Brookings Inst: National Sales Tax would help those who earn over $200K

[Bush_Eats_Beef]

To determine the revenue- and budget-neutral tax rate in a national sales tax requires estimating the rates of evasion, avoidance, the extent to which deductions, exemptions and credit would be re-introduced, and the impact on economic growth. With extremely conservative assumptions about the magnitude of evasion, avoidance, and statutory base erosion, it would require a 60 percent tax-exclusive (38 percent tax-inclusive) tax rate to replace existing federal taxes, and a 26 percent tax-exclusive (21 percent tax-inclusive) tax rate to replace the existing personal income tax. These estimates do not include any allowance for economic growth, but even if the economy grew by 5 percent, which would be an enormous effect relative to existing estimates, the tax-exclusive tax rates would only come down to 57 percent and 19 percent to replace all federal taxes, or the income tax, respectively.

Note that the eventual sales tax rate that households would face would likely be significantly higher because existing state sales tax would be added. In addition, most or all state income taxes would probably be abolished in the absence of a federal income tax system (since the states depend on the federal income tax system for reporting purposes) and converted to sales taxes. These would add considerably to the combined sales tax rate. Any transition relief provided to households would reduce the tax base and raise the required rate further. And if major consumption items like food, housing, or health care were exempted from the base (the assumption above do not allow for such large exemptions), the tax-exclusive rate could rise to over 100 percent. In short, any realistic plan for a national retail sales tax that replaced the bulk of the federal tax system would require extremely high tax rates. Sales taxes at such high rates raise crucial questions about enforceability. Advocates and sponsors of sales tax proposals have suggested that much lower rates, on the order of 23-30 percent would be sufficient to replace the entire federal system. These estimates are lower than the ones above for three reasons. First, they are quoted in tax-inclusive terms. Second, they assume that there is no evasion, no avoidance, and no statutory base erosion due to political pressures or hard-to-tax items.

Third, quite simply, the advocates made a mathematical mistake in calculating their required tax rate. An analysis of the required rate in a sales tax requires some assumption about what happens to the level of (the prices that consumers see before sales taxes are imposed) in the transition to a sales tax. Producer prices could (a) remain constant in nominal terms, (b) fall by the entire amount of the previously embedded taxes, or (c) fall by an amount between the first two benchmarks. In calculating their required rate, the NRST advocates assumed that producer prices would remain constant when they calculated the amount of revenue the government would obtain from a sales tax, but assumed that producer prices would fall when calculating the amount of spending the government would have to do to maintain current programs. These assumptions are obviously inconsistent, and they either understate government spending needs, overstate the revenue likely to be obtained, or both. Making a consistent assumption about producer prices — regardless of whether the assumption is (a), (b) or (c), leads to a higher rate than the advocates have assumed.

Advocates like to assert that sales taxes are pro-family relative to the income tax. But children and families benefit disproportionately from numerous features of the current system, including dependent exemptions, child credits, child care credits, earned income credits and education credits. And the preferential treatment of housing, health insurance, and state and local tax payments also plausibly helps families, since they consume relatively more housing, medical services, and government-provided services such as education. All of these preferences would be eliminated under a sales tax. Moreover, compared to childless couples, families with kids generally have high consumption relative to income, so switching from income tax to a consumption tax would further raise tax burdens during years when family needs were highest. Based on 1996 data, a recent study found that enactment of a broad-based, flat-rate consumption tax like the sales tax or flat tax would hurt families with incomes less than $200,000, because of the loss of tax preferences, but would help families with income above $200,000, due to the dramatic reduction in the top tax rate. Incorporating the 1997 and 2001 tax changes—especially the child and education credits—would only exacerbate these results.

http://www.brook.edu/views/articles/gale/20040924.pdf

[Midlodemocrat]

1. Dude, you need a warning in yout title

if you are going to force me to look at smirky.

[CrispyQ]

2. The "have & the have mores"

laughing it up at the expense of the little people.


These people deserve to burn for eternity. Their greed is incomprehensible to me.