The Fair Tax Act of 2005 Part VIII
Moving right along to the next section which details the imposition of the Sales Tax.
`SEC. 101. IMPOSITION OF SALES TAX.
`(a) In General- There is hereby imposed a tax on the use or consumption in the United States of taxable property or services.
`(b) Rate-
`(1) FOR 2007- In the calendar year 2007, the rate of tax is 23 percent of the gross payments for the taxable property or service.
`(2) FOR YEARS AFTER 2007- For years after the calendar year 2007, the rate of tax is the combined Federal tax rate percentage (as defined in paragraph (3)) of the gross payments for the taxable property or service.
`(3) COMBINED FEDERAL TAX RATE PERCENTAGE- The combined Federal tax rate percentage is the sum of–
`(A) the general revenue rate (as defined in paragraph (4), and
`(B) the old-age, survivors and disability insurance rate, and
`(C) the hospital insurance rate.
`(4) GENERAL REVENUE RATE- The general revenue rate shall be 14.91 percent.
`(c) Coordination With Import Duties- The tax imposed by this section is in addition to any import duties imposed by chapter 4 of title 19, United States Code. The Secretary shall provide by regulation that, to the maximum extent practicable, the tax imposed by this section on imported taxable property and services is collected and administered in conjunction with any applicable import duties imposed by the United States.
`(d) Liability for Tax-
`(1) IN GENERAL- The person using or consuming taxable property or services in the United States is liable for the tax imposed by this section, except as provided in paragraph (2) of this subsection.
`(2) EXCEPTION WHERE TAX PAID TO SELLER- A person using or consuming a taxable property or service in the United States is not liable for the tax imposed by this section if the person pays the tax to a person selling the taxable property or service and receives from such person a purchaser’s receipt within the meaning of section 510.
Now several points come from this:
1. It has a starting rate of 23%, but this can change. It will be made of three components, a general rate, an old age, survivors (Social Security) rate, and a hospital insurance (Medicare) rate. These rates could in fact be raised or lowered. But unlike today, any change in any portion of the rate results in a bottom-line expense or relief for every citizen that is immediately visible the next time you shop at Wal-Mart. Think back to the last time sales taxes went up where you live. Did you notice? I did.
2. This tax is in addition to duties on imports.
3. Liability for paying the tax is generally on the consumer, except when you pay the tax and get a receipt for it from a retailer. This means if you didn’t pay tax on something because someone sold it to you ‘off the books’ you are liable for the tax. Otherwise, if you got a receipt and were sold the item lawfully, there is nothing to worry about. The retailer is then responsible for remitting the tax.
I think you are missing some important points about the rate. Only the Medicare and SS funds are protected from inflation. The 14.91% portion of the 23% rate is fixed- can’t be changed without amending the law. The roughly 8% which goes to Social Security will go up automatically with inflation. There is no scenario you have ever seen in your lifetime where the overall rate might go down. Granted, at 3% inflation, the rate will creep up a miniscule .0024% annually- hardly noticeable. But with 18% inflation such as experienced in the 1980’s, the rate might rise by 1.5% each year. This part of HR25 is why advocates can assure lower income retirees that they won’t be hurt by inflation, that is, their SS checks (as well as the prebate) will continue to rise with inflation.
As for imports, the way I see it, importers will be expected to pay the tax along with any duty charges when the stuff enters the country. Then, when the stuff is sold to an end user, the tax will again be paid by the customer and the importer will either get a credit or perhaps just keep the tax revenue?? Is this a potential situation for increased fraud?
(1) FOR 2007- In the calendar year 2007, the rate of tax is 23 percent of the gross payments for the taxable property or service.
This bit of legislative smoke and mirrors will be the first thing that the W&M Revenue Sub-committee will revise. Folks, HR25 is a bill to establish a national sales tax, and the sales tax rate is 31%, period. The bill is not a place for marketing tricks nor is it a place to make comparisons to the income tax. 20 million retailers couldn’t care less what the inclusive rate is! They simply need to know what percentage sales tax to tack on to their cost plus profit price! Can anyone tell me how a retailer could determine the final after tax price given the above definition? It’s time to end the false and misleading advertising and tell it like it is.
Hank,
The federal rate is not automatically changed for inflation, which is generally a good thing. One of the things I don’t like about the bill is letting it automatically increase with inflation. Also, altering the federal rate SHOULD be protected by visibility. If it’s going to change, we citizens should know about it. That’s a good thing.
Also, if you and I can calculate the 30% vs. 23% thing, the retailers can, too. It’s not that hard.
But I understand why some folks are concerned about the 30% vs. 23% thing. It is perhaps admirable to consider each and every line of a bill to be part of a con, and to react accordingly.
However, I believe that making the FairTax out to be a traditional sales tax of 30% is almost as misleading. Such a description fails to compare with effective tax rates today, and makes it appear to be much greater of a burden than it actually is. Many detractors use this number to imply that the 30% will be applied on top of today’s prices, which simply would not happen. Without mentioning the amount of tax included in prices today, people don’t have a clear idea of the potential benefits or impacts.
So perhaps either statement is misleading in its own way. One is too optimistic, the other too alarmist. Most of us debating this issue have decided that 15% increase in today’s prices might be a decent first-year estimate, and no one seems to be making that reality clear to anyone, although the sticker shock on 15% would seem to be minimal in trade for no income tax.
Maybe in the next version of the bill, presumably to be introduced next year, we should ask Rep. Linder & co. for language detailing both ‘versions’ of the rate in order to debar such worry of the bill being misleading.
James,
“Also, if you and I can calculate the 30% vs. 23% thing, the retailers can, too. It’s not that hard.”
I truly hate to display my ignorance, but I have never been able to solve this problem. Given that a retailer knows the cost plus profit he wishes to sell something, how does he determine the sales tax and the final cost if all he is given is the 23% inclusive guidance. Seems to me there are two unknowns, not one, so, please lay out the formula that retailers can use. It may not be rocket science, but I can’t seem to get it.
Clearly I don’t agree that there is anything misleading about a 31% national sales tax. I do agree that there needs to be a follow on statement that the net price increase is expected to be around 15%. Remember—1.00x.88×1.31=1.15!!! Taxes and prices are two different subjects.
Your comments about not liking any inflation adjustments indicate good, sound Libertarian leanings. Actually, you may be talking about what has sometimes been called “starve the beast” or “phase 2″. I gather that many Fairtax advocates hope that they can force the government to reduce spending because of the switch to a national sales tax. I don’t share that view, and as previously posted, I believe that term limits and a balanced budget amendment might be more productive than nattering about how to collect revenue.
The way you calculate it is simple, just use the 30% number on top of your raw price. It’s a mathematical ratio. You use the same logic we have used to determine what the 30% number was in the first place.
If my raw price is 75 cents, then 0.75 x 1.3 = 97.5 cents.
the tax is = 22.5 cents
22.5 / 97.5 = ~23% of your final charge price of 97.5 cents.
So it’s not very tough at all. If retailers want to report raw prices and charge sales tax exclusively they can. If they wish to use inclusive prices, they can as well, so long as they report the tax on the receipt.
But, tax or no tax, the market ultimately dictates what prices will be. What people will be willing to pay may go up if their effective tax burdens go down, or if more plentiful economic situations arise in their towns (which is what we hope would happen). If not, then retailers will simply have to reduce prices until they get to a salable level. That’s the market.
So our 15% price increase is a point-in-time estimate. The market is fluid, and such price increases would only be a temporary situation. If the economists estimates of economic growth, increased international competitiveness and such are correct, many prices might be able to come down, or our economy would grow to handle them.
BTW, just for anyone who is interested, the Tax Foundation has a podcast!!
http://www.taxfoundation.org/podcast/
I highly recommend it for anyone truly interested in tax reform in general.
A generic formula to determine taxes regardless of rate would be like this:
Assume x is the stated inclusive rate of tax, and y is the exclusive rate.
x = y / (1 + y)
for example, if the rate is 23% as it is in the bill;
.23 = y / (1 + y)
.23 + .23y = y
.23 / y + .23 = 1
.23/y = .77
.77y=.23
y=0.2987 or ~30%
Now if the rate was say, 20%, the rate would be:
.20 = y/(1 + y)
.20 + .20y = y
.20/y + .20 = 1
.20/y = .8
.20=.8y
y=.2/.8
y=.25 25% even.
Light dawns on marblehead!!! Your generic formula is what I’ve been looking for all along. So, if HR25 becomes law with the 23% number, retailers will have to take their cost plus profit and multiply by .2987 to arrive at the proper amount of the tax, right?
Pretty much. The tricky part isn’t figuring out the FairTax part, it’s determining how much cost goes away. That part will only happen as you begin to take advantage of tax-free business with your producers, wholesalers and such, as well as determining your own personal tax savings now that there is no personal or corporate income tax on you or your business.
To comment to balanced budgets:
The trick with restricting government spending has always been that there are very real circumstances where the government will HAVE to spend more money than it has, such as natural disasters, insuring a failed bank, wartime, or some other calamity. Such is life.
The government, naturally, wants to be able to ‘break the budget’ if it has to (and often just when it wishes to). What can be done about this?
TABOR laws (essentially balanced budget amendments) in Colorado and elsewhere have met with mixed results. Some programs got cut, but people got solid tax money back in their pockets. Here in Nebraska, it got voted down before it could be tried.
The real problem with spending today is that no one wants to really cut Social Security or Medicare, and cutting military spending is not popular either. Discretionary spending (the war on terror) is a controversial matter in and of itself regardless of its cost. So to really ‘balance the budget’ politicians may simply raise taxes to pull it off.
The strength I see in the FairTax is the projected economic benefits. By encouraging economic growth, we may be able to simply grow revenues to cover a good chunk of our deficit. We would still need a lot of pressure to reduce spending, but I think we are beginning to see some of that pressure today.
Term limits for congressmen and senators may well keep our representatives from becoming career politicians, and introduce more ‘new blood’ into the political class. It might take a couple of elections’ worth of senators to really notice the effects, but it might help.
One pressure we could use with the FairTax is the ability for the people to organize to not send money to the government by simply buying less stuff. Putting off buying a car or a TV until a certain date, staying home instead of going to restaurants, etc. If lots of people did that, they could send a strong message to the feds in terms of missing revenue if they did not agree with policies.
Would they respond? Who knows. Lord knows they don’t seem to respond to letters and phone calls.
In the event there is some confusion over the terms “entitlements” and “discretionary spending”, here are the Senate definitions:
“entitlement - A Federal program or provision of law that requires payments to any person or unit of government that meets the eligibility criteria established by law. Entitlements constitute a binding obligation on the part of the Federal Government, and eligible recipients have legal recourse if the obligation is not fulfilled. Social Security and veterans’ compensation and pensions are examples of entitlement programs. ”
Comment: One of the problems with balancing the budget is the growth of entitlements as a percent of the total federal budget. And HR25 would add around $600 billion annually to the list of entitlements.
“discretionary spending - Spending (budget authority and outlays)controlled in annual appropriations acts.”
Comment: Discretionary spending is usually broken into defense and non defense buckets. But it is all discretionary. And, while President Bush said he wanted a 4% cap on discretionary spending, Congress would not oblige him and discretionary spending has risen by double diget percentages of late. Blame it on the war in Iraq?
As for pressuring the Congress to reduce spending by adjusting our personal spending under the Fairtax, I don’t believe that is very realistic. As I have previously noted, half of everyones personal expenditures is for services, and there are no used services. And the goods purchased are largely necessary such as groceries, petrol, clothes, etc. I suspect that “discretionary spending” by individuals doesn’t amount to 10% of everyones budget. So even if you got 30 million people to participate in a new goods boycott, the impact on government revenue would be hardly noticeable. Screwing up everyone’s life style to make a point with Congress looks to me like a tough sell.
You make a good point about the projected growth resulting in vastly increased revenue. But I fear that there is some law of Congressional economics that says spending must increase at the same rate or greater than revenue. Reagan claimed we could grow out of the deficit, but the national debt seems to have skyrocketed ever since. And worse, when Clinton cooked the books and claimed surpluses as far as the eye could see, the economists got very nervous about the impact of a deflationary economy. Oh well, democratic capitalism may have warts, but there isn’t anything better in sight!
To be fair, the discretionary budget you speak of did not include any money for the Global War on Terror or the war in Afghanistan.
Those were funded individually by separate bills unrelated to the standard discretionary spending budget that President Bush wanted to cap at 4%. So I don’t believe the President intended to cap war spending at 4% (the war certainly costs more than 4% of our budget).
But the war certainly isn’t the only thing that has increased our budget.
The drug prescription benefit has increased medicare costs by around $720 billion over the next ten years (I suppose about $70 billion a year or so).
The fact is that our federal deficit has been growing every year since the 60’s. It’s NUTS. We are lucky inflation hasn’t already caught up with us, to be quite honest.
I think we need economic growth AND fiscal discipline. Spending DOES need to come down (Lord yes), but we also need to grow the economy at the same time, or we’ll never catch up so long as we keep spending in the red. Truly balancing the budget each year will likely cost us all more in taxes than most of us would feel like we could afford. The deficit for 2006 is something like $300 billion (I think, last I heard was in the summer) which for us to cover it would cost each of us about 16.67% more in taxes than we pay today.
I couldn’t agree with you more. And it’s worse than most folks understand. According to a Heritage Foundation fellow, the single biggest threat to proposed federal spending on education, health research, veterans benefits, homeland security, defense, and the environment is the projected growth in Social Security, Medicare, and Medicaid. The “big three” are projected to squeeze out the entire non defense discretionary budget by 2020, and the entire discretionary budget by 2034. Unless I live to be 100, I won’t get to see the train wreck, but you will, and it’s damn scary.
One suggested solution is to give back to the states some traditional responsibilities such as education, housing, transportation, etc. Get the federal middleman out of the process and let local administrations get the job done. May have merit?
Another suggestion is to set up a commission along the lines of the BRAC which managed to close down a lot of unneeded military bases. The commission could examine the budget and weed out all unnecessary programs. Might just work?
As I have repeatedly written, the villain is not the income tax–it is the highly regressive payroll taxes. If all of you Fairtax advocates would just refocus you energy, and support a small, broadbased national sales tax to replace the payroll taxes, I would be a rabid supporter. Such a program would be seen as evolutionary in nature by the Congress, not as revolutionary as the Fairtax. Not that I expect anyone to agree at this time, but my continued semi support of the Fairtax is based on the hope that your final legacy will be national awareness of the merits of a limited national sales tax.
A lot of us are concerned that moving in steps toward consumption-based taxation would quite possibly lead us to get mired in an ugly hybrid system that does not accomplish the goals of creating simplicity, eliminating regressiveness, or making broad-based, low effective rate tax policies work.
For example, establishing a FairTax-style system that started out very low, replacing only Social Security and other payroll taxes, might be seen as very good because it would eliminate a big regressive tax, and move us further towards consumption-based taxes. But even if successful, would we ever be able to eventually move ALL our taxes to such a system? Keeping income taxes means keeping all of the very bad elements of corruption and injustice that come with it, even if the lower rates make the economic problems less severe.
There are essentially three big taxes that are just plain BAD at the Federal level.
As you point out, payroll taxes, for being regressive after $90,000.
Alternative Minimum Tax, for not being indexed to inflation and being ridiculously high compared to the ‘regular’ system.
Corporate Income Tax, for being a fallacy and greatly impeding the competitiveness of businesses in America or epecially businesses from American operating overseas.
If we could get rid of these three items, and move them to a new sales tax, in increments of 5 or 6%, that would be awesome, if we could generate momentum and precedent to push in that direction.
I simply don’t have the confidence that doing this piecemeal would get the job done.
I suppose it’s time for you to get on with IX, but I want you to know I have appreciated your comments and general intellect. If a 30 year old and 75 year old can have such a civil discourse, there may be hope for the future.
One final question. I have frequently been told that the last thing the Fairtax advocates want is what you call a hybrid system of taxation. Frankly, I can’t see the problem. Canada has all types of taxes, and by the way, the latest info is they have balanced their budget and hope to extinguish their national debt in a few years. Many states have income, sales, property, etc. taxes and the sky hasn’t fallen. Are you sure that the “all or nothing” strategy is really the best way to accomplish the overall goal? What is it about having different types of taxes targeted at different revenue needs that gets everyones shorts bunched up?? Evolution is preferred by Congress as opposed to revolution, and failure to recognize that fact could be fatal.
Well, I think it’s just that we don’t see a rosy future for income taxes in this country, anyway. Every time there is any work to fix the income tax problem, it gets frittered away by lobbyists. We don’t want the income tax to be a major component of our revenue system anymore because it seems to be one of the easiest things to abuse.
Other countries do OK because they use SIMPLE, BROAD income taxes that have very few exceptions and LOW RATES. In America, we have a tax system so complex that it now merits its own (not insignificant) industry just to support it, and relatively high rates of income tax as well.
It is not to say that it could not be done, but there are rather powerful and entrenched forces in the USA that have created a powerbase and cash cow from the income tax code and they rebuilt it within 6 years of the last time anyone knocked their little house down. We feel it’s time to take away their bricks before they get another chance.
Oh, and BTW it’s fun having this talk with you as well. You have been helpful in forcing me to think really carefully about this subject and really double-check my math and make sure I haven’t missed anything important.
I still remain a FairTax supporter, and a more informed one now for getting to joust around out here!
That even goes for JWK, if he’s listening.
A quick comment on the issue of inflationary increases in the tax rate:
I’m not entirely sure why they would even be contemplated right off the bat. If you define inflation in terms of price increases, then the tax itself has a built-in mechanism for increasing revenue to account for increasing entitlement payouts. Entitlement payouts are currently tied to consumer-price-based inflation indicators. Well, as the prices of consumers goods increases, so does the revenue from the FairTax.
If you tie entitlement payouts to income inflation rather than price inflation, historic numbers would indicate that you’ll actually be better off because price indicators have almost always outpaced wage indicators.