-dollar yachts.

On the other hand, I'm not sure about the rebate system that lets the government give out money to people. Now we're back to "how much income did you earn?" that makes the current tax system so complex.
No it doesn't. It is not based on income but the number of people in the household.

[QuikSand]

What GrantDawg is saying is that it's easier to count heads than dollars.

[QuikSand]

I didn't read beyond the first half page, so sorry to interject here. I think from a libertarian point of view, the focus is not on the method of taxation but on (reducing) spending of what revenues do come in. Instead of trying to change the tax code, I would propose to put forth the effort to substantially cut govt waste, pork and bureaucracy. Once that is achieved, then it really doesn't matter how it taxes (I don't think any method is perfect, they all have flaws).

He missed his cue, but you'll find that his language is very nearly the same as I indicated -- it's the easiest argument in politics. Who's actually in favor of waste? Nobody, of course!

[Buccaneer]

He missed his cue, but you'll find that his language is very nearly the same as I indicated -- it's the easiest argument in politics. Who's actually in favor of waste? Nobody, of course!
Ah, now I see it after reading through all of this (it's in #143). Yes it is an easy argument but I believe the reality of Potomac Fever (hey, another buzzword!) is predicated upon expectations of the constituents (or more accurately, the lobbyists they hire) to "get their share of the pie". Just like when a household is forced to cut expenses (if one is prudent) when faced with revenue shortfalls or reductions, shouldn't we impress upon "Washington" to do the same? I think it goes back to the dreaded NIMBY mindset where anyone can identify "wastes, pork, inefficiencies" in other areas but not in the ones that affect them. But sacrifices have to be made but it appears we have a populace (and a Congress) that listens to themselves too much. Here's a hypothetical question: Can our nation today accept and go through the budget tightenings and rationings of the WW2 era?

[randal7]

Yeah! Go back to the shire randal7 where houses only cost 1000 bucks and take your algebra and national sales tax with you.

Did I mention that I only work four days a week, also? :p

And actually, I am ambivalent about the nat'l sales tax for many of the same reasons given by others. I am in favor of massive tax cuts in some form.

Quik: thank you for the detailed answer. I understood most of it. I would argue that the benefit to me (and the rest of you as well) of more money personally and a bigger overall economy outweighs the time value of money to the gov't over even a two decade period, primarily because IT'S MY FREAKING MONEY IN THE FIRST PLACE. That doesn't seem to concern our noble leaders at all, however. And I follow up with another essay question for your amusement: suppose we target the tax cuts to the (evil) "rich people" whose investments drive economic growth more strongly than the 75 bucks I spend on groceries every week. Would an equivalent overall drop in taxes concentrated in money that will be invested more directly in economic growth have a more significant (and less delayed) effect?

Edit: how can I petition to have my title changed to "resident of the shire"?

[QuikSand]

And I follow up with another essay question for your amusement: suppose we target the tax cuts to the (evil) "rich people" whose investments drive economic growth more strongly than the 75 bucks I spend on groceries every week.

Who says that wealthy people's investments drive the economy more than your grocery spending? (Other than you)

I don't think that's an obvious assertion, but it's the one you don't even bother to form as a question.

[SunDancer]

I go back and forth on this as well. Sure, lower-income people get hit harder on food, etc, but now the rich get nailed when buying those million-dollar yachts.

On the other hand, I'm not sure about the rebate system that lets the government give out money to people. Now we're back to "how much income did you earn?" that makes the current tax system so complex.

Problem with that, rich people usually register their yatchs out of the country and get them built their. I would love to see a "luxury" tax on luxury cars, jewelry, ect.., but how would you prevent from individuals going abroad and purchasing the products?

[GrantDawg]

Problem with that, rich people usually register their yatchs out of the country and get them built their. I would love to see a "luxury" tax on luxury cars, jewelry, ect.., but how would you prevent from individuals going abroad and purchasing the products?
I believe that is a big problem with things such as yachts were that would be easy to do. Cars and such would have taxes placed on them just like they do now when people bring them home.

It does make me wonder about the cost of compliance. We may have less money lost by people lying on ther tax returns etc. but there will still be people who will find a way around paying sales tax. A blackmarket for big ticket items will explode and around that we would most likely see an increase in other crimes (which always go hand-in-hand with such activities).

[JonInMiddleGA]

... but how would you prevent from individuals going abroad and purchasing the products?

Or simply saying "screw this" and moving all of their "evil money" abroad permanently?

[GrantDawg]

Or simply saying "screw this" and moving all of their "evil money" abroad permanently?
Actually they would be much less likely to do that since there would be no tax on making money on that money. The current system is what makes that desirable.

[JonInMiddleGA]

Actually they would be much less likely to do that since there would be no tax on making money on that money. The current system is what makes that desirable.

Err, I was commenting on this:

"I would love to see a "luxury" tax on luxury cars, jewelry, ect..,"

I took that to be a separate item from a sales tax/flat tax plan, instead of an element of it. There've been so many things bandied about in this thread, it's kinda hard to tell which goes with what sometimes.

And in either case, I'd say a specific "luxury tax", whether it's part of revised plan or not, would add motivation to simply take the money & go elsewhere with it.

Hell, I'm sorely tempted now at times and I haven't bought a car in several years, nor any jewelry beyond $1,000 since I got married.

[randal7]

Who says that wealthy people's investments drive the economy more than your grocery spending? (Other than you)

I don't think that's an obvious assertion, but it's the one you don't even bother to form as a question.

Let's imagine I have $10k. I am a hungry guy, and I buy $10k worth of groceries at the local mom & pop this year. Of that, mom & pop have maybe $1k profit to improve, expand, or whatever.

However, if I take the same $10k and partner with mom & pop, they have ten times as much to try and build their business. This was my (apparently unclear) premise, that investing allows for more rapid growth of a business. People seek investors because if they wait for profits to accumulate enough to allow expansion it takes a lot longer. The wealthy, by definition, are much more likely to have cash to invest, and are likely to want to invest it because the potential return is so much higher than in my passbook savings account.

So, if we arrange our 1% tax cut to encourage investing and so that people who invest have more money to do so, will that spur more economic growth than a 1% cut across the board? This would mean making the tax less progressive. A $100 cut to 10 million people is not going to spur much investing. A $10k cut to 100,000 people will.

[JPhillips]

randal: I'm sure QS will have a more detailed reply, but your argument only applies to the owners of the store. Sure they will benefit more from that 10k, but their suppliers will see none of that money. The 10k spent in small sums by individuals will still work it's way into the economy, it's just that the winners will be more dispersed.

As QS said, there is really no proof that one billion dollars put into the economy is more beneficial if it is done in a small number of large chunks. What changes is who wins and who loses.

[QuikSand]

Let's imagine I have $10k. I am a hungry guy, and I buy $10k worth of groceries at the local mom & pop this year. Of that, mom & pop have maybe $1k profit to improve, expand, or whatever.

However, if I take the same $10k and partner with mom & pop, they have ten times as much to try and build their business. This was my (apparently unclear) premise, that investing allows for more rapid growth of a business. People seek investors because if they wait for profits to accumulate enough to allow expansion it takes a lot longer. The wealthy, by definition, are much more likely to have cash to invest, and are likely to want to invest it because the potential return is so much higher than in my passbook savings account.

So, if we arrange our 1% tax cut to encourage investing and so that people who invest have more money to do so, will that spur more economic growth than a 1% cut across the board? This would mean making the tax less progressive. A $100 cut to 10 million people is not going to spur much investing. A $10k cut to 100,000 people will.


There are an awful lot of holes in this theory, I think.

Let's leave it very simple -- your first example is that the $10,000 goes to consumer spending.

Second example is that the same $10,000 goes to "building a business." Okay, what is that, exactly? Buying lumber to expand the store? Buying more equipment for the store's operation? Buying more goods to sell?

I'm still trying to see where this turns into a magical multiplier that's so much better than just spending it in commerce. The lumber guy gets some more business... or the guy who sells cash registers... or the wholesaler does. Why is that fundamentally different than having the grocers get more business?


Your assumption is just that "investment" is better than "comsumption." I don't know that this is an unassailable position to take. You can "invest" all you want into mom and pop's store... but transactions are like the tango, it takes two.

There are some who will argue that there are "multiplier" effects that occur higher up in the production chain... but I think this is more of a case of losing track of the more diffuse effects in the real world, that what we can claim to see in a hypothetical super-simplified multi-step economy.


It's actually pretty simple. Volume of money times its velocity. But that takes us all the way to the other competing branch of economic thnking, and nobody's very comfortable with that these days.

Cut taxes, and we lose any benefits we were getting from that government spending, but we gain by the fact that that income is now available for private uses by the people who have it. It's not that tough. Trying to get specific in saying that one thing is better than another is tough business.

[randal7]

I'm not sure we're talking about exactly the same thing (or maybe I just don't understand). Let's say I have a product - it could be any good/service, but let's say I designed a program that improves PC performance by 100%. Obviously, there is a demand for this product. But, I have no money to advertise, so I rely on word of mouth. I have no production facilities, so I burn the CD's on my PC, I print the labels at home, and I pack and ship myself. Obviously, I am not maximizing the potential of my product. And if I wait until my revenues allow me to acquire facilities and buy advertising, I will likely wait a long while.

Now let's say someone recognizes my genius and invests a few million in my business. I upgrade my production and packaging capacity, hire some help, and advertise nationwide. Within a couple years, I have a multi-million dollar revenue.

Now yes, this would have happened eventually, probably, but it happened a whole lot faster because of that investment (time value of money again). Investing can allow a business to maximize it's potential much more rapidly, and thereby expand the economy much more rapidly. In a nutshell, my point is not that investing is better, but that it facilitates additional consumption. So, wouldn't tax cuts targeted to encourage/increase investments spur more growth than an across the board cut of the same size?

[Buzzbee]

I don't think Quik has said that reducing the tax rate wouldn't spur on the economy. I believe he has said that a tax cut growing the economy enough to offset the loss of revenue would be a long term proposition.

In your specific example of the computer program that increases PC performance by 100%, you have painted that as a fairly low risk, high reward endeavor. My assumption is that this type of investment would occur regardless of the tax rate.

My perception is that the 1% tax cut "targeted to spur investment" would only serve to bring investments into the fold that otherwise would not have been made. In other words, investments with more risk, or investments with lesser reward would see investment dollars with a tax cut that wouldn't see money with no tax cut.

I guess you could visualize it as a list of investments with those having low risk, high reward at the top, annd high risk, low reward at the bottom. Decreasing the tax rate would only serve to add a few investments to the "okay" portion of the list rather than have them in the "no way" portion of the list.

Also, with your claim of more investments, wouldn't it also be logical to expect more failed investments, which would offset some of the growth acheived?

Not sure if my argument is valid, so I'll defer to Quik or others to confirm or refute. It's just my perception of things.

[QuikSand]

Now let's say someone recognizes my genius and invests a few million in my business. I upgrade my production and packaging capacity, hire some help, and advertise nationwide. Within a couple years, I have a multi-million dollar revenue.

And guess what? The world is not composed of endless best-case-scenarios.

For every miraculous business concept that is just itching to take off to the stratosphere like you desribe are hundreds of worthless "investment" pursuits, just waiting to crash and burn.

So, if you want to paint the economy as one big business investment that can turn into a multifold success with just a little seed money... let's also include the many, many other places that other investors put their money that don't turn into multi-million dollar businesses right away, and instead fold up like a tent.

Sure, business investment can be beneficial to the economy. But youu don't really tell us anything about what it means by describing some slanted story about the great idea that just needs that tiny little push to explode and save everyone.


I'm with Buzzbee above, basically.

[SunDancer]

Just curious,
Where do you see our country situation in 10 to 20 years, with baby boomers hitting retirement? Will health care be a major situation? Also, I remember reading the big debate on the estate tax (something I support)? Is this something Kerry would re-instution?

[GrantDawg]

Just curious,
Where do you see our country situation in 10 to 20 years, with baby boomers hitting retirement? Will health care be a major situation? Also, I remember reading the big debate on the estate tax (something I support)? Is this something Kerry would re-instution?
I don't think the estate tax was repealed. They tried but that part failed if I remember correctly.

[SunDancer]

I don't think the estate tax was repealed. They tried but that part failed if I remember correctly.

Oh ok.

[Warhammer]

I just wanted to bring up something that others might be missing. The fact that many jobs have been going overseas has been going on for quite a while, but some have been leaving for tax reasons as well. By implementing a sales tax system rather than a income tax, the company would be more likely to stay here because their profits will not be taxed. That, hopefully, means more jobs here. It also means that companies could pay their employees more money as well.

My fear with a sales tax system is that they will still have the other forms of income tax taken out of my check every month, Social Security, FICA, and all that good stuff. If they stop taking these out of my check, then I am for the sales tax, if they still collect these taxes, then I will be getting hosed, at any sales tax over say 10%.

[clintl]

I just wanted to bring up something that others might be missing. The fact that many jobs have been going overseas has been going on for quite a while, but some have been leaving for tax reasons as well. By implementing a sales tax system rather than a income tax, the company would be more likely to stay here because their profits will not be taxed. That, hopefully, means more jobs here. It also means that companies could pay their employees more money as well.

My fear with a sales tax system is that they will still have the other forms of income tax taken out of my check every month, Social Security, FICA, and all that good stuff. If they stop taking these out of my check, then I am for the sales tax, if they still collect these taxes, then I will be getting hosed, at any sales tax over say 10%.

There have been some companies moving their headquarters overseas for income tax reasons, but that doesn't have much to do with them moving operations overseas. They're moving operations overseas because they can get people overseas to work for only a tiny fraction of the wages they have to pay here. The headquarters jobs lost are minimal if that; often, it's not much more than filing some paperwork.

[SunDancer]

There have been some companies moving their headquarters overseas for income tax reasons, but that doesn't have much to do with them moving operations overseas. They're moving operations overseas because they can get people overseas to work for only a tiny fraction of the wages they have to pay here. The headquarters jobs lost are minimal if that; often, it's not much more than filing some paperwork.

I always been curious, what do you see about the Baby Boomer generation (the majority of the wealth and a huge number of the population and working sector), being like in ten years? Being 20 years old, I am curious into what you guys think in 10 to 15 years that the country will be like? One thing that worries me, in that 10-15 years, when Boomers enter old age, will health care costs be a major cripple on the country (insurance, medicare, medicaid will surely surge due to the needs of the care of senior citizens). Also, how are Boomers in terms of savings, as it seems they believe that they'll work until they die. Will the shift of Boomers lessen the need for job creation (due to the smaller number of the preceeding population generations). Will we see our economy slow down and our spending habits greatly change?

[SunDancer]

I don't think the estate tax was repealed. They tried but that part failed if I remember correctly.

I though they passed it where the percentage goes down until something like 0% until around 2010/2011, then it resets back to the orginial form. I know Bill Gates was vocal about against dropping it.

[GrantDawg]

I though they passed it where the percentage goes down until something like 0% until around 2010/2011, then it resets back to the orginial form. I know Bill Gates was vocal about against dropping it.
I'm pretty sure it didn't pass. If you go to the IRS website, they still have the forms for it.