Walter Williams on the FairTax

[DRZinn]

http://www.townhall.com/columnists/walterwilliams/ww20041222.shtml

Rep. John Linder (R-Ga.) has authored H.R. 25 "To promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax to be administered primarily by the States." Before we look at whether a national sales tax is a good idea, how about a little Economics 101 just to convince you that government spending, not government taxation, is the true measure of governmental impact on our lives?

Keeping the numbers small, suppose the annual value of what Americans produce, our gross domestic product, is $100. If government spends $40 of it, of necessity the government must force us to spend $40 less. There are several ways this can be done. Government could tax us $40. Government could borrow, thereby driving up interest rates and reducing private spending. Government could simply print money, which would cause inflation and reduce our purchasing power. Finally, government could employ some combination of the three.

The bottom line is that if government spends $40 of our GDP, we can't spend that same $40. There's no question that tax reform is needed, but tax reform is secondary to a much larger issue -- federal spending. From 1787 to 1920, except during war, federal spending was a mere 3 percent of GDP, compared to today's 20 percent. If the federal government takes only 3 percent of the GDP, just about any tax system is relatively non-oppressive. However, if government were to take 50 percent, 60 percent or 70 percent of the GDP, you tell me what tax system would be non-oppressive.

There's no question that some forms of taxation are worse than others. In addition to its economic disincentive effects and intrusions on personal privacy, our income tax has huge compliance costs estimated to be between $250 billion and $500 billion each year.

Abolition of the IRS and the income tax code it enforces, replaced by a national sales, would create greater economic incentives, enhance personal privacy, and lower tax compliance cost by an estimated 90 percent. There'd also be greater faith and allegiance to our founders' constitutional vision, expressed in Article I, Section 9, which says, "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken." The founders feared the abuse and the government power inherent in an income tax. Another benefit of a national sales tax is that being taxed 23 percent to 30 percent with every purchase we become more aware of the cost of government. Income taxes and corporate taxes conceal that cost.

Before we accept a national sales tax, there are two minimal requirements. First, there must be a repeal of the 16th Amendment so Congress can't hit us with both an income and sales tax. Second, there must be a constitutional amendment fixing the national sales tax at a certain percentage that can only be increased by a three-fourths vote of the House of Representatives.

People have advocated a national sales tax or a flat income tax for years, and I don't want to rain on their parade. But here's my prediction: Congress will never enact a sales tax or a flat tax. Why? The two most powerful congressional committees are the House Ways and Means Committee and the Senate Finance Committee. Both dispense tax favors to different Americans that come at the expense of other Americans. With a sales or flat tax, their Santa Claus roles, not to mention campaign contributions, would be diminished. On top of that, they'd have restricted opportunities for social engineering through fiddling around with the tax code.

My personal preference is a constitutional amendment limiting federal spending to a fixed percentage, say 10 percent, of the GDP. You say, "Williams, why 10 percent?" My answer is that if 10 percent is good enough for the Baptist Church, it ought to be good enough for the U.S. Congress.

©2004 Creators Syndicate, Inc.

 

[griz]

As usual I find him logical, sensible, and just plain right. I've heard Niel Boortz and others talk about how the fair tax will save us so much money that the dept will be paid off in short order. How? If the Fed's spend a couple trillion a year, it doesn't matter how they collect it, it's till the same amount. You may change the burden to some individuals, but it's got to come from somewhere. The 250 mil of complience cost the article mentions are largely in the private sector as tax prep services.

Me, I think it should be billed monthly to each person. I know it would increase the collection costs, but writing a check every month will remind people just how much they are paying for our benevolent government. If that doesn't do it, maybe we should make the collection date the Friday before elections.

Yes I know this will never happen, but I can dream.

 

[DRZinn]

The good I see in it is that it'll become more visible, and hopefully raise some awareness of government spending.

 

[Standing Wolf]

If we were all equal under the law, we'd all chip in the same amount.

 

[m.i.sanders]

I've heard about a "National" Sales tax to replace the income tax. I'll be honest, the thought of congress with that kind of power really scares me. Don't get me wrong, something needs to happen with the income tax to fix it, like a flat tax. The problem with a sales tax however, is that for any particular items that aren't really PC, the sales tax can be raised to astronomical levels. We already have sin taxes on tobacco products, extra taxes on gas, and on high dollar items. It doesn't really take much of a stretch of the imagination to see a liberal administration, dem or rino, raising the sales tax on firearms and/or ammo to some prohibative level. What better way of implementing gun control without actually looking like you're implementing gun control.

 

[beerslurpy]

I think the idea is that all things are taxed equally.

But congress has such a hardon for social engineering that they would never do something simple and straightforward. It always has to be something filled with loopholes for their friends and with lots of liability on the taxpayer so it can be used as a weapon later on.

What if we switch to a national sales tax? The IRS raids you and says "provide us tax receipts for these paintings and those guns and this car and this house" and if you cant, they take it all. What if you have posessions that the government requires you to register and you didnt register them or pay sales tax on them? What if those items were firearms? Oh look we just abolished the 2nd amendment.

 

[RealGun]

It doesn't really take much of a stretch of the imagination to see a liberal administration, dem or rino, raising the sales tax on firearms and/or ammo to some prohibative level. What better way of implementing gun control without actually looking like you're implementing gun control.

This is exactly the problem I have in envisioning a national sales tax. There are excise taxes on liquor, cigarettes, gasoline, long distance phone service, etc. On the other hand there are price supports for some items like milk. A tax on milk wouldn't make sense. A new tax would certainly be item specific, exempting some and heavily biased against others. It is very much a value judgment. Milk is "for the children". Where do you think guns will be placed in the grand scheme?

Furthermore, there may be heavy State involvement in collecting this tax, but there are interstate items like mail order sales that will get hit directly by the Feds. This is a tax that is not being paid now; at least I don't believe for a minute that individuals file monthly sales and use tax returns for untaxed mail order items. Evading the tax is part of the attraction of mail order buying, hoping to compensate for shipping cost. Those items are not tax free. A state simply has no jurisdiction to collect a use tax for out of state residents. It is not in fact a sales tax. It is a use tax; bought "for use in...". A percent or two added fro local tax only applies if bought for local resident use, but stores really make no distinction or ask for proof of residence. Out of town resident purchasers are technically exempt. I sell big ticket items, so I do make that distinction, both for out-of-state and out-of-town.

 

[Firethorn]

We already have sin taxes on tobacco products, extra taxes on gas, and on high dollar items

Don't forget the taxes on drinkable alchohol, and the transfer taxes on certain weapons. $200 for a machine gun.

So why are you so concerned that they'll go around and increase taxes on certain items in an attempt to reduce usage of "bad" items? They already do it without the assistance of a national sales tax!

If we ever do go to implement that, we'll simply have to fight to keep it simple. There is honest debate potential for the "rebate check", not taxing grocery store food, medical care(and what constitutes medical care), etc...

BeerSlurpy, the proposals I've seen would be for new items only. As in they'd approach it more on the business end. They wouldn't raid you, they'd be raiding the business you bought it from for tax evasion. You don't write a check out to the city/state everytime you pay sales tax on a bottle of shampoo, do you?

 

[petrel800]

The real genious of the Fair Tax is the elimination of all payroll taxes. For instance, Medicare and Social Security are no longer taken out of your paycheck the way the bill is written. That would allow me to invest that money and actually get a positive return vs. the negative return the goverment gives on social security.

The current system holds us back more than it allows us to grow. Remember, that employers have to match your payroll taxes to the government. If the IRS were eliminated, those matching funds would no longer be paid. Thus allowing for more employment and higher wages. The current system is a cause of outsourcing and puts american workers at a disadvantage. Also, call me uncompassionate, but I don't see any reason why people should be making money off others peoples work (Earned Income Tax Credit). I think everyone should pay a little, worse case scenario the real poor pay nothing, but no one gets a income credit if you didn't pay any taxes.

The government already taxes non PC items like cigarettes and booze so I don't understand how a sales tax will be any different than what is already going on.

Bottom line is, look at your paycheck and what is taken by the federal government. Add that to your total. Then think about the possibilities. At 24 years old when I did that, I could own my first house, and begin a family. That to me is motivating enough to push for the Fair Tax. What could you do with the extra money, retire earlier, start your family, marry your significant other, get a raise, start your own company, . . . ?

 

[HankB]

I'd be worried that we wouldn't get a national sales tax replacing the Federal income tax . . . I'd be worried about getting it IN ADDITION TO the Federal income tax. Walter Williams alludes to this with his requirement that the 16th Amendment be repealed.

Individuals wouldn't be required to provide sales tax receipts on paintings and "stuff" any more than they are now - collection of the tax would take place somewhere higher up the chain of sellers of new goods. (You wouldn't have to pay it or collect it if you were buying or selling used stuff at a garage sale or something. Enforcement would be IMPOSSIBLE.)

And the interstate mail-order business wouldn't be affected at all - it's just that a "national sales tax" would be explicitly added to the purchase price, rather than the vendor including HIS current tax overhead (like income tax, property tax on his warehouse, etc.) in the selling prices. Interstate state sales tax collections wouldn't be an issue.

And I really LIKE the idea of limiting Federal spending to a fixed percentage of the GNP - I came up with this idea independently back when I was in elementary school. Government shouldn't be allowed to grow faster than the economy . . . but that's a whole new discussion.

 

[txgho1911]

Pros and Cons

So far as I can discern from the deeper investigations of and translations the Cons out weight the Pros for this particular bill.

http://www.jpfo.org/fairtax.htm

Items in a store sold for $1.00 will be marked for $1.30 to include the 23% sales tax. I would like the law passed for this tax not to tax itself in whatever fuzzy math way they have written this. Add the tax at the register so it is in the consumers face every time they spend money.

Congress would also need limits like 3/4 required majority on tax hikes. I would agree to a 10% limit of GDP but would also add a limitation of barrowing to 1%.

10% would still be too much with the right management in place.

I would want the system frozen from social engineering of higher tax rates on any item.

Absolutely no government run refund monthly for poverty level spending on necessities. Some states sales taxes today do not apply to non-processed food from the grocery store.

 

[petrel800]

Don't forget about imbedded taxes that would no longer be collected. That $1.00 item you speak of has 18-25% of its current price as hidden imbedded taxes. As the market works, that item would start out at $1.30 with the federal sales tax, but would be competitively forced down to $1.00 again due to the fact the IRS would no longer be collecting those imbedded taxes. So basically, you will wind up with your whole paycheck and as the market works, be paying relitively the same price for goods and services.

The other thing I like about this is it will tax all money spent in this country on retail services. Tourists from other countries along with people who have been cheating the current tax system will be forced to bare their fair share. I really like the idea of taxing forign tourists because we have bore the cost of most countries defense, drug research, product development, and other aid for years. Its time to pay us back.

Finally, the 23% figure was the original figure used when proposing the tax. Current research from scholars shows that the break even point (where we would take in exactly in taxes what we are right now) would be at 18-20%.

As far as I'm concerned, this is truly a step in the right direction in limiting the growth of government.

 

[Obiwan]

A Nat'l sales tax would level the playing field between mail order and local merchants...A good thing I think.

The mail order companies would have to be cheap enough to offset shipping or they couldn't compete.

Or they would have to offer things not available locally

There would be no IRS...a good thing

Tax collection would be done by merchants....not thr IRS

And since things generally cost more as time goes on....at least big things....there would be a gradual increase in the amount collected.

Limiting spending to 10% period is a great idea...as GDP increases so will increase the amount that can be spent.

The Congress will have an abiding interest in keeping us all happy...and spending!

But we all gotta be willing to see spending for OUR pet programs be limited

That is the hard part....we are all accustomed to our entitlements

Happy Holidays

 

[txgho1911]

Many pros but not enough

Those are Pros as well as the blackmarketeers of today on the illeagal drug trade will pay a fair share as well.
The numbers I used came from the jfpo article. How does a 23% tax on $1.00 cause a total of $1.30. My math would tell me to pay $1.23.
Seeing how my congresional represenative is a missrepresentation of a human I would urge everyone to include this issue to be addressed with your representative. All by it's self.
I believe this version of tax reform is in the right direction.
It does not reasonably limit congress. That is a con. Gridlock and no change would be reasonable.

 

[RealGun]

There would be no IRS...a good thing

I am a business person and I am not aware of any federal bureaucracy to collect such a tax. I believe IRS would have some work to do. All sales taxes currently are actually use taxes that apply only to State residents and collected and reported at the State level. Thus an interstate sale has no tax, because it is no ones jurisdiction, when not bought "for use in " the State. The person receiving the goods is supposed to file monthly for unpaid use taxes. Of course, no one does and few know about that law.

The Fed tax would be what I believe is called an excise tax or a true sales tax, unconditionally assessed against the sale.

 

[DRZinn]

The "23%" figure is politician-speak. They figure that if the after-tax price is $1.30, then the 30 cents tax is 23% of that total. Doncha jus' love 'em?

- Overall prices go down, due to elimination of "embedded" taxes that we now have, so the tax brings prices back to (more or less) what they were, only now all the tax is visible, which gets tempers up, and thrifty politicians in office. And no IRS.

The part that I hate is the rebate checks. That's just stupid. All ya gotta do is exempt groceries, housing under <x> dollars per month, used cars under <x> dollars, clothing under <x> dollars, and bus passes. Then nobody has to send out checks every month. Those barely making it, able to pay for only the necessities, will pay no tax. But most of the "poor" in this country have TV's, DVD players, etc, so screw 'em. It'd also convince them to live a little more within their means.

 

[R.H. Lee]

A consumption based, or sales tax is the way to go. However, it is not about revenue generation, it is about power and manipulation. There is no way Congress is gonna let go of their power to micromanage and reward and punish, as the whimsy permits under the current corrupt tax code.

 

[mons meg]

Thus spake CATO (good read):

http://www.cato.org/pubs/handbook/hb108/hb108-24.pdf

 

[Firethorn]

How does a 23% tax on $1.00 cause a total of $1.30. My math would tell me to pay $1.23.

It's called an inclusive tax. At a simple level, you could call it a retail business gross income tax(ie no deductions). This is how it is done in Europe. I found that I enjoyed this while I was over there. I could add up my purchases in my head and know what the total is. You simply adjust the percentage charged a bit down to adjust.

$1.30 * 23% = $ .299 (or a 30% sales tax the way we normally figure it).

The reason you don't charge sales tax for non-consumer items (business to business) is that encourages vertical consolidation a bit much, where a business will own most steps of the production process, from the wells and fields to the distribution centers.

The idea here is that keeping the KISS principle in mind allows taxes to ultimately be a lighter burden on everybody, outweighing the occasional "unfairness", or somebody managing to bypass the system. Law of Averages, as even the drug dealers buy stuff at walmart occasionally.

Auditing would be done almost completely within the business world. The businesses most able to cheat, the sole proprietorships, are the same ones with the most oppertunity to cheat on income taxes.

Remember, for a black market of untaxed goods to spread, they have to leave the business sector sometime, and that's what the auditors will look for.

 

[RealGun]

Let's get this straight. If a cash register total is $1.00 and the after tax total is $1.30, the consumer tax rate is 30%, period. If you want to discuss it from the perspective of 23%, you are just trying to deal with a lower, more palatable number. The consumer is paying 30%, but the politically correct number is 23%. Do we have to go into this program laden with BS from the outset?

Okay, so the consumer pays 30%, but the business pays 23% of all retail receipts. Big deal, but let's call a spade a spade here.

There will be the same loophole as there is now on sales/use tax. A business, small business in particular, especially sole proprietorship, can claim to be buying goods for resale, presenting a tax collection license, and buy goods tax exempt. The cost of any item consumed as an expense is taxable via the sales tax filing each month. Any item consumed for personal use is taxable via the same monthly filing. Pay me now or pay me later. What you have to know actually happens is that those taxable portions never get declared, and the tax never gets paid.

 

[Firethorn]

If a cash register total is $1.00 and the after tax total is $1.30, the consumer tax rate is 30%, period.

Yes, this is true. When you figure a post-sale tax. But your register total won't be $1.00, it'll be $1.30. If your register total is $1, your "pre-tax" price would be 77 cents.

What you don't realize that with the inclusive tax, the tax is included in the price tag. You don't get a receipt with a line saying 30% federal tax. It's included in the price of each item already.

It works like concession pricing, where they say "tax already included". Most places don't do this because most states want the full percentage of the posted sale price. For a $5 item(and local 6.5% sales tax), the state wants 32.5 cents, not the ~30 cents than an fair inclusive tax would be.

While a 30% tax is relativley easy to figure in the head, adding in a local 6.5%(or whatever) tax makes it harder to figure. A 36.5% rate would be a pain in the butt. I'd probably figure a third, then round up.

 

[RealGun]

Nonsense. I AM a retailer who charges tax, and I would have to calculate 30% of my desired net price and add it. 30% of $1 is 30 cents, so the price is $1.30. Margin has the same quandary. If my cost is 50 cents and I charge a dollar, my markup is "keystone" at 100%. However, margin is 50% of the selling price. Why try to make a great debate of it unless trying to deceive the consumer? Pick whichever way makes the most sense to you, but don't try to rewrite the trade convention.

The consumer is going to go nuts in comparison shopping, unless it is well understood which part of the price is tax, so yes, from the consumer point of view, 23% will be their number, if the convention is to include tax in the price tag. I don't see that happening, because when first implemented, the psychology will be all wrong, and the tax could be seen as a huge price increase. Taxes are always itemized on everything else. Take a look at your long distance phone bill, for example.

The consumer is welcome to think of the tax as 23% of the price, but the fact is that the merchant added 30% to his price.

 

[DRZinn]

DocZinn posted:

The "23%" figure is politician-speak. They figure that if the after-tax price is $1.30, then the 30 cents tax is 23% of that total. Doncha jus' love 'em?

They love to obfuscate.

 

[Firethorn]

Realgun, yes, you would be adding on 30% for the tax. I'm not saying that you wouldn't have a pain in the arse dealing with the tax, at least at first. But when in exchange I wouldn't have to worry about it, it's nicer for me.

I'm not a retail seller. I'm a consumer. As it is, when comparison shopping outside of town, I have to figure 6.5% in town, 5% out of town, versus shipping if I mail order. Let's face it, I care about the final price, not the price without taxes, shipping, or whatever.

But yes, I do think that it would be more honest to call it a 30% tax.

I think it's seriously wrong that our federal government would require a 30% tax, when you consoldate it all.

 

[RevDisk]

Congress will never vote to remove the majority of its power. Want an national sales tax? Sure, you'd likely get it. Income tax would disappear, IRS would get a name change, you'd pay more when you bought things. Few years down the road (under best of circumstances), something would happen and another tax would be added. Then another. Then another. Then you'd likely get some form of income tax. Likely it would be hidden, but it'd still occur.

A NST would be nice in theory. The odds of it being benefial and not just another tax? Fairly low.