Flat Tax (National Sales Tax) Debate

[mattd]

Okay, me and a buddy are having a little debate over this proposed flat tax. I'm against it, because of the regressive nature of it all. I know a lot of you are really into this debate, so I'll ask you what should be the counter argument in this. Let's begin with my argument:

 

Let's imagine two frugal traveling salesmen. They each have to buy a new car every four years to (say) keep up appearances, and they need reliable transportation.

(One guy makes 20K, the other 300K)

Run the numbers on a the RATE of total income each pays on on 5% sales tax.

 

Poor Boy buys a $20,000 car pays $1000 or 5.0% of his income.

Rich Boy buys a $60,000 car pays $3000 or 1.0% of his income.

 

Poor Boy has 5 times the tax bite, or rate of tax on a car. Rich Boy hardly feels sales taxes. That's why a sales tax (a national flat tax) would be a bad thing depending on your level of income and views on morality on who should float the costs of our government and all.

 

 

 

Now here's his reply:

 

The Fair Tax plan that's in Congress right now is actually a purely PROGRESSIVE tax system. The system we have now is entirely regressive. Your example works within our current system. It's a mistake to compare sales tax alone within our current sytem. The idea is to replace the whole thing with somethign that is actually fair to everyone and works. Your premise neglects to account for the 25% to 30% increase in the cost of goods due to embedded tax costs as a result or our current system. Therefore, the $20000 car actually costs $15,000 and the propose tax rate (same for everybody) would add about $4000 to what he'd pay, creating a net increase in savings of $1000 over the current system (and before current taxes). Not to mention that the poor guy gets to keep 100% of his paycheck and choose how to, and how much, tax he has to pay in a given year. He buys a car he can afford and pays $4000 into the system.

 

Here's where it becomes progressive. The rich guy buys the (currently $60000) car which under the new system actually costs $45000. He pays $10350 in taxes on the car. The more you consume the more you pay. Taxes on income are always regressive and unfair.

 

Let's throw a couple more things in. Under the new plan, used goods are tax-free. So the poor guy can buy a 1-year-old car which someone paid $5000 less than in the current system for, and for a couple grand less, since it's a year later. Plus no tax. So he can get a car which we think is worth $20000 under the current system for around $12000 under the new system and pay NO TAX. That's ZERO percent of anyone's income. If poor guy can afford the more expensive car now under the regressive system, that actually means he could CHOOSE to buy a car that is actually worth more and still afford it.

 

Not to mention the monthly rebate that every person would get under the new system which zeros out any tax up to the poverty level. This feature alone lets poor people put more money in their pockets.

 

And let's not forget that this system also makes rich people pay their fair share for once. No fancy lawyers are going to be able to find loopholes, because there aren't any.

[Aardvark]

There are arguments for a flat sales tax replacing income tax but not that it would be progressive.

 

Every economic study shows that lower income earners spend a greater proportion of their money on goods which would be subject to a sales tax. It would be regressive.

 

Talking about stripping out embedded taxes in the price of things is just nonsense. A flat sales tax would not reduce the price of any cars.

 

Accept the fact that it would be a regressive tax.

[mattd]

I totally agree. I'm a tax auditor for my state, and I see how this stuff works, I'm just really bad at arguing it (not a good debater), but I've gotta find a way to tell this guy why exactly he's wrong.

[Aardvark]

Ask him to quantify what exact taxes are embedded in the price of a car.

 

Then ask him how these would be reduced by one single penny by the abolition of income tax. As income tax has no relevance at all on the price of a car he will not be able to answer honestly without bullshitting.

 

A sales tax would only add to the cost of the car, not reduce it. Therefore his entire argument falls. Simple.

[mattd]

Thanks Aardvark!

[Pangloss]

Nicely argued.

 

An interesting example of how you can start running into trouble if you stray from the purpose of funding the government into dealing with social injustice.

[Ophiolite]

I'm at a loss. I don't have an opinion. I know, I'll make a couple up.

 

No tax cost embedded in the price of the car. Humbug. The present wage structure of the car plant workers (and the suppliers, ad part way to infinitum) is a result of the preceding tax burden.

 

You can call it a flat tax, but still have a couple of valleys. VAT in the UK is not added to food, children's clothes or books. Set up the right exceptions and you protect the low wage earner.

 

As a Scot I'd far rather have no income tax and have all tax generated by sales tax, since Scot's don't actually spend money! (Actually that was just a rumour we started so we woudn't have to buy a round.)

[mattd]

This is his reply to all that:

 

I'm not making this stuff up either. And of course there will have to be some agency to oversee this, but it won't have to be as large and intrusive as the current IRS.

 

Sales tax loopholes aren't really loopholes in the law. They are people figuring our ways to evade paying them, which is illegal, as you know from your job. I understand there are gray areas in the current state sales tax system because things are not defined. They should be. And this new fairtax plan accounts for making things clear. Our current tax code is full of legal ways to avoid paying taxes. These are called loopholes. You pay accountants and tax lawyers to figure out where they are and how to use them. What an unnecessary expense; paying people a bunch of money to figure out how to not pay bigger chunks of money.

 

Since you study this every single day of your life, you should already know the effects of embedded taxes on our economy. And you should know that a progressive tax is simply one where the more that someone earns, the more tax you pay. The less you earn, the less you pay. Period. And, of course, regessive tax systems are those in which people at the low end of income levels pay more percentage of their income than do people at the high end. These normally apply to taxes on INCOME, not consumption. I'm talking about a specific Fair Tax plan which uses a retail consumption tax as only one of its features to achieve many benefits for poor and rich people alike. Even though consumption taxes aren't normally referred to as regressive our progressive, the Fair Tax plan is actually more progressive by application then our current tax system. Again, this is not simply invoking a sales tax on top of our current system, which would be a bad idea.

 

The income tax goes away (some agency, call it the IRS if you want, presides over getting taxes), no more payroll taxes (THE MOST REGRESSIVE FORM OF TAXATION GOING), no more SS or income witholding. Aside from what your state exacts, you get 100% of your paycheck.

 

Each household gets a monthly rebate equal to the amount of sales tax you would pay for (for goods needed to survive, though you can spend it however you want)your family size according to gov't numbers up to the poverty line. This untaxes everyone in America up to the poverty line, plus NO PAYROLL TAXES. So people below the poverty line live tax free on the necessities of life. It doesn't get more progressive. And technology makes it easier to administer this than ever before.

 

Above the poverty level, everyone pays a 23% tax on all new retail goods. No tax on used items, no tax on b2b, no estate tax, no marriage penalty. None of that ... the income tax and its codes went away.

 

Not to mention those embedded taxes going away and reducing the cost of goods. But i'm getting to that.

 

So people can choose what they buy and how they pay their tax. Poor people can choose to buy used goods and live tax free. And so can rich people. The point is that the system is transparent, people understand it, and it's in the people's hands suddenly. Your tax destiny is up to you. I can see why people might be against it ... they don't want people having choices or control over their lives. But that's another story.

 

As for the black market, the revenue lost in our current system far outweighs any black market that might arise. We'd gain all the revenue from some current black markets and criminal activities that don't normally yield income tax revenues. i.e. the drug dealer doesn't pay income tax on his business, but he'd pay the sales tax on the new BMW he buys.

 

Also, any economist will tell you that the consumption base is much more stable than the income base (ie: people generally consume consistently from year to year, but their income usually fluctuates; to wit, one person generally has to eat the same amount of food each year, but may earn more or less money from year to year.) This fact would help government better budget its resources.

 

And it sounds like you're arguing for my position with your statements about sales tax being "the easy money," and the IRS spending less money on enforcement. Of course, it's easier to figure out and collect a sales tax and enforce it than it is to do the same for an income tax. As a result, the IRS can NEVER spend enough money to enforce it. It's just too expensive. As a result tax evaders get away with millions of dollars they owe the country. Cash transactions are a problem, but cash is used less and less, and it takes two people to evade a sales tax (the store and the customer), which makes it less likely. With the income tax, it only takes one person to cheat.

 

As for embedded taxes; they exist, they are real and they account for between 25% to 30% of the price we all pay for goods. You don't have to believe me. You can listen to actual Harvard economists (among others, MIT, Stanford)who have studied the phenomenon. There is a ton of info at http://www.fairtax.org for you to look at.

 

When the income tax is repealed, the embedded cost of goods due to taxes will eventually be driven down as a result of market forces. No one is talking about stripping them out, the market will take care of it, as it always does. Here's an example of where these taxes come from, and why the cost of a car would go down once they're eliminated.

 

A business owner makes apple sauce. To run his business he has to pay all sorts of taxes; income, payroll, medicare, SS, property, you name it. In order to make his apple sauce profitable he needs to calculate some of that cost into his product. He also is paying a small percentage for everything he buys to run his business, paper towels, laser printers, apple smasher machine, mops. Every one of the companies that makes the paper towels, printers, mops, etc. is adding a percentage of their tax cost to those items. So the apple sauce dude is paying a bit of tax (that someone else owes) to pay for the materials needed to make apple sauce; when he buys jars from the jar company ... when he pays the trucking company to take the sauce to the grocery. So when the grocery store buys the apple sauce, they're paying for all those little bits of tax along the way. then the grocer marks the sauce up to include some of his tax burden and a little bit for profit (not much profit margin in the retail food business). All this mark-up adds up to about 28% on average, as the economists have figured. So once you remove this tax burden at all those points, competitive forces will bring the cost down.

 

The embedded taxes point is just a key benefit, a side effect, of the Fair Tax Plan. The main purpose of the plan is to create a simplified FAIR tax system.

 

Will there be problems to smooth out? Yes. Will all types of people benefit? Yes. Will our economy explode? Yes. Will the American worker finally be on a level playing field with other nations who employ consumption, flat, or VATs? Yes.

 

You can argue against this idea, but arguing for the current income tax system is a waste of time. It doesn't work, it isn't fair to people, and it's time is up.

 

 

I don't know about you guys, but this guy is driving me nuts.

[Aardvark]

So he did reply with bullshit. He's changed the terms of his argument.

 

He now advocates abolishing ALL taxes, not just income tax, and establish a rebate system to guarantee a minimum income.

 

He also says he will abolish all tax loopholes.

 

The rebate system will be wide open for abuse, and consumption taxes are notorious for fiddling, just look at the efforts needed to collect VAT in the UK, it can get pretty nasty, esp when some things are zero rated and some not, it's amazing how inventive business's can be in labelling and defining goods.

 

The yield at 23% would be far lower than present taxation, which half of gov spending does he advocate axing? The minimum income would be very expensive to undertake. At a rough estimate you'd need a tax rate nearer 70%, and then the tax dodging comes into force.

 

Also the assertion that consumption is stable while income varies is wrong. Expendiiture on the basics of survival remain constant but on all else vary. Consumption rises and falls with the economy. The tax base would vary, going up and down.

 

Basically, he advocates cutting tax by a huge amount, then giving a large free handout to everyone and magically stop all tax evasion and avoidance.

 

It makes as much sense as saying 2+2=74. A bigger deficit than ever seen before, tax evasion, an unstable tax base and a huge drain through an expensive open to abuse minimum income 'rebate'.

 

He doesnt begin to make sense anywhere.

[mattd]

Aardvark, you're my hero.

[Aardvark]

[SCOOTER93]

I think a VAT would discourage consumotion and encourage an underground market in 2nd hand goods. I don't think I favor it.

 

I tend to favor a flat rate income tax, maybe with a reasonable personal excemption.

[LucidDreamer]

encourage an underground market in 2nd hand goods.

Too late. Its called Ebay.

[mattd]

Too late. Its called Ebay.

 

 

[john5746]

It would be interesting to see how much the costs of the income tax and sales taxes. I don't understand why a flat tax is needed to be simple though. Isn't an elevated tax simple?

 

A flat tax of any form will SHIFT the burden towards the lower income bracket, pure and simple. The wealthy benefit most from society. They should pay a higher rate. They get a higher rate of pay increase, actually save money to invest in capital where they get a higher rate of return, not to mention tax shelter. Increases in healthcare insurance, education, etc. has a small affect on them.

 

If someone tells you they will give you a million, but that you must pay 60% in taxes, you still want the million don't you?

[chadn]

The wealthy benefit most from society.

 

How exactly do they benefit the most? I'd say the poor benefit the most from society. When was the last time the rich recieved welfare checks?

[john5746]

If Bill Gates lived alone on an island, how well would he be doing? How about Brittany Spears? Michael Jordan?

[mattd]

I'm a cpa and I've spent a number of years working with taxes, and I got to say, there's really no system that would be totally fair to everyone. I think we should be paying more attention to how the govt. spends the money it collects from us.

[chadn]

If Bill Gates lived alone on an island, how well would he be doing? How about Brittany Spears? Michael Jordan?

 

Thats rediculus, how well would nayone do if they lived alone on an island?

 

Hmmm? Send a welfare bum to an island and send someone used to working, like say Bill Gates. I wonder which will do better?

[mattd]

If Bill Gates lived alone on an island, how well would he be doing? How about Brittany Spears? Michael Jordan?

 

 

That depends.

 

Would Bill have his money with him? If so, then I would fly over to that island and take it from him because the US govt wouldn't be protecting him.

 

And I think that about sums it up, the rich get to keep what they have and make more thanks to the govt. If that bum were on that island, he would just rot away and no one would care.

[chadn]

And I think that about sums it up, the rich get to keep what they have and make more thanks to the govt.

 

Money gives the rich the ability to hire mercenaries and guards. No need for government protection. With my own fighting force I could force the poor into slave labor or whatever.

 

Who has benefited the most from government? The poor.

[john5746]

I agree with Mattd. We need to concentrate on the spending. Shifting taxes still screws people.

 

Chadn - don't equate wealth with hard work and poverty with laziness. Wealth is usually obtained through leverage of other people's work. This is ok, not evil. What this means is that to obtain this wealth, you rely on people and the society they live in. Bill Gates has a lot more to gain in keeping America economically strong than I do. I am not tring to punish him, his company provides jobs, etc. But, as smart and hardworking as he is, he couldn't do it without society. I couldn't live as I do either, but I could come closer to my standard of living than he could come to within his without society. Therefore, he benefits more from society. So, he can pay a higher rate to keep society functioning.

[Sayonara]

Would Bill have his money with him? If so, then I would fly over to that island and take it from him because the US govt wouldn't be protecting him.

No, but the cyborg army and missile defences he shipped over there would be.

[mattd]

C'mon, he's bill gates. I'd just wait until those cyborg's operating systems crash, then make my move.

[Sayonara]

They run on Linux.

 

He didn't become the richest man in the universe by paying for things.