Flat-tax myths?
I would like to make a few comments on “Carroll perpetuates flat-tax myths,” the recent letter from Bruce W. Most.
I haven’t studied the concept of a flat tax so I won’t judge his Myth 1.
But as for Myth 2, like most liberals, Most seems to divide our country between financial winners and financial losers. The American dream is, in part, financial success, so why are they so set against rich or successful people? Seems it would only be fair that we all pay the same percentage of our income in taxes. Why must we tax the unsuccessful people — to whom most of the government programs are directed — less than the successful who get far less government support?
As to Myth 3, Most seems to confuse government deficits with private-sector deficits. When they have less, Mr. Most, we have more.
Richard Taylor, Littleton
Quit using the tax system as a social engineering tool, and use it as it was meant to be...a revenue collection tool.
A flat tax and/or national sales tax would accomplish revenue collection without the discriminatory aspects of our current spaghetti code social engineering tax system.
Posted by QBT on May 3, 2007 12:30 AMBut what about all the millions who have to work 8 minimum wage jobs just to buy food?
I say lets go for the flat tax as then everyone including the illigals, drug dealers, and street walkers get to help pay for the government. those 3 groups are not paying thier share under the current take from the rich ad give to the poor robin hood tax system
Posted by on May 3, 2007 07:48 AMQBT:
"A flat tax and/or national sales tax would accomplish revenue collection without the discriminatory aspects of our current spaghetti code social engineering tax system."
As for the flat tax, that's a red herring. The spaghetti code & social engineering part of the current tax system has nothing to do with what tax rate is used, but how the taxable income is determined. Once you (or your accountant and/or high priced attorneys) go through all the hoops to determine what income you owe taxes on, then the tax rate is applied.
Determining your tax rate with the current system is the easy part and takes all of 5 seconds. Simply substituting a flat tax would do nothing to simplify your tax returns. You could just as well simplify the tax system and still have a progressive tax rate.
A national sales tax however would eliminate all those complications since it wouldn't be based on income. It would still be subject to all sorts of tinkering from polititians (but that's another issue altogether).
That said, I'm not against a flat tax (or a national sales tax), but I do get very skeptical when it's proponents keep selling it as a way to simplify taxes because that is so blatently false I have to wonder if they really don't know what the heck they are talking or if they do what's their motivation for being so deceptive??
A flat tax and national sales tax should to be debated, but you do a great disservice to your own issue when you make claims that are totally unrelated to the issue - unless thats the intention to begin with...
It seems that a flat tax could still be circumvented pretty easily by groups of people including criminals, illegal aliens, drug dealers, street walkers, and anybody else sly enough to try. The FairTax, which is a national sales tax system, would blow a flat tax system out of the water. It's an excellent proposal that has been gaining support from both Democrats and Republicans in Congress. Go to FairTax.org to check it out.
Posted by Pat on May 3, 2007 09:09 AMQBT -
As for a national sales tax, taxing home sales would create a huge tax liability - a 10% rate would result in a $20,000 tax bill on the sale of a modest $200,000 home (and 10% is probably way low, 20-30% would be more likely). That would put a huge brake on home sales and drive home ownership into the toilet.
So do you support taxing home sales?
If you exempt home sales from the sales tax, or if you have a different rate or some sort of payment plan (like paying the tax over the life of the mortgage), then isn't that just another form of using taxes for social engineering?
And then if you do allow an exemption, special rates or payment plan for home sales, it doesn't seem far fetched to me for other things to be exempted or get their own special plan - cars? refrigerators? food? Then there's all the politician's supporters and pet causes (think exemptions for construction materials for the "bridge to nowhere", condom sales to schools, concession sales at the ballpark and on and on and on...).
Posted by CL on May 3, 2007 09:12 AMCL, your comments about a national sales tax echo my own skepticism that politicians (fueled by lobbyists) would screw the whole thing up.
It could be a terrifically simplified system - and one that might even encourage this country to stop being so consumer-driven. On the other hand, that's exactly what I fear would drive politicians and lobbyists to tinker with it until we're back to where we started in terms of complexity and loopholes.
Posted by mytwosense on May 3, 2007 09:20 AMOne thing flat tax advocates (or whatever their pet name is for it) overlook is that our tax code is often used as a tool of social policy, to encourage people and businesses to act a certain way (the carrot), or discourage certain behaviors (the stick). The home mortgage deduction (which many would be loath to leave behind) is just one of many incentives. Part of the touted "simplicity" of the flat tax is ignoring this aspect of the code.
Posted by anderson on May 3, 2007 09:44 AMif you buy something you pay a tax on it. no more incometax forms no more IRS
it works for everyone on the very same rate and the amounts differ by how much you spend to buy something
Certainly, and it sounds great and I would love to get back the hours I spend preparing my taxes. Man, I would save a bundle on asperin alone!
But like I wrote to QBT what about home sales? I just bought a house for $230,000 - if I had to pay a sales tax on it, I wouldn't have been able to afford it - the tax would have been more than my down payment! On top of that, who would want (or who could afford) to buy my old house if they have to pay the government $20,000 to $30,000????
What about car sales? Who wants to pay $2,000 to $4,000 in taxes for a low end ($20,000) car, not to mention that cutting into your down payment and possibly making the car you want unobtainable??
I would argue that this would in fact be social engineering in itself as it would introduce (massive!) disincentives that don't currently exist, and one with very negative consequences and to remove the consequences would require more "engineering", twiddling and gerrymanding and the next thing you know what seemed simple and fair becomes complex and unfair - ie: why should home builders benefit from a special tax break for their customers?
Posted by CL on May 3, 2007 10:21 AMFirst, the flat tax would only apply to sales of NEW homes (actually NEW anything). Resales would not be taxed. Think about that one for awhile. Second, the first point made about most government programs helping the unsuccessful is naive. If you look at the details, the successful are helped more by government programs and consume more tax based resources than the unsuccessful ever will.
Posted by CB on May 3, 2007 10:46 AMOf course his point was naive. The other portion of his statement is too: his claim that the poor (oops, he calls them unsuccessful--insinuating that (1) success = income and (2) their lot is due to a lack of talent or effort) pay "less" is only true if you look at it a certain way. Yes, they currently pay "less", as a percentage of their income, but in a flat tax they would pay "more" in terms of their disposable income.
To state it another way, a flat tax is not fair in that poorer people would be paying more of their income for the necessities of life, i.e., food, clothing, shelter.
Flat tax proposals, are surely of the "let's help the rich" variety. They are arguably the only group who would benefit.
Posted by anderson on May 3, 2007 11:00 AMCB -
It doesn't necessarily follow that only new items would be taxed by a national sales tax. It certainly could (and should IMO) only apply to new items. That doesn't negate the hugely negative impact on home ownership and home builders.
My whole point with home sales is to illustrate that its easy to say a national sales tax would cure all sorts of tax woes, it isn't without its consequences. Home sales, IMO, is one area that will keep a national sales tax from getting off the ground and to address that, the proponents will have to introduce things to it that are pretty much the same thing they are trying to eliminate (and around and around we go again).
As for programs helping the unsucessful vs successful - shrug - I'll beg that one off (although I suspect that's rather complex and difficult to quantify without a bunch of subjective measurements and qualifiers).
Posted by CL on May 3, 2007 11:17 AMMany good points on this thread.
CL said:
"Home sales, IMO, is one area that will keep a national sales tax from getting off the ground and to address that, the proponents will have to introduce things to it that are pretty much the same thing they are trying to eliminate (and around and around we go again)."
Would a national sales tax be applied to home buyers? Or would we still rely on property taxes? Either way, I don't see that as a deal breaker.
Of course, there will be exceptions and exemptions with a national sales tax. I don't see that as being anywhere close to the complexity of the current income tax.
The sales tax is much more transparent. And it is also much more flexible for the middle-class. It allows families to adjust their spending to limit their tax bill.
CL also said:
"What about car sales? Who wants to pay $2,000 to $4,000 in taxes for a low end ($20,000) car, not to mention that cutting into your down payment and possibly making the car you want unobtainable??"
Don't forget that paychecks will be much larger under a national sales tax. Not only will families be able to save more of their earnings, but they will also be able to invest more.
If my paycheck increased by 37%, I would be able to earn even more from 4.5% savings accounts and various investment vehicles.
So, an extra $2000 tacked on to a car price, financed over a period of three to six years, may not be as intimidating as it seems now.
Posted by John II on May 3, 2007 12:48 PMJust think, that extra $2,000 tacked on to a car price can be financed! Lord almighty, I smell a boondoggle for somebody.
Posted by anderson on May 3, 2007 01:35 PMExplain that comment anderson.
Haven't you ever financed a car purchase before? Do you not pay state sales tax on car purchases? Does the state sales tax not get included in the financed amount?
Posted by John II on May 3, 2007 02:01 PMGreat response John II
"Would a national sales tax be applied to home buyers? Or would we still rely on property taxes?"
Apples & oranges (well, maybe tangerines and oranges). Property taxes are local, not national so to rely on property taxes the feds would have to take funds from the states & counties. Also, sales taxes are a one time hit while property taxes are annual.
"Either way, I don't see that as a deal breaker"
Maybe it won't, I dunno, but I suspect it will.
"Of course, there will be exceptions and exemptions with a national sales tax. I don't see that as being anywhere close to the complexity of the current income tax."
I was actually responding to QBT saying a national sales tax would eliminate using taxes as a social engineering tool.
To start with it wouldn't be as complex as the income tax, but then the income tax wasn't very complex to begin with either. As soon as you allow one exemption, then there will be all sorts of pressure on the politians for this exception and that exception and this exclusion zone and so on. With that what do you think the politians will do given their past track record.
"The sales tax is much more transparent. And it is also much more flexible for the middle-class. It allows families to adjust their spending to limit their tax bill."
Agreed. However, when families adjust their spending in response to the tax, will overall spending go up or down? What will be the overall economic result of that? I suspect overall spending will decrease quite a bit will have a fairly negative economic impact. I realize families will have more money to spend, but when costs go up, consumers get more selective.
"Don't forget that paychecks will be much larger under a national sales tax. Not only will families be able to save more of their earnings, but they will also be able to invest more.
If my paycheck increased by 37%, I would be able to earn even more from 4.5% savings accounts and various investment vehicles.
So, an extra $2000 tacked on to a car price, financed over a period of three to six years, may not be as intimidating as it seems now."
Good point and a sound financial approach (although at best your check would be more like 20% better and never 37% unless you let the feds withhold waaay too much), but how many people really think and plan like that? Most people don't budget long term for specific large ticket items (or any large ticket items for that matter). Think of how many people are glad to see their tax refund and would be really POed if they didn't get one anymore (even though it's really the gov. giving their money back without interest).
Posted by CL on May 3, 2007 02:05 PMCL, did I miss something? When you brought up the scenario of paying for a car, I thought it was about paying a significantly greater amount of taxes on the purchases. I suggested that greater amount could be added on that already financed? What did I miss?
Posted by anderson on May 3, 2007 02:13 PManderson - I don't see where financing the taxes is really all that relevant. Fiscally, I think it's a bad idea (because then you are paying interest on your taxes - yuck!) but that's beside the point. People finance cars and all sorts of things as it is but they still exercise restraint when it comes to the purchase price.
Are you saying that tacking on a few grand to the cost of buying a car won't influence purchasing decisions because it can be financed?
Posted by on May 3, 2007 02:40 PMForgot to sign my 02:40 post to anderson.
Posted by CL on May 3, 2007 02:42 PMI wasn't suggesting it would influence purchasing decisions. I was merely pointing out that it would be a windfall for finance companies. If the amount financed is only 10% greater, that's huge. Much of America is already up to their eyeballs in debt. This would add to it.
Posted by anderson on May 3, 2007 03:02 PManderson,
I think the confusion stems from your use of "boondoggle".
Boondoggle does not mean "windfall". Perhaps, you meant to say boon?
Yes, I should have used the term boon rather than boondoggle.
Posted by anderson on May 3, 2007 03:49 PMWould it be too unrealistic to hope that a national sales tax might drive prices down, eventually? I realize that with certain products now, for example, cigarettes, retailers don't do that.
But I'm wondering if it was an across-the-board scenario, retailers would be forced to keep prices in the realm of reality knowing a sales tax would be added to them, otherwise, many products would start to get out of reach of the average consumer, and retailers would have no choice if they wanted to move their products.
Posted by mytwosense on May 3, 2007 04:35 PMI'm against the redistribution of wealth. I don't want to pay for other peoples kids to go to school.
Give me back my money, you wealth redistributioners!
Posted by Right Wing Nut on May 3, 2007 05:01 PMmytwosense,
"Would it be too unrealistic to hope that a national sales tax might drive prices down, eventually?"
Probably. I think the sales tax will probably have a larger impact on luxury and psuedo-luxury items such as watches and other jewelry.
Posted by John II on May 3, 2007 07:14 PManderson - Now I see what you meant.
Would it be a windfall for finance companies? Probably not, finance companys loathe taxes. The main things that drive a finance companies gross profits are 1) volume, 2) margin and 3) cost of defaults and those things are interrelated.
Would their volume increase? If cars sales stayed the same and buyers put the same amount down then yes, volume would increase - maybe.
But, for profits to go up with higer volume, their margin would have to stay the same or not drop much - and that may not be the case because...
...if buyers are putting the same amount down and financing more of the cars total cost (purchase price pluse the new sales tax) then less of the loan amount is backed by equity.
And two things will result from this - a higher default rate and lower return on reposessions (read lower margins) unless...
...you don't qualify as many loans and you don't finance as much unsecured debt - which maintains the margin but reduces the volume.
...or you try to increase your margin by raising your interest rate but this turns off buyers (reducing volume) and increases costs because the buyer gains equity at a lower rate and cars depreciate over time (lower return on repossesions).
You can actually go out and test this. Get some quotes on a mortgage. Finance 90% of the property value (LTV - Loan To Value) an you'll get a higher interest rate than if you finance at 70% LTV and have a harder time qualifying as well. On top of that, if your LTV is over 80% you'll be required to buy mortgage insurance too (or maybe do a piggyback - a 2nd mortgage at a higher rate).
The reason? Higher LTVs cost mortgage companies more than lower LTVs. The same thing applies to financing cars only worse as cars depreciate over time where real estate tends to appreciate (which is why mortgages have lower interest rates than car loans).
Posted by CL on May 3, 2007 08:12 PMCL,
Thanks for that informative post. That was interesting.
Posted by John II on May 3, 2007 09:59 PMIn the purest sense of a flat tax system; a flat tax would neither reward the poor for being poor or penalize the rich for being successful. Using a 10% rate, a poor person earning $20,000 a year would pay $2,000 in income tax; while a person earning $200,000 per year would pay $20,000 in income tax. Obviously the $2,000 is a bigger deal to the $20k wage earner, than the $20k is to the $200k wage earner. But with a flat tax, the system is fair and the scales of the tax burden are fair to the wage earner, in a similar sense to the scales of justice are blind in that all people coming before the court are equal.
A progressive rate tax system essentially penalizes a person for being successful.
As I've said before, I'd be more than happy to give up my mortgage interest and property tax deductions in favor of a flat and/or national sales tax. Although it has been claimed that a sales tax on homes could be deal breakers; the tax could be financed over the course of the loan interest free so no one profits from it. Furthermore, a sales tax on homes could lead to the reform of the property tax system, which is a mess too. I won't digress as to why property taxes are an unfair mess at this time.
A national sales tax is a consumer driven tax, and the more you buy, the more you help the government. A consumer driven tax might actually encourage people to save money for a rainy day instead of maxing out their credit cards to buy iPods and other useless crap they don't need. One could argue that this too is social engineering; but it is passive engineering as the consumer makes the choice to save their money or buy the latest big screen TV made by our good buddies in China.
Posted by QBT on May 3, 2007 11:33 PMCL, I am not an expert on this but I think you're overlooking the finance cos. willingness to take on add'l unsecured debt (volume if you will). Their business practices have changed over the past couple of decades. These cos. (Wells Fargo, Bank of America to name two) are always pumping me, for example, to take on more unsecured debt (secured debt of course is most desired, but if you don't have that they'll settle for unsecured). They don't give a rat's tail whether I can afford it, they just know I have a history of making payments. You speak of 1st line mortgage lenders, but it seems that's a different market. Subprime mortgage lenders have been known (i.e., some do this) for years to artificially inflate the price of homes to where the loan value is greater than the equity. One way is through unscrupulous appraisers. Another way is through adding all but the kitchen sink to the loan (e.g., credit card debt--that you now get to amortize over 30 years). In short, you seem to be describing a model where lenders act responsibly--maybe as community bankers did a generation or two ago.
I think today's corporate lenders are quite aware their practices have led to increased financial distress (defaulters etc) but to them that's just *part* of the equation. If they can make up it up elsewhere, through volume, higher interest rates etc., they will. Back to the scenario at hand. A $20,000 car loan, is all of a sudden $22,000 because of the add'l taxes. Not only that, there are more buyers with more income. Whoa, windfall!. Of course, the more responsible buyers will not go out and finance it all, but others will, in part because finance cos. and car dealers will encourage this.
Posted by anderson on May 4, 2007 10:01 AMA thought experiment reminder to those who are proposing a national sales tax:
Pretend there's a 10% sales tax.
Say person 1 spends their entire income in a month as they need that just for food, transport, etc. Their equivalent tax rate under an income tax would be 10%.
Say person 2 spends 1/10th of their income inside the nation in a month, as they make far more than what is needed. Their equivalent tax rate under an income tax would be 1%.
A national sales tax will more heavily tax the low income earners who effectively spend all their income each month just to get by, but will allow high earners to pay very little of their income to tax. They can either spend it abroad, or better yet, just wait for the system to break and be changed back and effectively pay no taxes for those years.
Lets forget the regressive tax idea of national sales tax.
Posted by Doug H. on May 4, 2007 10:28 AMQBT -
I don't so much oppose a flat tax or sales tax as I do it's being sold as a panacea with unrealistic expectations. In my first post, I addressed why a flat tax by itself will not simplify taxes and saying so is a red herring.
"Using a 10% rate, a poor person earning $20,000 a year would pay $2,000 in income tax; while a person earning $200,000 per year would pay $20,000 in income tax. Obviously the $2,000 is a bigger deal to the $20k wage earner, than the $20k is to the $200k wage earner."
This is another example of what I've been trying to say. Do you really think a 10% flat rate will generate enough revenue to cover the fed's expenditures? I realize you are using this as an example, but flat tax proponents constantly trot out rates that are way too low - in reality the rate would need to be closer to 20% in which case the family making $20,000 a year would have to pay out $4,000 in taxes. I suspect many of the flat tax proponents use such low rates to mask the huge shift of the tax burden that would follow in order to make it more palatable (which IMO is quite dishonest).
Personally, I would love to pay a 10% flat tax. That would have saved me about $10,000 last year.
I won't argue whether a flat tax is fair or not, I have mixed feeling about it but I will say that what constitutes "fair" is quite subjective and there are many who would disagree that a flat rate is more fair than a progressive rate.
IMO, a flat rate isn't viable politically unless you use a rate that is so low you end up with a situation that makes the current deficit look like chump change.
For me to really back a flat rate, it would need to be about 10%, but fed spending would have to be greatly reduced (which is something I strongly support) so that a 10% rate would be adequate to cover the outlays.
My reasons for that are concerns of the economic repercussions that will happen when you shift the tax load downward and put a huge damper on consumer spending. You may not care for what consumers spend their money on, but you can't deny the fact that the economy relies heavily on that spending.
And if you don't think you would need a 20% flat tax rate try this to put it in perspective. In 2005, according to the IRS preliminary figures ( http://www.irs.gov/pub/irs-soi/05in01pl.xls ), the average tax liability per return was over $10,000. To generate that same liability per return with a flat tax rate of 10% would require an average taxable income of over $100,000. Clearly a 10% is no where near high enough to generate the same level of income tax revenue.
The biggest problem with a progressive tax, IMO, is that is masks the huge amount of federal outlays (projected to be $3 trillion) from most people.
"Although it has been claimed that a sales tax on homes could be deal breakers; the tax could be financed over the course of the loan interest free so no one profits from it. Furthermore, a sales tax on homes could lead to the reform of the property tax system, which is a mess too. I won't digress as to why property taxes are an unfair mess at this time."
Just to be clear, my claim that taxing home sales would be a deal breaker is my opinion, not a statement of fact.
Who the heck is going to finance the taxes interest free and how would you coerce them to do so? Have the government cover it? Not only would that be very socialistic, the costs of doing so (and we know how well the gov. manages costs) would have to come from - guess what -tax revenue! Thanks, but I'll not just pass, I'll run away as fast as I can from that idea.
Property taxes are collected by the states, counties and municipalities so how is a federal sales tax going to reform that - are you going to funnel money from the feds to the local governments? I wouldn't mind property tax reform (my assesment from Jeffco just went up 30%!) but having it work down from the feds to the local governments is NOT the way to go with it.
"A national sales tax is a consumer driven tax, and the more you buy, the more you help the government. A consumer driven tax might actually encourage people to save money for a rainy day instead of maxing out their credit cards to buy iPods and other useless crap they don't need. One could argue that this too is social engineering; but it is passive engineering as the consumer makes the choice to save their money or buy the latest big screen TV made by our good buddies in China."
Let me say that I actually prefer a national sales tax (and for some of the reasons you mention). What I oppose is what I consider naive approaches and pie-in-the-sky promises that are put out there. I'm all for consumers making their own decisions, whether it be useless crap like iPods or not. Also, it could be argued that a national sales tax would actually increase consumers buying goods from China - if the goods are cheaper from China then the tax will be lower as well, making them that much more desirable.
Doug H.,
"A national sales tax will more heavily tax the low income earners who effectively spend all their income each month just to get by, but will allow high earners to pay very little of their income to tax."
You are right in claiming that a national sales tax is regressive. But, there are plans, such as the Fair Tax, that propose a "prebate" or rebate for lower income families.
This addresses CL's point that a sales tax can get a bit more complicated than most people think.
Posted by John II on May 4, 2007 11:20 AMCL:
That's why I think a combination of a national sales tax and flat income tax would be the most workable solution.
If the Federal flat tax rate was 20% and most of us are in the 28% bracket; that would amount to a 8% tax cut right there.
For those supporting our current system, even a tinkered with (again) version; I suspect that the amount of revenue lost to fraud, bad book keeping, tax loopholes, etc is massive enough to at least partially offset the perceived loss of revenue by going to a flat tax system.
As for the sales tax and property tax mess on houses and other real property; that would have to be worked out between the Feds and the states, and space here does not permit going into all the possibilities on that matter.
If one adds up all forms of taxation and governmental fees (tax by any other name); I suspect the actual tax rate for Americans approached 50% or more.
Posted by QBT on May 4, 2007 12:06 PMJohn II,
I agree with you that the fair tax prebate addresses some of the concerns for those at the low end, but it unfortunately limits the shape of the taxation curve in the specifics. It is of the correct shape for progressive increase based upon spending, but it's not easily adjustable relative to income without a lot of invasive and complicated means.
This isn't the only reason to reject it outright though, the national sales tax/fair tax also incentivizes the richest (and anyone else who can afford it) to spend less in this country and more on vacations, investments, or assets elsewhere.
While the standard supporters of trickle down economics have been wrong about quite a bit, they aren't wrong in that we want the capital circulating and moving in the US economy, and that those with wealth are a big part of that. Simply having investment and spending flow out of the country can only be deleterious. Due to trade agreements we can't (and arguably shouldn't) simply tariff it back into the US either.
We may as well call it the "support foreign investment tax."
Posted by Doug H. on May 4, 2007 12:40 PManderson -
There certainly are all sorts of angles in credit and financing, what I was trying to illustrate was why it's doubtful that the sales tax would result in higher profits for finance companies.
BTW, I have designed and developed mortgage software systems over the past 9 years (currently with Bank of America by way of their buyout of MBNA - the credit card company) which is kindof why I took the mortgage angle. Anyway
Sure mortgage lending and credit lending are different, but the basic principles are the same. If you think your credit card debt is unsecured, try defaulting on it and see what happens. It may not be tied to a specific piece of property like a mortgage or auto loan, but it is backed to a significant degree with your assets. The credit card companies are more than willing to issue you a credit with much looser standards than a mortgage or auto lender will, but look back at my earlier post and how this works is there - they charge a much higher rate (once you get past the low intro rate). Also a credit card isn't the same as taking out a loan because they aren't financing you until you actually use the card. And one other item that's different with credit cards - when you charge something, they charge the seller a fee of 2% or 3% of the purchase price.
The recent problems with the mortgage industry have a couple different sources, unscrupulous appraisers like you mentioned, but the recent crackdown in the sub-prime market was due to brokers (who don't finance loans, so they don't incur the risks) passing loans that were too risky (and hence more expensive) for the lenders.
Anyhow, there will be lenders that work different angles to generate profits (ie higher rates for riskier loans, lower rates for safer loans and so on), that's how a free market works, but they can't escape the reality that the less security backing loans, the more risky and expensive financing those loans will be (long term over many loans).
Anyhow I think we have worn out this tangent. I think I've explained why I don't think the sales tax would result in a boon for lenders. I most certainly could be wrong but I don't have the time or inclination to go any further with it. Yeah, I'm wimping out.
"Back to the scenario at hand. A $20,000 car loan, is all of a sudden $22,000 because of the add'l taxes. Not only that, there are more buyers with more income. Whoa, windfall!. Of course, the more responsible buyers will not go out and finance it all, but others will, in part because finance cos. and car dealers will encourage this."
I don't buy into your premise here. For example, a family who under the old system would have paid $2000 in income taxes would see all of their tax saving for that year used with a single purchase, and with all of their other taxed purchases end up paying may very well balk at the $22,000 total cost. On the other hand, a family that would have paid say $15,000 in taxes under the old system might actually spend more on a car (pre-tax) than they would have under the old system. So I really don't know if overall sales would go up or down, but I suspect they would go down (partly because I think the sales tax rate would need to be more like 25% than 10%).
Doug H.,
You said:
"This isn't the only reason to reject it outright though, the national sales tax/fair tax also incentivizes the richest (and anyone else who can afford it) to spend less in this country and more on vacations, investments, or assets elsewhere."
That's an excellent point that quite honestly, I never thought of. I always assumed the wealthy would cut back on certain luxury items. But, I never thought about the possibility of the wealthy making tax free money here and spending money tax free in other countries.
They could literally schedule trips to Canada or elsewhere to do all their shopping and then return here with all their stuff.
Now that I think about it, I remember growing up in New Jersey and seeing all the New York license plates in the mall parking lots. They would drive to Jersey just to save money on the sales tax.
CL, what are your thoughts on this?
Posted by John II on May 4, 2007 12:51 PMCL, I think I understand what all you're saying, but let me put it to you this way:
Income taxes (let's say 20% of income overall just for simplicity) are currently OFF the table to lenders. They go directly from your pocket (with or without an employer as agent) to the government, albeit with the possibility of a small return.
By contrast, if a nat'l sales tax were to replace an income tax, all that extra money in your pocket (20%) is potentially ON the table, and lenders would undoubtedly enourage you to put it there so they could grab a slice. As an aside, I believe this is the primary motive behind all arguments to privatize Soc Security--so that that money would be on the table.
There are many variables that would go into whether car sales would increase. My instinct tells me they would, but as you suggest, we don't really know. The example you give invokes the image of the rational consumer. I say: not all consumers are rational.
Posted by anderson on May 4, 2007 01:50 PManderson,
What's with the obsession with the finance companies? What does it matter if they get extra business from a national sales tax?
CL articulately outlined his thoughts that since the income tax already deducts taxes before you even get your hands on the money, some people may be more willing to spend it.
But, with a sales tax, that tax money has not been paid until the consumer makes a purchase. So, CL is saying that may actually be a disincentive to buy a new car.
Therefore, car sales may actually decline, which would result in a loss of business for finance companies.
Either way, I think you should walk away from this dead horse.
As for your comment about Social Security money being on the table, that's a good thing considering off the table means it's sitting in an unlocked safe in Washington D.C.
Posted by John II on May 4, 2007 02:05 PMAt least it's in a safe instead of being gambled and lost like summer wages.
Posted by anderson on May 4, 2007 02:14 PManderson,
Really? If you feel that way then keep yours in a safe.
How about we test your little theory? You keep your retirement savings in a safe. I'll invest mine in stocks, bonds, and savings accounts.
Let's meet back in here 30 years. Who do you think will have the bigger retirement fund?
Posted by John II on May 4, 2007 02:21 PMDoug H:
"This isn't the only reason to reject it outright though, the national sales tax/fair tax also incentivizes the richest (and anyone else who can afford it) to spend less in this country and more on vacations, investments, or assets elsewhere."
John II:
"That's an excellent point that quite honestly, I never thought of. I always assumed the wealthy would cut back on certain luxury items. But, I never thought about the possibility of the wealthy making tax free money here and spending money tax free in other countries.
They could literally schedule trips to Canada or elsewhere to do all their shopping and then return here with all their stuff"
I don't really see that much difference than Joe Blow going online and ordering stuff from another country. If it's that big of an issue, you could always set up import duties (which we already have to some extent) or something like a VAT. I might even support something like that (I haven't really thought about it much) not so much from the inequity standpoint but because the added sales tax would create a bigger incentive for what would normally be domestic sales to take place out of country resulting in lost tax revenue (and higher tax rates to make up the loss). There's also the potential for all sorts of loopholes to have sales "technically" originate out of country. That could give companies with the ability to have sales originate out of country an unfair advantage over those that couldn't (ie - can't afford to set up a store front (no pun intended) outside the US).
The richest will always have the incentive and means to avoid paying their fair share of taxes, it comes with being, well, wealthy. We have that already with tax shelters, offshore investments and accounts and such that allow the well off avoid paying taxes and those would disappear when the income tax goes away. I'm not shrugging it off, I just don't know if it would be any worse than what we already have without a knowing a bunch of details
"Now that I think about it, I remember growing up in New Jersey and seeing all the New York license plates in the mall parking lots. They would drive to Jersey just to save money on the sales tax."
If they were willing to drive to Jersey, they deserved a break :)
Posted by CL on May 4, 2007 05:17 PMQBT:
For those supporting our current system, even a tinkered with (again) version; I suspect that the amount of revenue lost to fraud, bad book keeping, tax loopholes, etc is massive enough to at least partially offset the perceived loss of revenue by going to a flat tax system
Hopefully its clear by now that I don't support the current system.
I have no doubt that the amount of revenue lost to fraud and such is huge. However, like I said in my first post on this thread, a flat tax itself does nothing to address this because it simply replaces one tax rate with another and it's not the rate that's the problem (except for the fairness argument) it's all the machinations in determining what income to tax in the first place that's the problem.
Argue for removing deductions and simplifying the tax code - fine. Argue for replacing the progressive rate with a flat one - fine. But to argue that changing the rate simplifies the tax code, removes bad bookkeeping, loopholes and fraud is what I'm calling a red herring and IMO hurts your cause because people like me (who might otherwise support your proposals) see right through it which raises serious doubts to the soundness of the overall proposal as well as suspicious ions as to the actual intent.
John II , anderson & QBT
The weekend is here so I may not be back before this thread expires so I wanted to say it has been a very pleasurable exchange.
It's a shame that such civil discourse is such a rare thing around here.
Take care and have a good weekend.
$)*&*)%, it's snowing up here again!
Posted by CL on May 4, 2007 05:53 PM