National Sales Tax

Previously, we’ve discussed problems with existing tax policy in the United States as well as an alternative to that policy in the form of a national sales tax. 

Tonight, let’s look at a few specifics and common criticisms of the sales tax.

What rate would be required of a sales tax?

The numbers vary. Of the articles referenced below, Forbes says between 23% and 30%.  Cato says 15%. 

For an overly general consideration of a possible rate, ponder the following numbers:  

GDP = $18 Trillion

Federal Budget = $4 Trillion

$4 Trillion/$18 Trillion = 22.2%

This is roughly equivalent to the rate of one of the popular sales tax proposals, The Fair Tax, which calls for 23%.

If everyone pays a flat rate, isn’t this a regressive tax that would hurt the poor the most?

The Fair Tax takes this into account by suggesting a pre-bate up to the poverty level. Essentially, purchases made up to the poverty level each month will be tax free. 

Forbes points out that another way to look at the regressive nature of the sales tax is in terms of consumer lifestyle. In other words, some wealthy individuals may be at a point in their life where they make little income but live a wealthy lifestyle – meaning, they buy a lot of stuff.  These consumers would pay more than they currently do under the income tax.

For all the current talk about the rich not “paying their fair share”, a sales tax would ensure each of us pays exactly our fair share – of consumption.  

How many would pay the sales tax in comparison to the current system?

So, we mentioned last night, the sales tax would broaden the tax base because illegal businesses, tourists, and those who fail to file a return would still pay into the system with the sales tax. Proponents of the Fair Tax estimate the number of tax payers would jump to 250 million from the current 155 million tax filers.

It’s also worth noting that while there still may be some illegal activity, the cost of enforcement will go way down. Instead of the federal government having to manage the filings of 155 million individual returns, it will only have to manage the filings of the businesses through which the sales tax was raised.

Lastly, we’ll end the way we started, with the comment that incentives matter.  As we shared previously, the income tax discourages productivity.  In contrast, because each consumer knows the tax paid on each transaction, a sales tax would encourage savings. Increased savings could lead to increased investments in our economy, and a healthier financial outlook of American citizens. 

-John Anchor

Follow us on Twitter @JohnAnchorBLOG

References:

Forbes

https://www.forbes.com/sites/davidmarotta/2013/02/11/is-a-national-sales-tax-really-fair/#1bd619801790

U.S. News

https://www.usnews.com/news/blogs/washington-whispers/2010/04/12/10-problems-with-the-income-tax

Cato

https://www.cato.org/publications/commentary/considering-national-sales-tax

Fox Business

http://www.foxbusiness.com/features/2015/04/09/replacing-income-tax-with-national-sales-tax.html

Fair Tax

https://fairtax.org

 

 

An Alternative to the Federal Income Tax

Yesterday, we looked at problems with the income tax. Specifically, we discussed how the progressive nature of the income tax discourages productivity. (You can read that analysis here.)

With these problems in mind, consider a national sales tax as an alternative to the federal income tax.

Based on consumption (an action) rather than earnings (property), a sales tax would give individual taxpayers greater control of their tax contribution.  While income tax is automatically withheld from a person’s paycheck today, a sales tax would allow that person to factor tax into a decision about whether or not to buy a product. 

A sales tax would also mean increased transparency in that each taxpayer would see with each transaction exactly how much his or her tax contributions are. That isn’t the case today. 

Our current system protects the bureaucracy at the expense of the taxpayers by effectively hiding our tax contribution. It’s on our paycheck stubs, true enough, but how many actually pay attention to it.  If I asked you for the dollar amount you paid in federal taxes last year, could you tell me?  I bet you could tell me how much your refund was though, right?  Do you see my point?  If each of us had to physically write a check to the treasury for every dollar we pay in taxes, more of us would take an interest in tax policy.

Additionally, switching tax policies would give each taxpayer privacy protections we do not enjoy today. No longer would we be required to tell the IRS how we made our money. It wouldn’t matter because revenue would be raised on the consumption end. 

Moreover, a national sales tax would expand the tax base.  There are some sources of income today that do not get reported because they are not legal. With a sales tax, black market businesses would contribute tax revenue because these shady individuals still shop in our stores and buy our goods. 

Another group that would begin paying taxes in the United States are visitors and tourists.  This is a group that drives on our roads and uses our infrastructure but contributes nothing in income taxes unless they actually work here.

Tomorrow, we’ll break down the numbers and respond to some early criticism.  How much would the rate of a national sales tax have to be? What about its effect on low-income citizens? Wouldn’t we be going from a progressive to a regressive structure?

More to come…

-John Anchor

Follow us on Twitter @JohnAnchorBLOG

References:

Forbes

https://www.forbes.com/sites/davidmarotta/2013/02/11/is-a-national-sales-tax-really-fair/#1bd619801790

U.S. News

https://www.usnews.com/news/blogs/washington-whispers/2010/04/12/10-problems-with-the-income-tax

Cato

https://www.cato.org/publications/commentary/considering-national-sales-tax

Fox Business

http://www.foxbusiness.com/features/2015/04/09/replacing-income-tax-with-national-sales-tax.html

The Problem with the Income Tax

Incentives matter. 

The reason capitalism is a superior economic system to socialism is because the reward of getting to keep what one earns provides sufficient incentive to take the risk of starting a business and working hard enough to provide a service to one’s fellow citizens, a service for which the citizens will, in turn, pay a fair price.

To the contrary, when the fruits of one’s labor are pooled such that those who gave half the effort as one’s neighbor are entitled to the same resulting benefit, the hard worker has no incentive to continue to work harder than his neighbor, and a decrease in overall productivity is the result.

So, the policies which define the system provide the incentive necessary for economic growth. 

Keep this in mind as we turn our attention to our tax structure.

History of the Income Tax

The income tax in its current form was created by the passage of the sixteenth amendment in 1913. Prior to this, the federal government raised revenue through tariffs applied to imported goods.  

(For more on the history of income tax percentages, see our previous entry on the subject here.)

Problems with the Incentives of the Income Tax

The income tax is a progressive tax, meaning that the greater one’s income, the higher percentage of tax he or she pays.

(This has led many to believe the narrative that the rich are not paying their fair share. Our thoughts on that can be found here.)

While it may appear on the surface that the progressive nature of our tax code is fair, it appears so for many of the same reasons socialism is attractive to so many.

The problem is with the incentive, or in this case, disincentive.

By taxing the higher wage earners at a higher rate, this effectively punishes productivity.  The result, on a macro scale, of punishing productivity is a reduction of it.

This is why, for the opposite reason, large across the board tax cuts have historically spurred economic growth. Tax cuts create an incentive to earn more because the earners are allowed to keep more of their own income.

(See the history of tax cuts and economic growth here.)

So much in life can be traced back to dollars and cents. Just follow the money.

Tomorrow, we’ll look at more problems with the income tax and a better solution for generating federal revenue.

-John Anchor

Follow us on Twitter @JohnAnchorBLOG

References:

Forbes

https://www.forbes.com/sites/davidmarotta/2013/02/11/is-a-national-sales-tax-really-fair/#5fbcd4981790

U.S. News

https://www.usnews.com/news/blogs/washington-whispers/2010/04/12/10-problems-with-the-income-tax

 

Class Warfare and the War on Poverty

“The rich aren’t paying their fair share!”

Class warfare division tactics are a frequent part of the political playbook.  The question that politicians and pundits seem unwilling to answer regards what tax percentage specifically makes up a fair share. (We’ve discussed it previously here.)

As far as the tactic of division goes, several points deserve to be made. The politicians who claim to be for reducing poverty through social programs need to be held accountable to the history of this practice. 

Let’s review. 

The greatest attempt and most dollars spent on poverty reduction was initiated through President Johnson’s “War on Poverty”.  Since 1965, the United States has spent over $22 trillion on social programs to fight poverty. (This is three times more than spent on all U.S. military wars since the American Revolution, inflation adjusted, and does not include Social Security or Medicaid.)

Has it worked?

Prior to the War on Poverty, the poverty rate was falling dramatically. From 32.2% in 1950 to 17.3% in 1965.  After the War on Poverty was initiated in 1965, the poverty rate basically flat-lined and has been around 15% ever since. 

It should be noted that the definition of the poverty classification has changed over the years. Those living in poverty today enjoy much improved living conditions over those meeting the poverty definition in decades past.  As our economy has grown, everyone, including those at the poverty level, have benefited. 

The best help for the poor is the job creation that comes through growth of a free market economy. Economic growth is often stimulated by tax cuts and regulatory reform. (For the 20th century economic effects on income tax reform, see here.)

Yet, so often we’re told that the rich are getting richer at the expense of the poor.  This implies that the only way for the poor to improve their circumstances is to take money away from the rich – otherwise known as income redistribution. 

A free market capitalist economy does not work this way. To use the pie analogy, everyone benefits when the size of the pie increases. To focus only on redistributing pie slices does not grow the size of the pie – and often shrinks it.  (See Venezuela.)

Look at the policies of the Obama Administration as an example.  The United States economy has grown at only an average of 2.1% since 2009, making it one of the slowest economic recoveries following a recession in United States history.

Why is that?

Let me suggest that a key reason is because the policies in place during the Obama presidency discouraged hiring. 

The Affordable Care Act incentivized small businesses to remain under fifty employees to avoid the employer mandate.  Many laid off employees to reach this number.

In the energy sector, stringent environmental regulations made it more expensive to do business.  This affected staffing levels.

The Heritage Foundation reported: “In its first six years the Obama Administration…imposed 194 major regulations on the private sector. That figure is more than twice the number imposed by the Bush Administration in its first six years.”

The high regulatory environment and slow economic growth during the Obama years is not a coincidence. The tax cuts and subsequent economic expansion during the Reagan years also is no coincidence.  They both should serve as a reminder of the importance of a free market economy and its benefit on citizens of all economic levels.

-John Anchor

Follow us on Twitter @JohnAnchorBLOG

References:

War on Poverty

http://www.heritage.org/poverty-and-inequality/report/the-war-poverty-after-50-years

Obama Recovery

http://www.cnsnews.com/news/article/terence-p-jeffrey/us-has-record-10th-straight-year-without-3-growth-gdp

Obama Small Business Report Card

https://www.washingtonpost.com/news/on-small-business/wp/2015/11/16/gene-marks-president-obamas-small-business-scorecard/?utm_term=.de75bf1b34e7

Tax Cuts and Economic Growth

“(Trickle-Down Economics) doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible post-war boom of the 50s and 60s. And it didn’t work when we tried it during the last decade.”  -President Obama, December 6, 2011

Let’s look at the historical data.

The income tax was created by passage of the 16th Amendment in 1913 after the Supreme Court previously declared it unconstitutional. The initial top rate was 7%. 

By 1918, the top rate had risen to 77%. 

1920s 

Tax cuts reduced the top income tax rate from over 70% to under 25%.  Personal income tax revenues increased (despite the reduction in rates) from $719 million in 1921 to almost $1.2 billion in 1928. 

By the 1950s, the top rate had risen to 92%. 

1960s

Across the board tax cuts reduced the top rate from 90% to 70%. Tax revenues increased from $94 billion in 1961 to $153 billion in 1968. 

The 1970s saw the top income tax rate hover around 70%. 

1980s

A series of cuts brought the top rate from 70% down to 28%. Total tax revenues increased by 99% and income tax revenues increased by 54% by 1989. 

2000s

Across the board tax cuts in 2001 and 2003 reduced the top rate from 39.6% to 35%. Total tax revenues increased from $794 billion in 2003 to $1.16 trillion in 2007. 

Historically, dramatic cuts to the top income tax rate (“tax cuts for the rich!”) with across the board cuts have in fact stimulated the economy and increased tax revenues. 

Remember this as President Trump tackles tax reform in the coming days. 

-John Anchor

Follow us on Twitter @JohnAnchorBLOG

References:

President Obama

https://thinkprogress.org/obama-on-trickle-down-economics-it-doesn-t-work-it-has-never-worked-e92be238bde7

Income Tax Rate History 

https://en.m.wikipedia.org/wiki/Income_tax_in_the_United_States#History_of_top_rates

Historical Rate Cuts

http://www.heritage.org/node/18247/print-display

Bush Tax Cuts

https://www.forbes.com/sites/peterferrara/2012/12/06/why-america-is-going-to-miss-the-bush-tax-cuts/#1c10a95d800a

Tax Facts

STOP!

Before reading any further, ask yourself one question:

Am I lower, middle, or upper class?

How many times have you heard politicians spout about the rich not paying their fair share? How many times have you heard these same politicians define what constitutes “rich” or what exactly makes up a “fair” share?

Here are a few facts about the taxes we pay in the United States.

Upperclass is now defined according to the following income statistics:

Household of one: Minimum of $72,126
Household of two: Minimum of $102,001
Household of three: Minimum of $124,925
Household of four: Minimum of $144,251
Household of five: Minimum of $161,277

Top 1% Adjusted Gross Income: $465,626
Top 10% Adjusted Gross Income: $133,445

The top 1% earns around 22% of America’s gross income, yet pays 38% of total income tax revenue.

The top 10% earns 48% of total income but pays 70% of total income tax revenue.

The top 50% earns 89% of total income and pays 97% of all income tax revenue.

This means the bottom 50% of wage earners make up 11% of total income, but they pay only 3% of tax revenue. And…

The bottom 99% of income earners comprise 78% of gross income and yet pay only 62% of all income tax revenue.

Tell me again about the rich not paying their fair share?

-John Anchor

Follow us on Twitter @JohnAnchorBLOG

References:

Upperclass Defined

http://www.cnbc.com/2017/03/20/heres-how-much-you-have-to-earn-to-be-considered-upper-class.html

Top 1% Top 10% AGI

https://www.irs.gov/pub/irs-soi/16taxstatscard.pdf

% of Income Tax and AGI

https://www.irs.gov/pub/irs-soi/soi-a-ints-id1506.pdf