🚀 go-pugleaf

In <4ah7vl$i0k@msunews.cl.msu.edu> zik@enoch.cl.msu.edu (Ed Symanzik)
writes: 
>
>Bill Mechlenburg (mechlen@ix.netcom.com) wrote:
>:1. A national sales tax would have to be in the order of 30 to 40% on
>:top of state and local sales tax to produce enough revenue to replace
>:the present income tax. This high a tax would be a huge incentive for
>: cheating and evasion requiring a bureaucratic army of auditors and
>: enforcers.
>
>Only 18% if there were no exceptions.

OK, folks.  It's true, an 18% "national sales tax" can be revenue neutral 
and can substitute the income tax.  But it's not what you think it is.
Ed Symanzik pointed me to an article by an economics professor at Boston
University written in 1993.  I'll lay out below approximately what he is saying,
as I understand it.  The motivation of thesis is not simplifying the tax
system, but to stimulate savings and steer people away from consumption.
The problem as he saw it was that America saves only 2% of its total income
and we need at least 5-10% new investment each year.  Note, however that
investment in America has not decreased, it was merely made by foreigners.
The good professor worries that, if foreigners decide to no longer treat
America as a banana republic, i.e. not put any money in to exploit our
natural resources and human capital, we would be in deep trouble.

Ok, here's his thesis, the way I understand it:

First, lesson 1 in national income accounting Y = C + S.  Y is the national
income, or if you will, the GDP.  C is consumption, the entire bundle of
goods and services we purchase for that year, and S is savings for that year,
the amount we put in banks, buy bonds, money market fund, or the stock 
market for that year.  To state it another way, what you earned, forget the
government for the moment, if not spent (C) has to be saved (S).  With the
tax system in place, Y really is Y = C + S + tY, t being the effective income 
tax rate on the nation.

Currently, the tax system taxes Y, and let you make your investment decision
according to your disposable income (i.e. after tax dollars (1-t)Y).  
Essentially, what the professor proposes is not to tax S but to tax C 
only.  That is, a savings deduction, but everything else is taxable.  To 
simplify tax collection, a tax on C can be collected at the time goods or
services are purchased, in the form of a "national sales tax" and for now 
you can keep tY.  The equation then becomes Y = C(1+tc) + S.  tc, of course, 
is the consumption tax rate, and that rate can be revenue neutral at 18%.  
According, to the professor, the capital stock, i.e. what Americans would 
have saved and invested over the long haul, would be dramatically increased 
and we would all look forward to a bright future (or perhaps rejoin the 
first or second world).

The professor is, of course, aware that the tax is rather regressive.  To
remedy that, he suggests tax credits to families according to their income.
Families will then file a return to get a refund every year.  Of course,
to accommodate the tax credit, tc has to increase above 18%

Ok, my take on this:

But what is C really, in terms all of us are familiar?  It's 
everything, not only what we buy at the supermarket, at Fry's or Macy's.
It includes your doctor's visits, your health and auto insurances, your rent
or mortgage, interest on your credit card balances, legal fees, the
tip you gave to the waitor, the labor portion of the auto repair bills
and so forth.  So, folks, don't think of the national sales tax as the kind
we pay to our state and county governments, that is generally only applied
to retail sales, this national sales tax includes all goods and services.
To put things in perspective, total retail sales in the U.S. was 1.4
trillion in 1994.  After deduction on non-taxable items like food, that's
the tax base for State and county sales tax, but that's not going to be 
the tax base for the national sales tax.  The national sales tax is
levied on everything that is consumed.  With our dismal propensity to
save (only 2% of our income), the tax is levied on 98% of GDP, or about
6.2 trillion dollars.

The important part, however, is that this tax is not as voluntary as
people seem to think, unless you are comfortable with the argument
that it's totally up to you whether you want to be homeless or to receive
health care, since most of us spend most of our money, the disposable 
portion anyway, on shelter, medicine, transportation and to a smaller 
extent food.  These items, I consider non-discretionary consumption. I, 
for one, don't spend much buying stereos, MazelTov software, and caribbean 
vacations, which I would consider truly discretionary consumption.

So who are the people who would pay more?  What would the tax rate be, if
only retail sales are taxed?  I'll leave these questions to the problem set.