So I got to thinking the other day. We discussed a possible option for Bush's tax reform in my macro economics class. The professor is anticipating a federal sales tax on goods and services to the tune of approximately 23%. This does a number of things:


Causes people to spend less and save more (in the short run)
Since the only tax would be a consumption tax, any investment earnings would not be taxed (from what I understand. I could be wrong)
People would be much more inclined to invest money
People learn to invest


Among other things, Bush has said he would like to allow young people to keep a portion of their contribution to Social Security for private investment.

Very interesting... Encourage people to invest so they can learn how, then give them a portion of their SS to privately invest... Could this be leading up to a complete privatization of SS? These two moves seem to go hand in hand.

Also, since the switch is meant to be revenue neutral (i.e. the same amount of tax revenue would be collected), and the IRS would effectively be removed (saving something to the tune of $200 billion dollars a year), the money spent on the IRS could be used to pay SS benefits for those receiving them.

Am I nuts, or does a lot of this really fall into place? If it is true, Bush is quite the sly dog. :giggle:

Where on earth did the idea of a 23% federal sales tax come from? There's no way that could ever happen. I don't see the public standing for ANY federal sales tax, let alone 23%! In TN, state sales tax is 9.5%, one of the highest in the country, and in my mind outrageous. But considering there is no state income tax, people allow it. I can't fathom a federal sales tax, on top of a federal income tax. Especially that high.

Edited...okay, I answered my own question:
http://www.ncpa.org/edo/bb/2004/20040809bb.htm

But really. I don't see any of that as Bush's tax reform. Just another idea that'll never happen--like the flat tax. Which IMO is a much, much better plan, but what do I know, LOL.

I also don't think he'll get away with total SS privatization. So many checks and balances in goverment, and even with Republican control, I think there's enough Democrats to prevent a measure like that from passing. But I'm very interested in seeing what does happen with SS. I sure don't trust the system as it is now.

I'm not an economist, but it sounds interesting to me. But then, I make a decent amount of money and don't spend a lot of it. Poor people don't make a lot of money and spend all of it, so it would hurt them financially. Did your professor say anything about the implications of a regressive tax?

One nice thing I see is that people won't be able to "work the system" to pay less than their share.

Poor people don't make a lot of money and spend all of it, so it would hurt them financially.

Sigh...I hate being labeled "poor," but I suppose it's true. And you're right, it would definitely hurt us. We can barely get by as it is. I can't imagine paying that much tax on everything. We currently don't have to pay income tax--our income is too low so anything withheld we get back. So any kind of federal income tax would be money that we are NOT already paying. How would they ensure lower-income people don't get pushed into starvation? I gotta say, I would absolutely hate the stigma of having some sort of "no tax" ID card to show at the time of purchase. Let's just rub it in a little more, huh? But then there is really no other way--we can't afford to shell out the tax ahead of time and then be reimbursed.

I don't think this sort of tax plan would ever fly.

A 23% sales tax would make a lot of hot deals on this site very cold, lol. Bush better not put GottaDeal out of business :)

briansmommy999,

I had a chance to look through that article, and found a few interesting things about it.

"But that’s not the way the Linder plan works. He deceptively calculates the rate as if the tax is part of the purchase price. He calls this the tax-inclusive rate. Calculating the rate the normal way people are accustomed to with state and local sales taxes would require a 30 percent tax rate, not 23 percent."

As far as I can tell, a 23% tax is a 23% tax. Any attempt to inflate or deflate that number is exercising the kind of math that gets you the wrong answer on a multitple choice test.

"And let us not forget that state and local sales taxes would come on top of the federal sales tax, pushing the total rate even higher."

That's the idea with ANY federal tax. State governments have to collect taxes in order to function, and the federal government has to collect taxes to run itself. So it's really a moot point to use that fact to gain leverage for one's argument.

"The Linder bill (H.R. 25) is also deceptive in its basic assumption that all consumption of goods and services in the U.S. would be taxed. Implicitly, Americans would be taxed on, among other things, all medical care, purchases of new homes, and services provided by state and local governments if Linder’s bill became law."

If we got rid of the federal sales tax, you would effectively have about 25% more money to spend. That's provided you fall into that tax bracket. If you don't, go to this website and substitute in the appropriate value: http://taxes.yahoo.com/rates.html

Let's say you make $50,000 per year before taxes, you spend $35,000 of it, the Federal income tax rate is 25%, and the Federal sales tax rate is 25%.

Under the income tax system you would pay $50,000*25% = $12,500 in taxes. Alternatively, under the sales tax system, you would pay $35,000*25% = $8,750.

Under the sales tax system you would save $12,500 - $8,750 = $3,750.

"Of course, it is completely idiotic to think that the American people will ever allow this to happen. The idea of taxing all consumption sounds nice in theory until you realize just how broad the definition of “consumption” would be under Linder’s plan."

My example above inclues all consumption, and yet most people will come out in better shape than not. What's so idiotic about that?

"Economist Evan Koenig of the Federal Reserve Bank of Dallas makes the point that any new sales tax is going to raise prices by that amount. If the Federal Reserve accommodates it, we are going to have 30 percent inflation the year the tax is introduced."

The sales tax would probably cause aggregate demand to fall for a short time since people wouldn't want to buy as much if it costs more. That's before they realize that they have extra money because their income isn't being taxed and go back to spending the normal amount. Such an event would actually lower the price level in the short run. At any rate, I have to take off soon, so I'm going to wrap this up by saying that the Fed would never in its wildest dreams think of increasing the money supply by 30%.

"If it is not accommodated, then producer prices are going to have to fall by 30 percent, which will cause a severe recession and greatly reduce the tax yield."

That's not the case. The increase in the price of things you buy after taxes would make up for the fact that you had more disposable income. No adjustment would be necessary on anybody's part because the way we live would still be affordable.

If you would like further clarification, please feel free to ask. :)

I remember reading about this. The retail industry was against this idea because it puts the tax burden on them.

I remember reading about this. The retail industry was against this idea because it puts the tax burden on them.


How? The tax burden isn't on them *now* (for sales tax). The only "burden" on them is the act of collecting the tax. They're already doing that anyway. They're also currently remitting sales tax at the state level and projected income tax on a quarterly basis at the federal level. What's the difference?

The burden is on us, the consumer, the eventual payer of the tax. We aren't going to stop spending money on things that we need (the fact that gas consumption barely changed while prices *doubled* proves that). We're also not likely to stop spending money on things we want, especially once it sinks in that our paychecks have increased by xx%.

For the record, this was the first time I had heard the 23% number, but I'd support it fully if (and only if) it meant complete and total elimination of the IRS.

Steveh...

What would you propose, though, for families that currently do not pay any income tax at all? My family falls in that category. Our total household income is under $30,000 annually, and anything that is withheld, we get back at tax time. Plus we get the Earned Income Credit, which is a major help to families like us.

We pay sales tax at the stores when we buy things (well, if I shop off post...no tax on post) but we can't afford to buy much other than food and basic necessities (clothes from Walmart and secondhand stores, shoes for the kids, etc.)

So...if the country went from an income tax plan, to a sales tax plan, and I was hit with a 23% federal tax on my groceries (or whatever it was that I bought) on top of whatever local taxes there might be...that would be additional taxes that I do not currently pay, because I don't currently pay income tax. I wouldn't save any money. I would be out a ton of money instead and would barely be able to eat, let alone clothe my children.

What would you propose doing for families like mine? Give me an "I'm poor" card that exempts me from tax and shows off to everyone at the store that I'm poor? Make me pay the extra tax when I already can't afford anything? I don't see a good solution here.

Steveh...
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What would you propose doing for families like mine? Give me an "I'm poor" card that exempts me from tax and shows off to everyone at the store that I'm poor? Make me pay the extra tax when I already can't afford anything? I don't see a good solution here.

Let me start by saying that a national sales tax would be my second choice of solutions (and a distant second). I'll get to my first choice in a moment, but let me answer your question first.

I see two possible scenarios. First (and least preferable, to me at least), would be a card like you suggested. Technically speaking, it would work, but I think it would be a bad idea, both psychologically and for fraud reasons. The second possibility would be for every household in the country (wealthy, poor, and everybody in the middle) to receive an annual credit of an amount equivalent to the poverty line times the tax rate - so for instance, if the poverty line was $25k and the tax rate was 23%, every family in America would receive a check for $5750. Spend less than $25k and you're ahead. Spend more and you pay the tax. (Note that the numbers I picked are arbitrary and without any data behind them, I would hope that if a system like that were to be implemented, the numbers would be the result of a legitimate calculation and be indexed to inflation.)


Now. My preferred choice. Flat tax. The IRS (or GAO) would generate one (massive) table each year. This table would show the average income (more likely a percentage (75%? 80%?) of the average) by family size by zip code (county?) for the previous year. Each family would look up their zip code (or county) and their family size to determine the "base income" for their specific family. They would then take their annual household income (no deductions) and subtract the "base income" from it giving them their "taxable income". Then they'd multiply their taxable income by the tax rate and that would be the tax they owed (assuming it's a positive number). If it's a negative number, that's the credit they would receive. As an example, if the base income for a family of 4 in your county was $40k and the national flat tax rate was 15% (I just made that up, I think that's around the number I've heard mentioned in other places) and your household income was $30k, you would receive a credit of $1500 at the end of the year. OTOH, if you had a household income of $100k, you'd pay $10,500 in taxes. Again, the tax rate would need to have a logical calculation behind it to get the base rate, not some arbitrary number pulled out of the air, but you probably get the idea.

This has the advantage of being a simple calculation, with absolutely no room for "special interest tax credits". Generating the table would be relatively easy as each year the IRS already knows what each particular family (that files) makes (gross) and how many people are in that household. It also allows the people at the bottom of the income scale to pay little or no taxes (and most likely receive a credit), while the high income earners would shoulder the majority of the tax bill. Not only that, *everybody* would have a one page tax return:



1) How much did you make last year: ________
2) What is the "base income" for your family size: ________
3) Subtract line 2 from line 1: ________
4) Multiply line 3 by 15%: ________
If line 4 is greater than 0, make your check out to "US Treasury".
If line 4 is less than 0, you can expect your refund in 2 to 4 weeks.


The flat tax also has the advantage of any adjustments made to the tax rate would be across the board. Kick the rate up by 1%, and everybody in the country gets their tax rate bumped by 1%. Period. What could be more fair than that?

I loooooooove the idea of a flat tax. I am ALL for a flat tax. I'd rather have our current system than a sales tax system though. I see so many problems w/o good solutions with the sales tax system. Our family is above the poverty line; we don't qualify for food stamps or other aid programs. But we still make less than most families and spend every last penny in a paycheck, we receive the EIC and we don't have to pay taxes as our income is low enough to meet those guidelines. So a simple plan to do a percentage of the poverty level...I don't see that as a great idea. Although I get what you're saying and realize it could use any number, not just whatever the poverty level is. Mainly I just see it as really difficult to carry out successfully. Either you get the money at the beginning of the year, and have to budget it out to supplement each month's income to make up for the taxes (and most people are bad at budgeting), or you get it after the fact, in which case it does you no good--money I receive in September doesn't help February at all--or you get it a little at a time, but that still doesn't help much. I'd have to go through my budget and divide up that extra money per paycheck and allocate some of it to each category: food, bills, gas, clothes, etc. to make sure I had the right amount of money in each category to get what we need. It would be a royal pain. Sounds like a LOT of work.

A flat tax is just SO EASY! I don't know why more people aren't for it. I know that those in the upper tax brackets are upset at having a greater portion of tax taken from them, and while I don't have anywhere near that much money, I agree with their reasoning. Along that line...I think it's interesting that when Bush gives tax cuts to nearly everyone across the board, he's pegged as "giving tax cuts to the wealthy." Well, yeah, he gave them breaks, but he gave them to the middle-class too, etc. If one person gets a tax cut, I say everyone should get one. The government could get by on less; especially if it cut a bunch of programs. But then that would start a different discussion entirely! (I'm a Libertarian and very pro-small-government-who-stays-out-of-everyone's-business.)

I loooooooove the idea of a flat tax. I am ALL for a flat tax. I'd rather have our current system than a sales tax system though. I see so many problems w/o good solutions with the sales tax system.
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It would be a royal pain. Sounds like a LOT of work.

Couldn't agree more... although our current tax system is a lot of work as well... (I always thought it would be an interesting experiment to see what would happen if everybody had to write the gov't a check each paycheck to cover their taxes... it's amazing how many people think in "net income"... then they get a tax refund and act like they "won" something...)

A flat tax is just SO EASY! I don't know why more people aren't for it. I know that those in the upper tax brackets are upset at having a greater portion of tax taken from them, and while I don't have anywhere near that much money, I agree with their reasoning.

I'm not sure I entirely agree with you here... I don't think it would affect the rich all that much (given the right number)... if you look at the tax returns filed by the Bushes, the Cheneys and the Kerrys before the election, you will see that all of them paid an effective tax rate in the 12-18% range -- due to *legal* tax shelters... Some individuals spend 100's of thousands a year just to avoid paying taxes (legally)... Doing the flat tax would eliminate that, but they would still pay approximately the same percentage... (incidentally, I think exactly one deduction should remain... charitable giving... there are a lot of very wealthy (and some not so wealthy) that give a lot of money to charity... and I'd hazard a guess that if all tax-deductibility were taken away on charitable giving, it would go down significantly...)

Along that line...I think it's interesting that when Bush gives tax cuts to nearly everyone across the board, he's pegged as "giving tax cuts to the wealthy." Well, yeah, he gave them breaks, but he gave them to the middle-class too, etc. If one person gets a tax cut, I say everyone should get one. The government could get by on less; especially if it cut a bunch of programs. But then that would start a different discussion entirely! (I'm a Libertarian and very pro-small-government-who-stays-out-of-everyone's-business.)

Yeah, that one kills me... He gave a tax cut to everybody... took millions of people off the tax rolls entirely... but because the top 5% receive a larger percentage of the total cut, it was "a tax cut for the rich"... guess what people... the top 5% pay 50% of the taxes in this country... the top 10% pay 80%... unreal...

Washington definitely needs to learn to live within their means... (and while I happen to be a huge Bush supporter, I think he could do a *whole lot* better in this area...)