« Closet Tolerants | Main | Trouble In Phase-Out Land »

Watch Those Numbers

Knight-Ridder reports on tax reform, including a proposal for a national sales tax: "The proposal would impose a 23 percent tax on all retail sales to replace revenues lost by eliminating the income tax and the 12.4 percent payroll tax that funds Social Security." Beware! This is based on an eccentric definition of "23 percent." Right now, the District has what we call a "5.75 percent sales tax." That means that if I buy something that costs $10, I need to pay $0.575 in taxes, for a total of $10.58. Thus, under the GOP plan, assuming we ignore the local tax, I should need to pay $2.30 in taxes on my $10 purchase. In fact, the proposal is for me to pay $3.00 in taxes. This is what normal people call a "30 percent tax on all retail sales." They get the 23 percent number by observing that out of an after-tax price of $13.00, the $3.00 in taxes is 23 percent of the total. There is a possible world in which a tax at this rate is called a "23 percent sales tax," but in the actual world it's what we call a "30 percent sales tax."

The number of reasons why this is a bad idea are legion including, notably, the fact that contra Knight-Ridder this would not be "the simplest to collect." On the contrary, the incentives to evade the tax through cash payments would be enormous. Major retailers couldn't get away with this because it would mess up their books, but small businesses would have every incentive to cheat. And it's not just a tax on what we normally consider retail sales -- it's also a tax on, say, rent which would be almost universally evaded. There would be absolutely no way for the government to realize that I was paying my landlord in envelopes full of cash with no taxes paid. I assume that due to a combination of unworkability and the fact that this would be a disaster for major retailers like WalMart (whose customers would suddenly have no money and who would lose market share to smaller firms better-equipped to evade taxes) will ensure that this does not, in fact, happen, but it would be a disaster virtually without precedent in modern history.

February 20, 2005 | Permalink

TrackBack

TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8345160fd69e200d83457c75e69e2

Listed below are links to weblogs that reference Watch Those Numbers:

» Batshit Insane from Political Animal
BATSHIT INSANE....Knight Ridder reports on ideas for reforming our tax system:A national sales tax would hit consumers at the retail level, just like state and local sales taxes....Sales-tax advocates, whose ranks include House Majority Leader Tom DeLa... [Read More]

Tracked on Feb 20, 2005 4:11:09 PM

» Batshit Insane from Political Animal
BATSHIT INSANE....Knight Ridder reports on ideas for reforming our tax system:A national sales tax would hit consumers at the retail level, just like state and local sales taxes....Sales-tax advocates, whose ranks include House Majority Leader Tom DeLa... [Read More]

Tracked on Feb 20, 2005 4:16:17 PM

» Sales Tax from Mads Kvalsvik
I think [Matt] is wrong, and I'd like to cite my beloved Norway as an example. Norwegians already pay 23% VAT on everything except food. [Read More]

Tracked on Feb 20, 2005 10:48:27 PM

» The Real Cost of The Fair Tax Act from dougpetch.com
Demonstrating yet again why he's one of my daily must-reads, Matthew Yglesias exposes the smoke and mirrors being used to push a national sales tax.... [Read More]

Tracked on Feb 21, 2005 6:58:14 AM

» Crisis On Infinite Returns from Pandagon
Value-added taxes and a national sales tax are being reliably trotted out...again for the umpteenth time, with the same misconceptions (read: lies) being bandied about. It includes my favorite, the 23% tax that's really 30% because it's calculated unli... [Read More]

Tracked on Feb 21, 2005 10:50:51 AM

» Kibbles and B****ing from Live from the Nuke Free Zone
First, rest in peace, Hunter S. Thompson. I haven't read much of his work, but what I have read, I've enjoyed. Here are some samples of Thompson's writing. Perhaps one of my fellow writers who is a bigger fan than... [Read More]

Tracked on Feb 21, 2005 4:05:30 PM

» REFUTING REFUTATIONS OF THE CONSUMPTION TAX from Pejmanesque
I'm on record as supporting the replacement of our current "progressive" income tax system with a consumption tax, so it is with some interest that I read this post by Matt Yglesias, where he argues against the enactment of a... [Read More]

Tracked on Feb 22, 2005 12:09:51 AM

Comments

Businesses already have to pay tax on all profits, which is calculated by subtracting expenses from revenue.

So I don't see why a direct tax on revenue would be undoable.

Posted by: Abigail | Feb 20, 2005 2:35:41 PM

The rest of the world uses VAT. It seems to work for them. It really is much cheaper and simpler to collect. Sure it can be evaded to some extent, but so can every other tax ever devised. You're right to complain about the deceptive 23% though.

Posted by: Xavier | Feb 20, 2005 2:45:18 PM

Is that a serious proposal? Who proposed it? Whoever did must be insane. Sales taxes are the *most* regressive; that's why a number of states abolished sales taxes on food.

So we end the (less than it was but still sorta) progressive income tax, and replace it with a (huge, extremely) regressive national sales tax.

This makes no sense, none whatsoever, unless the intent is to leave the middle class and working poor worse off than they are. Like looting the SocSec Trust Fund, it's another trick to distribute all wealth upward.

Please tell me this 'national sales tax' is someone's idea of a joke.

Posted by: CaseyL | Feb 20, 2005 2:45:57 PM

Maybe you thought it was too obvious to point out, but a sales tax is also highly regressive.

Notice also that this proposal disconnects paying into SS from drawing out from it -- i.e., turns it from a social insurance program tied to your work by a payroll tax into something else -- something without a clear, causally and ethically connected, dedicated revenue stream. Something like welfare.

Posted by: larry birnbaum | Feb 20, 2005 2:48:41 PM

"but a sales tax is also highly regressive."

What if the sales were applicable to all stock, bond, and other financial transactions and transfers? And totally refundable to everyone under $100k annual income?

Just kidding, the purpose of the tax is wealth redistribution, upwards.

Posted by: bob mcmanus | Feb 20, 2005 2:57:32 PM

Hi -

Matthew, pound on this! The fact that many countries have VATs doesn't mean it's a good idea: I live in Germany and the VAT is regressive.

And that word hides the fact that it is taking money from the strata of society that is least capable of paying for it. I know people here in Germany who live on the German version of social security and who can barely afford to put food on their plates: they pay 16% sales tax on most of what they consume, with 7% on newspapers and magazines.

And due to several factors - low incomes during their working lives, one wage earner in the family - they get pretty much the minimum from the German equivalent of social security. That 16% means that they are not able to save up any money for emergencies and the like, let alone have enough to afford a vacation. Which means that government largesse, incompetence, waste and destrucful subsidies are based on monies taken from those least able to afford it. That is morally repugnant.

I can afford it, but I don't spend something like 95% of my income on necessities like my relatives here do; VAT is a great way for people with high incomes to avoid paying taxes.

VAT is perfidious, regressive, is aimed at gathering the largest amounts of monies from those least able to pay. It should be considered a sign of moral turpitude and should be a scandal among modern economies.

John

VAT delendum est! :-)

Posted by: John F. Opie | Feb 20, 2005 3:05:15 PM

Abigail:
Businesses already have to pay tax on all profits, which is calculated by subtracting expenses from revenue.

So I don't see why a direct tax on revenue would be undoable.

businesses wouldn't be paying this tax - they would be collecting it from their consumers and passing it on. Its the consumers that have the incentive to evade the tax.

Posted by: flory | Feb 20, 2005 3:06:39 PM

"but it would be a disaster virtually without precedent in modern history."

Which undoubtedly would be the point implementing such a proposal.

Posted by: Tom DC/VA | Feb 20, 2005 3:09:45 PM

"Businesses already have to pay tax on all profits, which is calculated by subtracting expenses from revenue"
The consumer could be paying a tax on both the profit built into the item as well as the cost. For example under the current system a company sells a product for $100, if the costs of that product was $80 then the company pays a tax on the $20 of profit. If the tax is 40% then the company pays $8 in tax. If the company lowers its price by $8 to reflect the lower costs the consumer still pays $21.16(100-8=92*.23) in taxes. A national sales tax would shift a larger share of the tax burden to consumers.
The one benefit to this system is that it would definitely cut down on consumption assuming that it could be enforced.

Posted by: karl | Feb 20, 2005 3:15:20 PM

I can't believe they really expect the public to go for a 23% sales tax.

My guess is that it is in part a propaganda ploy to call attention to the size of government revenues, which extremists like DeLay think are huge and awful. When the public says: "23% - that's nuts!" They will say: "Of course it's nuts! But that's what it would take to get rid of thre income tax. So, that's how bad your taxes are now!"

But perhaps they believe they can dupe the public into taking a huge slice out of revenues by starting at 23% and then "lowering the price" as part of an attractive package to get rid of the income tax. Here's the pitch:

What if I told you, Mr. and Mrs. Public, that if you could end of paying NO INCOME TAX AT ALL?! Sounds great, right? Too good to be true, you say? Not at all! This is a genuine offer!

How much would you be willing to pay for this great deal? Most legislatures would charge at least a 30% sales tax for this swell benefit. Or 25%, or 23% or at best 21%.

But we are able to make you an unbelievable one-time offer: we're not even asking for 20%, not 18%, not even 16% or 15% or 14% or 13% - but only 12%! That's right, for a mere 12% national sales tax, you could pay NO INCOME TAX AT ALL!!!"

[Fine Print: this deal will cut national revenues, and the size of the governement in half.]

The idea may be first to regressively shift the tax burden off the rich and onto the poor, and then wait for the public outcry "Get rid of these hideous sales taxes!" in order to generate the political momentum for cutting further.

Remember, these guys are extremists who hate almost all taxes, and all non-military government expenditures, but who can't get the public to go along with their draconian plans without tricking them into it somehow. They won't be satisfied until the government consists of little more than the Penatgon and the Congressional dining room.

Posted by: Dan Kervick | Feb 20, 2005 3:36:47 PM

Instead of trying to finish the job of entirely shifting the burden of taxation back to the poor and middle class by stealth, why not just bring back endentured servitude and slavery? I mean really. The American people have given the most reactionary elements of American society pretty much free reign to do as they please over the last generation. Why not just be perfectly honest about what you want? They'll probably let you have it. Really.

Posted by: Robin the Hood | Feb 20, 2005 3:37:35 PM

Rate and Regressive

1) As far as the rate: The current Government/GDP is about 20%, even including Social Security, which is about 10%. Thus if we did have a TOTAL sales (VAT) tax, then it might be about 20%.

2) Given the deductions... our IRS, SS, Low Capital Gains, and No Estate taxes, are relatively flat now, so perhaps a flat sales tax (that replaced all our other taxes) might not be too different. (Except for at the bottom level with Earned Credit?)

3) My personal thought is to have a VAT or Sales tax say about 30%, (REPLACING ALL OTHERS) but not on such things as Food, Medical, Housing, though the exact things are open to discussion. The idea would be to put in some progressivity without complicating the tax structure much.

Posted by: Mike Liveright | Feb 20, 2005 3:55:50 PM

Might it be worth exploring a tax on all sales? Thus when General Motors buys some steel it pays a sales tax, just as I do when I buy my toothpaste. Both are sales transactions, after all. Seems fair.

Posted by: dick mulliken | Feb 20, 2005 4:00:26 PM

Although I am unable to believe it, the hypothesis that most closely fits the evidence of GWB's presidency is that he is trying to see just how many disasters he can cause while still maintaining close to 50% approval.

Posted by: theCoach | Feb 20, 2005 4:02:53 PM

This idea is so bad Democrats/liberals shouldn't even spend time talking about it. They should just say "I'm willing to look at any good ideas" and then watch Republicans sqirm.

There are a lot of people that feel that Democrats will stop this idea and subsequently vote Republican because of other issues. Democrats acting like they can't or won't put any effort into stopping it is probable a winning political strategy.

Posted by: Chad | Feb 20, 2005 4:04:48 PM

Matt, I don't know where to start. You and some posters have offered a target rich environment. :)

Look. Our present taxation systems (federal, state, county, municipal) collect far more taxes than most people realize. Just pull out a calculator and start crunching numbers. Remember to readjustment the taxes and fees (as net percentage rates of available post fed and state income) paid against income to arrive at true taxation rates. The cumulative taxation rate is very high. It's absurdly high. So, we don't have the best system at the present time.

If we were to substitute our current federal taxation system applied to individuals with a flat tax, NST, or VAT, a limited group of exceptions could be made. Examples, end of year tax reimbursement for those earnings less than a given level of gross income, no federal tax on food, drug products or housing, and a few other very limited measures.

I paid the VAT while living in Europe. But that's all I paid on goods. One tax. I believe I was paying 13%. In the U.S., I'm paying 8% sales tax on retail goods, fed and state income taxes, endless fees on my line phone and other utility bills, and fees for a bunch of other things. My cumulative effective tax rate is very high. Certainly much higher than in Europe.

If we were to opt for a flat tax, the current tax code deductions should simply go out the window. If we opt for a VAT tax, same story. National sales tax, maybe not the same story.

My recommendation would be to leave in place the 12.4% payroll tax for social programs, and opt for either a flat tax or VAT at a smaller percentage rate.

So, what exactly is the problem with a single tax rate of say 17% or 15%? I'm paying much more than that now, even with deductions. I fail to see the alarm.

I would be cautious with regard to comments from CPAs and others who have a vested interest in sustaining the existing taxation system. Their remarks may be a bit self-serving.

Posted by: Movie Guy | Feb 20, 2005 4:23:28 PM

What about a progressive consumption tax? Continue to tax income but have a deduction for anything that is put into savings (savings accounts, stocks, bonds, debt repayment). Include in the definition of income any witdrawal from savings. This will create tax incentives for saving while preserving progressive rates. I imagine it would not be difficult to administer as it is based on our current income tax system.

Posted by: Eric Slusser | Feb 20, 2005 4:38:07 PM

"The cumulative taxation rate is very high. It's absurdly high."

The US tax rate is one of the lowest among industrialized nations. Quit whining.

Posted by: Joel | Feb 20, 2005 4:40:18 PM

Movie Guy says we should exempt food, rent, and medicine. OK, but that doesn't get around the regressive taxation issue. What about clothing? College tuition? School supplies? These are not optional items people in the lower income brackets can simply decide not to buy. Should the working class and working poor have to pay a bigger percentage of their disposal income than the more well-off when they buy other must-have items? Should college tuition - which is already beyond their ability to pay without taking out 2nd mortgages - be made further out of their reach?

So, OK: say we also exempt those items. What happens to the revenue projections? We'll have a situation where funding the country depends largely on how many luxury items Americans purchase. That doesn't sound like a good idea to me. How do we make up for the lost revenue, then? Add a higher percentage onto luxury goods to make up for not charging a national sales tax on necessities? OK, how high: 25%? 30%? How high do you go before you were better off paying the old income tax?

Then there's the issue of revenue sharing. As Movie Guy points out, his total 'tax' burden includes state income tax and utility user fees. Let's assume the state income tax exists because the state needs the revenues to fund state programs, services, and infrastructure. So, do the states get a cut of the national sales tax revenues? How big a cut? Who decides: the states? The US Congress? How are the funds allocated; how big a bureaucracy is needed to collect, track and allocate the federa; v. state revenue streams?

And what if states are only permitted a portion of revenue equal to a percentage of the revenue paid by the citizens in their state? That would mean places like Mississippi, Alabama, Missouri - all those fine, chronically-poor red states - would get the leavings after the wealthier states got their larger cuts. Poor states already have miserable educational systems and crumbling infrastructure. Shall we also consign them to substandard utilities - like, for example, sewage treatment done on the cheap? Can you say 'cholera epidemic'?

Movie Guy's post reminds me a lot of what happens when you get into a detailed discussion with libertarians about how their ideal society would function: they wind up jury-rigging and retro-fitting their "no-taxes" soceity until they've re-created a government in all but name, just one that isn't actually accountable to anyone.

PS: End-of-year reimbursements don't do one whole hell of a lot of good when the issue is lack of enough money to pay the out-of-pocket expenses *now.* If I can barely afford to get my kid into decent clothes NOW, if I can barely afford to buy my kid school supplies and textbooks NOW, and then there's another 15% added to the price NOW, I can't afford it NOW - promising me a tax refund at the end of the year doesn't help me NOW.

Posted by: CaseyL | Feb 20, 2005 4:50:24 PM

dick: Under a VAT, steel manufacturers would collect a tax on steel when they sell it to GM and then GM would collect a tax on the value of the car minus the value of the steel when it is sold to a dealership. If you tax the full value of the product at every stage of the transaction (which is what I think you're suggesting) you have a huge disincentive to involve multiple firms in a production line. You would end up with gigantic firms controlling the entire production process from raw materials to retail to avoid intermediate taxation. I don't think the left (or anyone for whom the phrase "giant integrated corporations" is scary) would like the results of what you're proposing.

Movie Guy: You're absolutely right. We can never forget that there is a large segment of the population with a vested interest in a complex tax system.

I still haven't seen any real argument that a sales tax is easier to avoid than an income tax. All evidence is to the contrary. When the Soviet Union dissolved and the former Soviet states were looking to build a new taxation scheme, the United States strongly advised them to use a VAT rather than an income tax because they believed that an income tax would be more widely evaded.

The arguments about regressivity are a little more complicated. Movie Guy is right that it is possible to have a sales tax scheme that is progressive. It's a complicated argument, but since I'm not a big fan of progressive taxation anyway I'm not going to bother making it.

Dan: "Remember, these guys are extremists who hate almost all taxes"

My god, I hope this is the argument Democrats choose to make. If they do, they're toast. No one has ever won an election by accusing the other guy of hating taxes.

Posted by: Xavier | Feb 20, 2005 5:00:03 PM

When the Mulroney Conservatives brought in a National Sales Tax in Canada, it was announced at 9% but "reduced" to 7 before implemantation. Just sayin'.

of course, that was also one reason they suffered what was (I believe) the worst electoral annihilation of a democratically elected national governing party in the 20th century...

Posted by: Wrye | Feb 20, 2005 5:07:57 PM

Since I live in a country which already has a 23% sales tax, let me tell you the problems. For once, it's really regressive. Even with exemptions on food, rent, etc. the poorer 10% of the population pays 50% more VAT (as a share of their income) than the richer 10%. Second, it's not that easy to collect. The consumer has every incentive to avoid it, and small businesses (especially street vendors) provide the opportunity. A lot of the people I know buys most of their clothes in informal street markets, for example. Another cheat is that you can buy things for yourself but ask for the invoice to be made in the name of your company. That way, the company gives you back the VAT and substracts it from the VAT they had to pay. Third, since the exemptions are needed to make it politically possible, it ends up strongly distorting prices. Buying sheets of paper, for example is more expensive than buying a paper notebook, since the notebook is exempt and the paper is not. Fourth, it discourages consumption (at least consumption of legal items, consumption of illegal or "informal" items does fine). Frankly i wouldn't recommend it. We have had it for 30 years and we are trying to return to the income tax.

Posted by: Carlos | Feb 20, 2005 6:44:14 PM

I think it is the case that in struggling economies, where all tax collection is centered around the cash register, there is a higher degree of avoidance of payment

Once people put money in the bank, or the income is tracked via soc security, 1099's, etc, it's much harder to hide

Cheating at the point of purchase results in billions of dishonest micro-transactions per year nationally, but just a few dozen or a couple of hundred for an individual. It's much easier on the conscience to engage in larger quantity of tiny fractional dishonesties, than a lesser number of big scary dishonesties.
If you get caught in cheating at point of purchase, it's tends to be a traffic ticket situation. If you get caught in cheating the IRS, it could result in jail time. Perception of significance of crime as well as likelihood and degree of punishment is important. When there's a total absence of structure, like in Russia in the 90's, perhaps enforcement at micro or macro levels was perceived as equally unlikely or avoidable.

My guess is VAT systems work better when there is universal moral buy-in around issues of fairness and wise use of govt resources, and the absence of serious economic pinching of the middle class, when the working class is sufficiently exempted or well cared for, and the related govt costs are manageable. Otherwise, income based systems enforced by a somewhat nasty bureaucracy could result in less cheating.

The willingness to move in this direction regardless of the potential for cheating, could be symptomatic of the tendency to set in motion forces which could ultimately lead to the undermining of the currency, social compact and collective American expectations as we know them. Thus offering an escape hatch in the face of a looming global reality which could render our historical path towards collective prosperity nonviable.
Our other choice of course is to get real, get cooperative and build a better outcome!

Posted by: Paul | Feb 20, 2005 6:48:34 PM

Xavier,

Fortunately I am not running for anything; nor do I put myself forward as a representative of the Democratic party. I'm not offering them advice; I'm just saying what I think. The Democrats are generally too slavish and moderate for my taste, and they can feel free to distance themselves from my comments to their heart's content.

That said, I reiterate: Tom DeLay and his cronies are nutjob extremists who hates almost all taxes. The kind of (non)government these fanatics really want is far to the right of the preference of average Americans, even average Republicans. And they are willing to work every sort of sly angle, build any Trojan Horse and create whatever type of fiscal train wreck is needed to gut the government most Americans want.

Posted by: Dan Kervick | Feb 20, 2005 6:49:43 PM

A consumption tax would work (as an above poster wrote, one takes one's earnings, subtracts one's savings deposits, and pays on the difference) but there are two reasons it won't work, or rather, works, but not the way the GOP wants it:

1) It can be made progressive rather easily, since it starts out working with one's income. In fact, the American economists who came up with the idea liked it, in part, because it could simply incorporate a progressivity. Progressivity being the very spawn of Satan in the eyes of those who financially back the GOP, this quality isn't a plus.
2) It's a tax on consumption, obviously. Which means producers who can manage to find investment capital outside the United States will be loathe to support something that would reduce consuming. Only the most doctrinaire GOP ideolougues would want to actively discourage consumption. It's the American Way.

This idea gets pushed by types who believe that we all don't know nuthin' 'bout the cost of gubmint we bear, that we lose track of property, sales, and income taxes and therefore don't recognize the size of the State. Bullshit. I recognize that the size of the State under the leadership of the GOP is increasing, and increasingly funded not by taxes (which I would willingly pay more of for something like real health care) but by loans.

Posted by: Brian C.B. | Feb 20, 2005 6:52:53 PM

The comments to this entry are closed.