What's wrong with a National Sales Tax?

The politicians in Washington would probably want us to pay the National Sales tax in addition to the current income tax.

This is coming from the totally clueless, but if it were a sales tax taken as things were bought then you could do away with the IRS and lower the overhead somewhat.

The downside would be all those IRS workers would be out of a job.

As I said, I’m clueless so feel free to clue me in if you can do it without be condescending.

Sales tax is repressive because it penalizes the poor. The poor and the rich pay the same rate, but to the rich it is chump change while to the poor it increases the price of everything they buy including food and clothing.

See above.
National sales tax is a great idea.
A consumption tax is more moral than a production tax.
Our government, however, will impose both, NOT make a substitution.
They will get you coming and going.

Wasn’t Forbes pushing this ages ago when he was running for president? I thought someone was. The main argument being that tax evaders, i.e. criminals, would be paying their share when they bought their fancy cars and boats and such. And where poor people would be paying a tax on things they needed to survive, the wealthy would be paying on necessities and luxuries.

Of course the conservatives like this idea cause it switches the “punishment” of taxation to the poor instead of the rich.

Having a 10% VAT on groceries is going to hurt the single parent who makes $1600/month much more than the richer person who makes $6000/month.

@sinscriven But isn’t the person who makes $6,000 a month more likely to buy cars, stereos, TVs, video games, music, brie, high end cappuccino machines, panini presses, etc? Wouldn’t they be paying more in the long run? Unless they lived like they only made $1,600 a month.

lower income people end up paying a higher proportion of income in taxes. That’s why rich people like it. The rich get richer, the poor stay poor.

If you mean sales tax instead of income tax, here is the thing: the very wealthy don’t spend all their money they save and invest tons of it. So a huge portion of their income would not be taxed. So, that means the sales tax would have to be awfully high, if the upper incomes of the wealthy were not being taxed. Many people think that is more fair. I don’t.

I would be open to the possibility of a combination of sales tax and income tax, but only if food is excluded. I find taxing staple goods to be regressive and borderline immoral.

H.R.25, or the Fair Tax Act of 2003, was an attempt to present a national sales tax. It’s long – but note that the Act does include sections on rebates and credits, as well as “family consumption allowances,” and shows an attempt to make the tax more regressive than an across the board national sales tax would be.

There’s a comparison between income and fair tax summary here. Some of the problems with a national sales tax (those who might miss out) can be found here, but most notably that example was critiqued as follows: “Under the Americans for Fair Taxation proposal, taxes would rise for households in the bottom 90 percent of the income distribution, while households in the top 1 percent would receive an average tax cut of over $75,000.”

So there’s a problem potentially with ensuring that the tax is sufficiently progressive. The current income tax system is actually almost dollar-for-dollar progressive, so that people earning a certain percentage of the GDP are paying pretty much that percentage of the tax revenue. This isn’t ideal, I argue, because the richer you get, the less valuable the dollar is subjectively – and once that’s factored in it reduces the apparent progressive nature of the current system.

I want to stress what the above means – the wealthy taxpayers earning the top third of the income are currently paying one third of the taxes. The argument that they’re getting off scott-free is totally bunk. So if we’re going to talk about whether the current system is fair or unfair, we have to acknowledge that there are highly fair aspects to it.

Some more articles about it can be found here, here, and here. Here are some of the aspects of the supporters of national sales tax (fair tax specifically, that are contradictory.

@iamthemob The parts I understood sound good to me.

@mrentropy It’s not enough. $6000 a month, they probably do spend the majority of their income, but lots of people make $20,000 a month and more. Our top 400 earners in the US make over $200million a year. My husband and I’s household income has doubled in the last 10 years, so 100% increase, but our expenditures are maybe 20% more.

I’ve argued this in the past but what the hell let me do it again. A sales tax is not a VAT. In any proposal I’ve seen groceries are not taxed. This allows the low income to feed themselves without the tax and only hits them for other expendable income. Clothing has been a huge argument but it is such a small percentage of the average household budget, I don’t get the argument.

It will do away with the IRS, a huge expense in itself. It also does away with all the tax account at year end (no more 1040s). the rich pay significantly more as they tend to spend significantly more. Any under the table wages whether from criminal or or other sources receive the same tax treatment. All the pieces to do this are already in place, any point of sale system in use allows this to happen and all the agencies needed are already in place. Overall, I love it.

I continue to struggle with the arguments of the ‘naysayers’. They argue that if you have a billion in the bank that you won’t have to pay taxes on it. Well, guess what, they don’t pay taxes on it now. Remember the argument that George Soro’s secretary paid more taxes than George Soros. Think about that. Do you think that his secretary spent more money than George. I think not. Liberals are in love with the progressive tax system because they can see the percentages rise as the income rises. It makes them think it’s fair. Even though we all know it’s not working that way and it costs all of us a huge amount of our GDP. Simply, simplify, simplify.

@Jaxk Forget money in the bank, let’s talk about earnings. If I make $200K and am taxed 20% I pay $40K. If I spend $100K at let’s say 20% sales tax, I pay $20K on my $200K earned so to speak. The guy who earned $100K pays the same as me. You’re ok with that?

Arguing whether money in the bank is taxed is another subject within the topic. The interest earned in a year is currently taxed, not the money that has been there.

The big thing is the IRS would not go away if we enacted this tomorrow. They are charged with administering the Health Care reform bill. In fact the IRS will expand by from 10–40K in the next 3 years just to administer health care.

Also, psychologically sales tax might quell spending. And, spending is a important part of the economic equation.

@JLeslie

I’m not sure how you get to the idea that the guy that earns $200K only spends half his money and I guess saves the other half. It doesn’t work that way.

And you have to remember that the sales tax might be a deterrent but the increased paycheck offsets that. The bigger paycheck might easily spur you to spend more. I sure there will those in both camps.

@Jaxk Again, my household income has increased 100% and we only spend 20% more. The rest I sock away in savings. If I went back to work, probably our spending would only increase another 10%, gas and clothes, maybe a few lunches out, and the rest of my earnings would go to savings most likely. The richer you get, not that I am rich, the more you can save.

Despite what some folks have said so far, a sales tax is absolutely regressive – meaning that poorer people will pay a higher proportion of their income in taxes than rich people will.

There seems to be a fundamental misunderstanding of what it means to have a “regressive” or “progressive” tax. We measure progressivity not by the overall amount of taxes different income groups pay but by their “average tax rates” (also known as “effective tax rates”). Your average tax rate is the total tax you paid divided by your total income.

An example might help. Imagine a country with just two people: Mr. Rich and Mr. Poor. Mr. Rich makes $100 a year and Mr. Poor makes just 10 a year. Now imagine that in this country there is just one income tax rate: 10%. Mr. Rich pays $10 in taxes and Mr. Poor pays just $1 in taxes. Some might say, well that’s progressive since Mr. Rich is paying ten times more than Mr. Poor. But they’d be wrong. Both are paying the same average tax rate.

To make this even more clear, imagine that this country has two tax rates. 10% on income up to $50, and then 5% on income over $50. Mr. Poor still pays $1 (10% of his $10 income), but Mr. Rich now pays $7.50 (10% of his first $50 is $5, plus 5% of his next $50 is $2.50). Again, if you were to say, well Mr. Rich pays more than Mr. Poor, so this tax system is progressive, you’d be very wrong. Mr Poor is paying 10% of his income, while Mr. Rich is only pay 7.5% of his income. That’s regressive.

The sales tax is regressive because poor people spend all of their income in any given year and rich people do not. Let’s use our hypothetical country again. Imagine now that our example country has no income tax, but instead uses a sales tax (on all goods – just to make things simpler) of 10%. Mr. Poor spends all his income, while Mr. Rich spends $75 of his income and saves the rest. Mr. Poor will still pay $1 in taxes (10% of his $10 spent), and Mr. Rich’s will pay $7.50 (10% of his $75 spent). But notice that, just as in the previous example, Mr Poor is paying a higher average tax rate than Mr Rich.

Fundamentally, we know from extensive research (for example, the Consumer Expenditure Survey) that wealthier people do not spend all of their yearly income, whereas middle class people do, and poor people actually spend more than their yearly income (usually facilitated by borrowing). As a result, sales taxes are always regressive.

@iamthemob

I admit I didn’t read all the links but several. There are a few recurring themes that seem to be misleading. First retirees are making as much but they typically aren’t spending much either. They already have a house if they’re going to, they aren’t buying new cars each year, they have already furnished thier house, and not buying a lot of new clothes (at least in my experience). So their sales tax by design will be low.

Another recurring theme seems to be this notion that people can just shop out-of-country. The can’t. Even today foriegn purchases are subject to taxation. You have to declare what you bought and pay the tax. Seems to be a weird and irresponsible point.

Also purchases are taxed whether new or used same as sales tax today. Yes you could buy a lawnmower from your next door neighbor and not declare it but I think that’s an insignificant point.

@WestRiverrat You’re contention that the IRS is, “charged with administering the Health Care reform bill. In fact the IRS will expand by from 10–40K in the next 3 years just to administer health care,” is indisputably, 100% false.

Please read Factcheck.org’s debunking of this myth. In case you don’t want to click, here’s the bottom line: “This wildly inaccurate claim started as an inflated, partisan assertion that 16,500 new IRS employees might be required to administer the new law. That devolved quickly into a claim, made by some Republican lawmakers, that 16,500 IRS “agents” would be required. Republican Rep. Ron Paul of Texas even claimed in a televised interview that all 16,500 would be carrying guns. None of those claims is true.”

@JLeslie

So let me see if I understand. First let me commend you on your savings most people don’t do that. They spend more as their incomes rise. But back to the point.

Your savings are not intended to be spent ever. Is that right. You intend to die with that money in the bank. You aren’t going to use it for retirement, or pay off the house or hell, even for a rainy day. Even if all that is true, you would also have to assume your heirs won’t spend it either. Because once it is spent, it is taxed. If all this is true, I have to believe yours is a very singular experience. Most people even when they save, do it for their retirement or some such thing.

@mrentropy : It’s relative, though. Would the taxed amount be greater from people with higher incomes because they will make more frivolous purchases? Yes, but the point would be that it’s across the board. The kind of person would by a panini press would be less troubled or merely irritated by a VAT but for someone who has a income that barely is enough for sustaining themselves, 10% can be bad enough to force someone to decide whether they eat healthy that week, or have enough cash for gas.

@Jaxk My mortgage has been paid off, and all my cars are owned outright. I have no debt at all, just bills like utilities and property taxes and expenses like gas for my car, and whatever else I want to spend money on. My fantasy is to never have to use my savings, and live off of interest in my old age, but I think I won’t quite save enough to really be able to do that in the end, we’ll see. I read that 30% of people own their homes outright, and 40% of people pay their credit cards in full every month. I am rounding the figures, because I don’t remember the more exact numbers. There are more people like me than you might think, although I agree I am not the majority of people.

There was an extremely long, but well represented, question about this not long ago that might be good additional reading for anyone interested.

Which tax policy is more fair

@Jaxk – Well, there’s no guarantee that retirees retire when they have a house (or that if they do, it’s mortgage free, or that they won’t refresh what they own – they are spending less on some things, but more on others, so we can’t say that it’s a slam dunk.

For purchases overseas, I don’t disagree – but that does require a monitoring system that might be intrusive.

And is there an argument for taxing used purchases? In many ways, although the same person isn’t being taxed twice, it’s arguable that this counts as double taxation. Considering that many people will buy used below a certain bracket, a difference in policy towards used items may serve to actually increase the progressive nature of the tax.

@Michael – You’re oversimplifying the issue. There’s nothing to say that a progressive tax system cannot be implemented – you are focusing on what seems to be an across-the-line tax without a rebate, exemption, or luxury-tax element. How much of income spent isn’t the only factor – it’s also what the income is spent on, and at what price it’s purchased.

As a quick example, clothing isn’t taxed in some areas, but only for individual items that are below a certain price, and not including accessories (unnecessary expenditures). So, a person buying a $120 coat is subject to tax, whereas someone buying a $90 coat would not be.

@Jaxk Regarding your point about George Soros…first, actually it was Warren Buffett who made the point that his secretary paid a tax rate higher than he did (see here).

Second, the reason he pays a lower rate than his secretary is not because he hid his income away in some secret bank account, it’s because we currently tax capital gains at the ridiculously low rate of 15%. Since Mr. Buffett – along with most of the very wealthiest people in the country – derives most of his income from capital gains, he gets to pay the same tax rate on that income as someone making just $30,000 pays on his income.

@Michael

Good catch on the Buffet/Soros thing. I hate it when I make that kind of stupid mistake. Nonetheless it doesn’t change the argument. I never suggested he was trying to hide his money but that his taxes don’t reflect either his income or his spending habits. There is a lot more to the difference than merely the capital gains rate. For instance, you’re not taxed on stocks until you sell them. His net worth is based on the value of all his holdings whether they been sold (and subsequently taxed) or not.

@iamthemob Well, of course my answer was a simplification (I did use a fake country with just two people in it, after all). But the fundamental point holds. True, there are things you could do to make a sales tax somewhat less regressive. You note rebates, exemptions, and luxury taxes as examples. Let me take each of those in turn.

Rebates – it would, certainly, make a sales tax much less regressive if the government were to send out rebates to low and moderate income taxpayers each year. I agree with that completely. But, if all we had was a sales tax, how would we know which taxpayers needed the rebates? We’d need to have some kind of income reporting – like with an income tax. Now, that’s be ok with me, but I know that many people who like the idea of a national sales tax like it so much in part because it would do away with the current income tax system (reporting, filing, IRS, etc).

Exemptions – here I take issue. You can’t exempt your way to a progressive sales tax. The reason is that while rich people certainly do spend their money on more expensive goods, it turns out that pretty much everyone spends the same proportion of their income on necessities. So if you exempt food, you’ll be exempting some share of poor folks’ income, but you’ll also be exempting the same share of rich folks’ income.

Luxury tax – I’ve never heard of the kind of tax structure you described (can you point me to a link where I can read more about your example?).

There’s one other way that I can think of to make a sales tax more progressive and that’s use the money it generates in a progressive way. Those of us who believe strongly in a progressive tax code might be willing to live with a regressive tax if it supported things like universal early childhood education, and better nutrition services for low income families, etc.

@Jaxk Percent paid in tax is not calculated based on wealth, it is based on income for the year, whether derived from capital gains, payroll check, or interest and dividends. When Buffet says he pays lower taxes than his secretary, he means based on his earning compared to hers for a year. Not money sitting in the bank, or how much his plane is worth.

@Jaxk Don’t kick yourself about the Soros/Buffett mixup. We’re having a really good discussion on a complex issue here and I don’t think anyone is going to dock you points for something minor like that.

As for your actual point…I agree with @JLeslie. When we’re talking about tax rates, we’re dividing tax paid by annual income, not by total wealth or net worth.

@Michael – The U.S. has many examples already – look at the chart. The exemptions are for individual items, or types, below a certain price.

That can also be adjusted based on items, and different items can be taxed at different rates (keeping simplicity in mind). And of course, if the item is for business purposes, it gets rebated up to a certain amount, perhaps.

@iamthemob

There are no guarantees in life. It is quite possible that a retiree may buy a new house. As with anybody that would assume they have enough money. We can always find an example of something that may happen differently but in general, at 65, you have acquired most of the hard or expensive items. Unless you’re rich in which case you will continue to buy expensive things the rest of your life.

As for the overseas purchases, we don’t need anything new. We already do that. The systems are in place.

And the double taxation issue is not new. We get double taxed all the time. Every time you pump gas you are being double taxed. If you get dividends your being double taxed. Anything with an excise tax and sales tax is double taxed.

And the other point I meant to make but forgot was the tax on business purchases. Any item purchased for anything other than resale is taxed. That is true today with any sales tax. If I purchase a broom for the store, I have to pay sales tax on it. Being a business purchase is not the criteria for tax exempt. (from your references)

@Jaxk

The fact that we have double-taxation aspects of the system now doesn’t mean that it should be included in any new or revised system. Sometimes it is proper, but that’s not an argument against it for the used good sales that there are double taxations now.

@iamthemob Thanks, that’s a helpful resource. But I can’t find anything on it that describes a sales tax that changes based on the price of a good (though, I admit, I might have missed it). Lots of states have exemptions or different rates for type of good – and I already discussed why that doesn’t change the regressivity of the tax – but I don’t see any that alter the rate based on price.

@Michael – Really? Connecticut? Clothing? >$50?

@Michael

Just to be clear, I was responding to your wealthiest comment wealth is based on net worth not annual earnings. I have no idea how much he earns in any particular year. It could be billions or it could be actually less than his secretary even though his portfolio grew at an enormous rate. My only point with that was that you could have invested in Sony back in to 70s, held that stock and never paid a dime of tax on it, and be worth billions today.

@iamthemob Aha. You are correct (I thought I might have missed it).

But let me counter with this: Despite this structure, Connecticut’s sales tax is still regressive. See this report from the Institute on Taxation and Economic Policy. Even with that, the poorer you are the higher your tax rate. This kind of proves my point…you really can’t design your way out of a regressive sales tax.

@Jaxk I am still curious, if the wealthier person, the high income earner, doesn’t spend a big part of their money, are you fine with them not paying tax at all on it, on what is not spent? You seem to assume most people just up their spending as they make more, but there is a point where that is simply not true for most, it levels off. Most people in the higher incomes think as I do in terms of retirement. Having enough to live off of, not to spend down. People who make higher incomes live in a whole different financial world. I recommend you don’t help those people keep more money as a percentage of their income than you.

@Jaxk True…there is absolutely a disconnect between wealth and income.

But every year the IRS puts out a report on the richest 400 taxpayers (richest based on income, not net worth) and in that report you can find their average tax rate. In the most recent year for which we have data, those richest 400 people paid an less than 17% in taxes. And the biggest reason why is the low low capital gains rate. Take a look here for some more thorough analysis.

@iamthemob Also, I just want to be clear, because it’s hard to convey tone in online posts…when I asked you to point me to some examples it was because I genuinely wanted to learn about that kind of tax structure. I was not questioning the existence of them. My apologies if it came across as accusatory or disbelieving.

@Michael

It doesn’t really prove anything though, as I didn’t put it forward as an argument that it was progressive. I don’t think it is, as there are plenty of items taxed for all.

But, it’s a mechanism that can be utilized to ensure it is progressive.

@Michael

I couldn’t find a listing of those tax payers so I don’t know if Buffet is on there. But there is a comment that is significant in all this.

“Of the taxpayers who appear in this group of 3,600
returns, less than 25 percent appear more than once,
and less than 13 percent appear more than twice.”

Most of the people that make this list are not your consistent earners. Rather they are people with a one time income spurt. Either selling a business or their holdings in a major business. It is difficult to align this with the Buffets or even Soros of the world.

@iamthemob Here’s the link to distributional analyses of the tax systems in all 50 states. If you can find me just one that has a progressive (or even flat) sales tax system, I will concede the point.

Otherwise, I think you will have to agree that sales taxes are always regressive.

@Jaxk In the first two minutes of this Buffet talks about his taxes compared to his staff.

@JLeslie

We still don’t have any idea what he makes. But that doesn’t matter. I have no problem with your premise that he makes a lot more than his secretary. I would however take exception to the idea that the capital gains rate should be raised. Here’s why and it relates to the quote I posted above. The list of millions changes every year. In other words the people on it (in a large part) are people selling off their investments, for retirement or just getting out of the business. If your selling you business to retire it is a one time deal and stripping you of twice as much as they do now (15% to 30%) or even more if you want to make it comparable with income tax, means you can’t retire. Just as an example say you’ve worked you business for all your life and sell it for $1 million. Current capital gains takes 15% or $150K. Leaving you $850K to retire on. Given the interest rates today that’s not much. If you change it to reflect the income tax, that 35% federal and another 10% state (California) you end up with a 45% tax and are left with $550K. Not nearly enough to retire.

So, I know I’m a little off topic here but comparing a Buffet scenario with all others that fit into the high worth category doesn’t work so well. And in either case, I think you fair better with a sales tax. The one time high income gets distributed more evenly over time and the big spenders get hit as their grander lifestyles demand buying more stuff.

@Michael

Absolutely not. That’s the most illogical argument ever.

(1) Not asking you to concede anything, especially not in the sense that there is a progressive state sales tax system.

(2) The fact that there aren’t state examples doesn’t lead to the conclusion that “sales taxes are always regressive.”

I don’t know whether it’s possible to get to a better and more progressive system than we have now, but there is work on progressivity, like introduction of the X-tax and arguments discussing how to increase its progressivity. The detail required in the analysis to determine how to do this, I have yet to see. But I also have yet to see anything that suggests an increase in tax based on the cost of the item, rather than an individual’s income.

There is a single flaw that I really don’t see anyone, I’ll say, being able to really deal with – the predictive market requirements, at least at the beginning, of the tax. People tend to spend less when they see something cost more. That I think is a problem indeed.

Sorry – the list of million S/B the list of millionaires.

As my college professor once told me, “you can’t just run spellcheck, you must proof read”.

@iamthemob So you’re saying that, in theory, there could be a progressive sales tax. I’ve already presented my case for why, even in theory, it would almost impossible. But more concretely, I think I’ve shown that there doesn’t exist, anywhere in this country at least, even one single example of an actual progressive sales tax – even in states where you would think you might find one (liberal states like Massachusetts, New York, California, etc.)

As for whether I’ve made the “most illogical argument ever,” I leave it for others to decide if it was “illogical” of me to offer as evidence of my argument that you can’t design a progressive income tax the simple fact that, even though most of the 50 states have sales taxes, not even one of them is actually progressive. To me, that seems pretty logical.

@Michael – If you can show me a democracy where there is no discrimination, then it’s possible to live in an equality based democracy.

However, if you can’t…then democracy can never achieve racial equality.

That’s your argument. You haven’t shown why it can’t achieve progressivity, simply pointed out the obstacles to it.

You have shown that concretely there isn’t a US progressive system – but in a system that mixes a whole bunch of other revenue-producing laws.

Over the past 30 years, we have made the US tax codes far more regressive than they were in the years from the Great Depression through 1980. A national sales tax is purely regressive. It is actually more regressive than a flat tax. It’s a terrible idea unless the goal is to phase out the middle class and transition the USA to something much more like a banana republic or an oligarchy.

Those who say it pushes the burden to the poor don’t know what they are talking about. Everyone has the same tax rate and your taxes are dependent on your buying power-therefore the rich are OBVIOUSLY going to have to pay more.

any referencing of factcheck.org is not reputable. I won’t listen to a Soros backed venture..

@jlelandg – You’re missing the point. Everyone needs to buy certain things. Therefore, a tax on people purchasing necessary items, depending on the amount, and depending on whether it’s straight across, makes the tax regressive. Most of the data shows that such taxes mean that the poor end up paying much, much larger percentages of their income than the wealthy. It’s more (1) the percentage of individual income, (2) contribution to the overall percentage in the tax base, and (3) accounting for the lower dollar value the more income one has that determine progressivity and fair distribution of tax liability.

Paying more means very, very little in the end, ironically.

Currently we have a system where almost half the country pays no income tax. So what is ‘Fair’. If you change the tax system so that a person that pays no income tax ends up paying even $1 dollar in tax, you raised his taxes infinitely. So if we think that is unfair then we should probably keep the system we have. It all depends on what ‘Fair’ means.

@jlelandg I am sorry, but that is completely false. A national sales tax would need to be at least 25% to provide even the inadequate revenue we are bringing in today.

Someone earning $25,000 spends almost every cent they earn on items that would all be taxed by a national sales tax. Their food, clothing, automobile, housing (even if they rent, the landlord passes the tax on buying the property on to the tennants. If the national sales tax So their effective tax rate would be 25% or near that.

Someone earning $250,000 a year typically invests a good deal of what they earn/ Even if they live in a MacMansion and buy designer clothes anc caviar, they pend perhaps half their annual income on taxable items, and have an effective tax rate of 12.5%.

Now let’s take a coprprate CEO earning $25,000,000 a year. S/he probably spemds more on luxury items that the fmaily earning a quarter of a million. Instead of a Lexus, s/he may drive a Lamborghini. Instead of a MacMansion in a affluent suburb, s/he had a tru mansion in the hills of Malibu and a vacation chalet in San Morits (not in the US so not touched by US taxes.). S/he spends 1/10th of annual personal income on taxable items, yielding an effective tax rate of 1.5%.

Now these are just generalizations, and there is no question that some high rollers earn millions and spend wveryting they get on themselves. But in general, those with truly high incomes would pay an extremely low effective tax rate with a national sales tax.

This is as recessive as taxation can get. At least with a flat tax everyone pays the same effective tax rate. With a sales tax, the effective tax rate drops lower the higher the income bracket goes.

@Jaxk No tax is “fair” so the fair tax argument is a red herring. I do like your idea expressed in a previous thread that everyone should have some some skin in the game. All Americans should realize that when they vote to “get something” from the government, it is they themselves that have to pay for it.

@ETpro

A couple of discrepancies. First I can’t help but wonder why everyone thinks that if you make over $200,000 you only spend half of it. That is not typical. Yes you save more than you did when you were making $20,000 but saving $100,000/yr is quite a stretch. And no matter how you slice it, the money gets spent eventually. Either the retirement route or through their heirs. Look at the most wealthy people on Forbes or any such listing. The truly rich spend a lot and leave whats left to their heirs which they in turn spend. Families like the Kennedy’s keep sliding down the list as thier money gets distributed and spent. New billionaires crop up to head the list. But they like the Kennedy’s will have thier fortunes distributed and spent. You have to think long range. All money is eventually spent.

Also, when a wealthy person buys a vacation chalet in San Morits, he doesn’t pay the tax. But when a wealthy Asian buys a vacation mansion in Pebble Beach he does pay the tax. It goes both ways and I believe we see more investment of this sort in the US than elsewhere.

I do like everyone to have some skin in the game. I’m glad to see we can agree sometimes.

@Jaxk I was careful to state that these were just rought gestimates. The intention is to show a trend. With increasing income, we spend a decreasing percentage on taxable items. My sum was 250,000, not $200,000. But be that as it may. Quibbling about exact amounts is just a way to ignore the big picture. There are no percentages I could have possibly put forth that would apply to everyone and would therefore be unassailable by a right-winger who wants to derail the conversation by turning it into a useless debate on exact percentages of taxable spending instead of a clear picture that a sales tax is deeply regressive.

It is possible to make sales taxes less regressive by exempting basic, non luxury food items and clothing. But when you do that, you force the tax rate on all other items significantly higher in orfer to still raise the same revenue. Instead of 25% we are looking at 35 to 40%, and that sort of tax applied to automobiles and homes hurts all but the wealthiest of shoppers.

@ETpro

You cut me to the quick. First the $200,00 number came as it the lowest number I can remember where the Democrats have draw a line to separate rich from poor. The number had been used earlier in the thread and I didn’t expect you to take exception the difference. So why do you think if you make $250K you only spend half of it?. Second, I went on to explain why the percentage saved made little or no difference. It all still gets spent. Your banter about exact percentages is what’s derailing the point.

Groceries should be excluded but I don’t see any significant change in the rate as a result.

The way the government works, everything would have a loophole, and luxury goods would end up being exempt or taxed at a lower rate.

@Jaxk About the capital gains. I am torn on this, but not because of retirement. If someone’s business is worth one million, then they were probably making a pretty penny while operating the business. I hope they were saving something all the years they enjoyed a good income. Very few businessmen are going to not do a business because the tax will be higher, except if there is some sort of tax benefit for doing the business outside of the country. But, most very small business owners are not thinking inside and outside the country. Maybe there is a compromise to raise it just a few percentage points? They not only get capital gains benefits in taxation, but they get the benefit of all sorts of write-offs while running the business. I have a family member who runs a small business, two employees typically, claims everything, nothing hidden, all done by the book, and his taxable income is close to nothing, even though he makes a nice amount of money. I was shocked to see how it all works out on his taxes.

Also, in terms of retirement, I am fine with the housing exception of no tax up to $500K gain for a couple on a primary dwelling, which is not capital gains, but it is one way typically people over time make some cash for retirement.

And, regarding the $250K number you are discussing with @ETpro I think it was back in the 80’s Congress came up with $250K as a dividing point, I would have to look it up to be sure. I just heard this again recently, and the point the person made was in todays dollars it is worth $380K.

@JLeslie

I don’t disagree with most of your point. I will take exception the idea that the value of the business means you’re making a lot of money. There is not always any relationship to the value. For instance the property (or assets) may be worth a million but your profit on the business barely pays the bills. A situation I’m very familiar with.

@Jaxk Certainly possible in some cases; the worth of a business can vary for many reasons.

@Jaxk Your problem is not that I used exact percentages but that my evidence doesn’t lead where you want it to go. Had I said roughly ¼th or about ⅓ you would have been just as quick to say I clearly had no idea what amount to ascribe to any figures, and my argument would only be valid if I gave exact percentages.

You are trying to argue that a sales tax is not regressive, but progressive. That’s an absurd and patently false assertion, and it is so far from true that the exact figures are of no consequence. It’s like trying to argue that the average US one story house is obviously taller than the average US skyscraper because I cannot attach exact figures to how high the average one story house and the average sky scraper in the US are.

I am only discussing the big picture here of whether the National Sales Tax is regressive or progressive. This thread did not ask what level of income should qualify as rich and my choice of brackets had nothing to do with that, as the sales tax rate applies equally to people in all income brackets.

Clearly, exempting tax on food alone would mean the tax rate on other things would need to be a bit higher. But I spoke of common proposals to exempt food, non-luxury clothing and non-luxury housing. Those items alone make up much of the total spending of the working poor. Exempting them all would require a significantly higher tax on remaining items in order to raise an equal revenue. We can get to actual numbers on that issue.

In 2009, the median US household income was $49,777. The spending chart here shows a family with pretax income of $63,091 and breaks out percentages of spending for various necessities and luxuries. That rather affluent family spends 12.4% of their income on food, 34.1% on housing and 3.95 on clothing. So if you exempted all those items from taxes, you would exempt 50.3% of their spending from your proposed national sales tax. How you are going to keep the rate at 25% and still collect just as much revenue is not clear to me.

@ETpro

Let’s back up here just a minute. To start with, there’s no way I would exempt all those items. You’ve pretty much exempted all the taxable spending. So let’s take a look at it from a different angle.

Your guy making $63,091 before taxes. According to your reference he pays 14.8% in tax and saves (I assume because he doesn’t spend it) 6.5%. That gets him down to the $49,638 number.

Under a sales tax scenario he wouldn’t pay tax on the saving (6.5%), nor the SS and pensions (10.1%), and we won’t be taxing cash contributions (3.7%). I’ve also included groceries (7%) but not eating out. So that all adds up to 27.3% ($17,034) that will not be taxed with a sales tax. Now if we assume the rest will be taxed at 25%, the tax liability will be 11,514 (63,091–17,034=46,057*.25=11,514). So at this point we’re fairly close but he’s still paying a bit more (2190) under the sales tax scenario.

Your graph shows Social Security and Pensions as spending. I assume that the 4.2% SS tax is part of that and is included in the sales tax scenario. That works out to be $2650 that he would not have to pay but would go directly back into his pocket. So $2650—$2190 =$460. He comes out $460 ahead with the Sales tax over the current tax system. And that is without the government sending him any money or compensating in any fashion.

Let me know if you disagree.

@Jaxk Without checking the math, I agree in principle. And that underscores the challenge. If the proposed tax system raises less revenue than the current one, it is going to make the deficit larger, not smaller. We have already proved that while there is truth in the Laffer Curve, we long since passed its sweet spot (top of the revenue bell curve) and additional tax cuts now drive higher deficits. They are not free money.

@ETpro

The sales tax system reduces revenue slightly but also reduces costs by eliminating the IRS. The percentage applied is designed provide the revenue equal to what we have now minus the cost savings. I’ve seen numbers ranging from 17% to 25% and obviously that needs to be proven. There is no question that if you pay no income taxes now, you will pay some in a sales tax scenario. That may seem regressive but I don’t think it is actually a bad thing. The overall affect and the reason I like it so much, is based on the idea that all money eventually gets spent. Even the Buffet and Soros money. It may take a long time and it may not be spent by Buffet and Soros but it will eventually be spent. And it doesn’t matter whether it was legally obtained, or from foriegn investors, all money spent gets treated equally.

Where we are on the Laffer Curve is highly debatable and the subject of much speculation. I know we would disagree on this and arguing the point would simply be a matter of what one guy thinks against what another guy thinks. So I’ll leave it alone.

@Jaxk I’d guess that most people paying no taxes today would end up paying close to 25% of their income with the proposed sales tax. A bit less if food were exempted, but still a large bite. Busset and Soros would pay a tiny fraction of their income. To me, that’s what regressive means.

One thing I do like about the sales tax is for those of us who do pay now, switching to this approach would be sssss easy. That’s seductive. Come up with a way to protect the lowest income groups, and put a strong inheritance tax on estates over say #10 million. Index the amount for inflation. I would probably sign on just because it is so darned easy to figure your taxes.

@ETpro

I know you’re concerned about the very rich not paying enough. As I said all money eventually gets spent. Joe Kennedy was one of the richest in the country back in the fifties. Now with the distributions and a little time they are all merely wealthy. A quote from this article

“A close friend of Ethel’s, recalling the “extravagance of the ebullient life” that she, Bob and the children enjoyed, hints that income and outgo run a neck-and-neck race in her household as in the ordinary American’s.

Ethel is the widow of Robert Kennedy. Sounds like she’s spending everything she gets. As I said, all money eventually gets spent.

@jaxk, Dynastic wealth can be given generation to generations for 100’s of years. They live off the interest. My parents will most likely never spend a penny of their savings, they are not wealthy by a long shot, but they have pensions they live off of. Their estate is small enough that there won’t be tax incurred when we inherit the money, if I understand the tax code correctly.

It is none of my business, but I do wonder what part of thr socio-econmic strata you consider yourself? I always wonder this when people fight to not tax the rich. Not because I am making a judgement, I just find it very interesting. I see wealthy people for it, wealthy people against. Lower middle class people fight hard to protect the wealthy, which always shocks me to be honest. It’s all very interesting to me to know how people see the big picture and where they personally are in the picture.

@JLeslie

I am semi retired. I have a business that pretty much runs itself but barely pays my bills. I’m in a situation that if the economy does well, I will do well. If it sucks, my business sucks. Taxes are not a concern to me personally as the top tax bracket (or virtually any bracket) has no affect on me. But I believe it will affect the economy so that is where all my arguments come in.

I believe it’s not what you have that’s important but rather what you can attain. Opportunity is the greatness of this country. People immigrated here over the past couple of centuries by the boat load (pun intended). They didn’t come here because they would get rich but rather because they could get rich. The streets aren’t paved with gold but there is gold out there. When you cap the people’s earnings, either through taxes or pay limits, you’re not affecting those already rich but rather those striving to be rich. I am well past my peak earnings years and what I’ve got, I’ve got. But I would like to see the same opportunities I had, left for my children and their children (more commonly known as my grandchildren). I don’t see that happening with a nanny state. Failure is a part of life. I’m very familiar with it. But so is success. I’m familiar with that as well. We can’t keep shoring up failure and limiting success. It breeds stagnation and nobody wins. IMHO

@Jaxk I am actually not the least concerned with the rich not paying enough. If I knew some way to build a great nation with no need for anyone to pay taxes, I would do that. What I don’t want a tax system to encourage is oligarchy. Oligarchy is very, very god for a tiny handful of fmailies and absolutely horrible for everyone else in that society. @JLeslie is exactly right. I don’t want to see dynastic wealth in America turn us into an economic analogue of medieval European feudalism.

All money does eventually get spent, but dynastic wealth exists as well, and it could not possibly do so if multi-billionaires spent all they bring in. The Rothschild family and the Saudi Royal Family are two examples of dynastic wealth. Each family is estimated to be worth upwards of a trillion dollars. They did not get that way by making sure their annual spending matched their annual income. Forbes lists 385 billionaires in America. None of them go on that list by earning over a billion dollars in one year and getting on the list just before they spent it all.

Wasn’t it during Eisenhower we had a very high upper income tax rate, businesses and the economy flourished? I think Eisenhower also believed in a decent wage for workers so they would go out and buy things. I need to google a little, as my history knowledge isn’t great. Maybe other people know the answer.

I really can’t see how taxing the superrich a little more, not the $250k mark, but over a million I would say, would inhibit the economy or small businesses. And, just to clarify many people don’t realize the real definition of small business. It is up to 500 employees in most industries, can be millions in assets depending on the industry.

@ETpro

I don’t have an issue with people like Gates, Jobs, or the Walton’s acquiring massive wealth. A couple of reasons for that. If you build a better mousetrap, the world will beat a path to your door. They did and the world did. They created something substantial that improved our lives. I have no problem with that. Where we may find some common ground however is in some of the others (specifically Hedge Fund managers), that neither created anything nor made our lives better. They merely made a fortune based thier ability to leverage other people money to manipulate prices and create wealth for themselves.

If you’re managing a fund, your income should be taxed at normal income tax rates. Capital gains is a tax on investment and quite often a tax on ingenuity, creativity. I’d hate to see that discouraged. Hedge funds however don’t really fit that bill and it would seem we could tax those that manage a fund as normal earnings as opposed to capital gains. I’m sure it would drive some of them out as fund managers but at least it would drive down thier leverage. Their influence on the market would become only thier own money as opposed the thier money plus the investment of hundreds or thousands of others. I doubt you would be opposed to the hedge fund managers getting higher tax rates but we’re likely still miles apart on the Waltons. And I doubt we can do anything about the Saudi Royal family.

@Jaxk I don’t think anyone is knocking people for coming up with great ideas and making money. It just seems to me there is a line that shouldn’t be crossed. Anyone making a fortune most likely has people working hard helping him make money. If someone makes $9 million or $10 million it has little impact on his life and spending, but if his employees start making $60k instead of $50k that is a really big difference for them, and helps the economy more. Same with taxation, taxing the very wealthy on their income will not negatively impact the economy.

I think maybe you are not thinking big enough. Not wealthy enough. That $250k mark is a terrible number that people dwell on. I am thinking much bigger.

@JLeslie

Actually, I do understand your point. The $200K or $250K mark has been widely touted and I’m not sure why that would be a good mark for separating wealthy from Middle class but that seems to be the administrations point. Definitely not mine and doesn’t sound like it’s yours either. However I am willing to give some ground (I can’t speak for all conservatives).

I’ve mentioned before that removing the cap on SS income would basically fix the problem with SS. That would equate to a 4.2% increase in taxes on the very wealthy with no impact on the middle class and very little on the well to do and small business. But it has no impact on the hedge fund managers or fund managers in general and that’s why my point above would comes into play as well.

Overall, I am not totally opposed to doing some things with the tax code but we have to be careful and a blanket increase will have a detrimental effect on the economy while not producing the results you expect (IMHO). There’s a major difference between wealth and income and the income tax only affects the salary part of incomes. At he high end that is a smaller and smaller piece.

@Jaxk I am fine rasing the SS cap a little also, which does directly affect my pocket. I would even be ok pay some more income tax (my household is under that $250k mark typically. One year we were higher because we sold something, and I happen tp make a lot of money that year, but it is an abberation for us, especially now that I have not been working at all). The thing about SS though, is they steal from it, and mix the money in with all the other money, which I have a big problem with. I think during Reagan they decided it was ok to take from the SS kitty, and everu president since has continued to do it. One of them has to reverse that.

Meanwhile, this last tax deal Obama made is going to lower SS withholdings from what I understand? Isn’t that right. Pisses me off. That whole deal pissed me off. I would have rather he let all the taxes go up in every category. The truth is the people suffering most right now are those without jobs, not those paying taxes on their income.

@JLeslie

I’m not sure why you blame Reagan for robbing SS. It has been part of the general fund from the very beginning. That is, it has never been a separate fund. Deficit spending has robbed from SS virtually every year since it was enacted.

Actually, I’m not talking about raising the cap on SS, I’m saying eliminate it. As for the last tax deal, it pisses me off as well. I think the SS suspension was intended to make the hiring of new people less costly for the employer. The problem is that employment is long range and the SS suspension is short range. I can’t imagine hiring will be affected much. Growing the economy and reducing unemployment are my primary goals for everything I propose. It all boils down to whether you encourage investment or limit it. Whether you encourage innovation or limit it. And whether you believe that government spends money more wisely than the private sector.

@Jaxk Not blaming him, I just thought that is when it started. Plenty of blame to go around.

@Jaxk One more time. I am not anti rich. I’m working hard to get rich myself. I too admire Bill Gates, Steve Jobs, Warren Buffet and Sam Walton. What I said is I am against a tax system that allows a build up of dynastic wealth. If Bill Gates’ kids inherit the smart genes, let them go out and do something to earn their fortune, and in doing so, enrich us all like their father did. I don’t want America becoming a banana republic.

Regarding @JLeslie‘s concern about raids on SS funds, we were not running substantial deficits until Reagan introduced his Voodoo Economics. In 1980, we had a $1 trillion national debt left from WWII. We had reduced the debt as a percent of GDP dramatically and continuously since the end of the war. It exploded under Reagan, even with the first substantial raid on Social Security funds. Reagan tripled the National Debt, slashing top tax rates by 60% while simultaneously increasing the size of government in unprecedented fashion.

@ETpro regarding debt vs GDP under Reagan. In 1988, Reagan’s last year in office, debt was 41 percent of GDP. That was the same as the debt vs GDP at the end of 2008, President George W. Bush’s last year in office. If you believe policies from Reagan to Bush were mistakes, do you think it makes sense to double down on those mistakes, like with the 80 percent debt vs GDP level which is projected when Obama leaves office?

@bkcunningham I can’t speak for @ETpro but I hate the huge debt we have now. I hated it under Reagan, and hate it under Bush and Obama. But, what really gets me is Bush had an opportunity after 9/11 to keep taxes at the Clinton rates to help pay for the war he felt necessary. The country was unified and pissed, and probably willing to give up some of their own money in their own pockets to fight the enemy. Let alone they had been paying that tax rate under Clinton anyway, and not many people were complaining. Bush decided to spend tons more and not fund it. It was not just some economic theory he felt was better for the country, this was committing serious funding for a war, and actually taking in less money to our government. I find that completely irresponsible. Obama felt it was necessary to do what he did so the economy did not plummet. I don’t agree with all that was done, but some of it did seem to be necessary in an emergency. Reagan thought his economic theory was golden, I think it was a mess.

@JLeslie

Apparently you don’t remember the recession we were in. Both when Reagan took office and when Bush took office. Both recessions were fairly severe When Reagan too office unemployment was climbing and peaked over 10%. Inflation was over 20% and the military was a joke (remember the Iran hostage rescue). When Bush took office the economy was in recession as well and 9/11 drove it deeper. Remember the Dow hit 7200 unemployment was beginning to rise. Both turned that around. The tax cuts were not to fund the war but rather to spark the economy and that’s what they did in both cases.

The only way to reduce the debt is through economic growth. Policy’s that spur economic growth will help to reduce the debt, policies that hurt economic growth will increase it. Take a look at the debt as a percentage of GDP under Bush, Clinton and Obama. Clinton took advantage of the unprecedented growth as a result of the DotCom boom and I applaud him for it. Neither Reagan nor Bush had that luxury.

@Jaxk I do remember the economy suffering as Bush took office. My property value went down shortly before I had to sell, and people were being laid off all around me. With all of them I would say I rather suffer the pain and do the right thing, then inflate the economy falsely, including Obama. Living on credit is not how I like to do things in my personal life or for our government. I know that is a little naive and idealistic, I am willing to accept that, but I don’t like when people feel comfortable with debt, and tout it as good thing, which is exactly how it was during Reagan. They kept saying debt is fine and good. That trickled down to people feeling they should take on debt, because they can do more with their own money then, which was bad advce in my opinion, because most people don’t know what to do with their own money. This constant float game is a somewhat of a false exonomy to make people feel good, feel like they have more money than they do. So, during Feagan, Bush, and Obama I have been freaked about the the national deficit, but the Republicans seem to only care when a Democrat is in, that really troubles me. The expressions Republicans fall in line and Democrats fall in love seems to be somewhat true.

@JLeslie

Sorry but that sounds awfully partisan. I know I’ve been complaining for the past ten years about the high spending. The Republicans were voted out of office in a large part as a result of the spending and it was a major part of the Democratic campaign. Once Obama took office, all of a sudden spending was good and all the ills and arguments of the past fell by the wayside. Hell democrats are still arguing for more spending. Talk about falling in line.

@jaxk I think both of us can’t stand the spending, and the people who we are probably most surrounded by are similar to us, no matter if they identify red or blue, and so our view of the other side is slanted so to speak. You make valid points is what I am saying. Both sides have people who are annoying,

The Republicans I know who voted for Obama, or who have recently (in the last 5 or 10 years) become disgusted with the Republican party never talked about the deficit, they bailed because they cannot stand the takeover of the Republican party by the Christian right wingers. It had more to do with science, the war, things like that in my circles. The people Who I consider to be right wing, not to be confused with Republican, did not vote for Obama.

@JLeslie

What, you’re saying my point of view is slanted? :-)

@bkcunningham You are entitled to your own opinions, but not your own facts. Here is a list of presidents, and the Debt to GDP Ratio when they assumed office and when they left. This isfrom Wikipedia, but the facts are public record and source is cited.

Jimmy Carter           35.8%—32.5%
Ronald Reagan        32.5%—53.1%
George H,W, Bush   53.1%—66.1%
Bill Clinton               66.1%—56.4%
George W. Bush      56.4%—83.4%

Can we agree there’s more than one variable to the economy…

It’s not as simple as spend = x and don’t spend = y…

It’s definitely not as simple as Republicans and Democrats in one political chair, even if it’s the most powerful chair.

If we take a look at unemployment and draw the numbers out by who’s in office, I would guess it pretty much averages out around 7% regardless of who’s doing the State of the Union. You can look at one term, or one president here and there and say they lowered or raised unemployment, but really you’d have to look well beyond their time to see the effects of their policies, and by the same token you’d have to give their policies time to take effect on the front end.

If Reagan took over a slumping economy, then so did Obama. The only way Clinton was responsible for the booming economy toward the end of his time was if Gore actually did invent the internet.

Doesn’t it seem more likely that the economy is cyclical in large part and who’s in office may have a greater affect on the direction of future growth rather than the growth itself? Booms will bust and busts will pass seems to be the rule of the day.

Arguing which party is “right” has little to do with tax policy. I think both sides agree that tax policy should essentially come down to taxes = budget. No one likes the debt.

We can go back and forth for days (and have), point out hundreds of charts and discrepancies, find supporting documents for any partisan claim but ultimately it’s all in the past.

The challenge is figuring out what’s going to work in the future, with today’s numbers and today’s economy. Why not draw something up for that and then discuss it rather than numbers from 30 years ago. There’s a wealth of knowledge and experience just in this conversation that all seems to be directed at finding where blames lies for the current problems.

Why not come up with at least a suggested solution?

off my soapbox, it’s like 18 degrees and sleeting in Texas, I’m not used to this crap :P

@ETpro here’s a really good source for a variety of data on budget receipts, outlays, surpluses or deficits. I’m not offering it to you as an argument. Just FYI if you are interested in a single source other than Wikipedia.

http://www.whitehouse.gov/omb/budget/Historicals/

@funkdaddy I guess that the question about a national sales tax was meant as a stab at coming up with a solution. And like the past or not, there’s no better way to figure out what works in advance of trying it than to study history. As George Santayana asid, “Those who do not read history are doomed to repeat it.”

@bkcunningham The Whitehouse site and the CBO site have the numbers in unprocessed Excel spreadsheets. When you download all the needed XLS files and open them up, you find that Wikipedia has it right, and no surprise. Those are the cources they cite.