Monday, March 27, 2006

National Sales Tax: A Closer Look At $$$ Figures...Part 3

Continuing on part 2... Imagine no income tax, no more waiting for W2s and trying to figure out how many allowable exemptions to take this year, no more giving the government an interest free loan, and imagine saving tax free...That's what started this series, but now it's time for a deeper look. What would be a reasonable "tax rate"? I'm thinking about 10-20% would be a ballpark figure of what I would expect to pay. I did some digging to try and find out, what if we really switched to a national sales tax? Well, I found some info at that listed Total US Income tax collected in 2003. Total US Income Tax (2003): $1,683,184,679,000 (reference) Then I needed to find some data on how much sales is done in the US that would be subject to the national sales tax. So I looked up retail sales information for 2003. On a side note, in my search I noticed everyone talks about percent increases in consumer spending, but no $$$ figure to go with it! But I finally found some data at Total US Retail Sales (2003, not seasonally adjusted, reference): $3,275,407,000,000. Wait, wait, wait...If you noticed and said, "OMG, I have to pay 50% tax??!?!" Hold on for a sec. Be sure you consider the whole picture... 1. You no longer have federal income tax being witheld from your paychecks! That's a big boost each pay period. 2. Tax credits would still be given depending on your exemptions. 3. Retail sales data above might not be complete. 4. Government can always get more budget conscious. (ha!) So if the US Census Retail Sales data is accurate, then $3.3 trillion would be taxed, which would mean a fifty percent tax! Could you imagine?? Is it worth it? I don't know. It would definitely get me spending less and saving more. Some odditities I found while searching for total US Retail Sales data...This other site reported annual retail sales in 2003 in the US of $59 trillion! That's a huge difference compared to the $3.2 trillion reported by the census. Although, $59 trillion sounds a little un-realistic. That would mean a national sales tax rate of 3%. :) So what's the real number? Beats me! But it would make a huge difference in whether people would support a drastic change like national sales tax. Another issue, what would happen to retirement accounts? Tax free would certainly lose its appeal. When I first started this series on national sales tax, I was all for it. After seeing the possible $$$ figures, I still am. It would get tourists, tax evaders, and immigrants all contributing to the country they are visiting or living in, and that sounds fair to me. I do have some concerns, but when you look at the concept in its fundamental state, it makes sense. This is the reason I believe it would work...Not to mention all the lost productivity due to hours of brain mangling tax work can now be spent freely. How do you put a monetary value on that?


Mike said...

But if it discouraged spending it would hurt the economy. Also people like many pfbloggers, who spend far, far less than regular folks would kind of be cheating the system. (Sort of.)

But you said it yourself, a 50% increase in sales tax would definately make people spend less. Now a 3% tax with no federal taxes or social security would be like X mas every day.

Penny Nickel said...

" But if it discouraged spending it would hurt the economy."

Who says that less production of non-necessities (the kind of things that people would cut back on buying) would be a bad thing? Sure, there would be fewer jobs needed to make those items... but maybe instead of higher unemployment, people across the spectrum could decrease their number of hours worked (since they're buying less stuff and thus need less money) to reabsorb those people into the economy. Maybe all us pfbloggers could drop down to 3/4 or 1/2-time. ;-)

Not that I'm in favor of an all-sales-tax system, but just sayin'. The "people who buy tons of junk they don't need are vital to a strong and healthy economy!" thing bugs me a little.

Apex said...

The 3% numbers are way too low. The 50% numbers are way too high.

Every flat tax proposal tend to fall in the area of about 18-23%. This is probably a fairly reasonable ball park for a sales tax too. As a whole the nation spends pretty much all of its income. The US Federal budget is a little bit north of 2 Trillion dollars. The US GDP is around 11 Trillion. That puts you in the 18-23% ball park rate give or take if you assume that all of GDP gets taxed in one way or another either through a VAT tax system or whatever might be the case.

Incidently it is usually noted that that consumption accounts for 2/3 of GDP which would put sales at about 7.5 Trillion so that 3 Trillion number does not seem to be an accurate representation of sales.

It is also the case that this tax can't just replace the income tax. It must replace the payroll tax as well which accounts for a huge portion of the revenue stream so the 1.6 Trillion number is a bit low which is why I pointed out the little more than 2 Trillion that the US govt needs to function each year.

I have heard many optimistic flat tax proponents touting 10-13% tax rates which is just unrealistic (although I have never heard any such thing as 3% which is certainly not possible anywhere on this planet).

Basically you can easily count on 20% and I would not be surprised after giving breaks for the poor and certain parts of the economy that may end up not being taxed if you end up closer to 25%. When you consider Federal and State taxes I think you can count on somewhere around 30% although there would probably be some rebates to figure in there too.

The money has got to come in and so many people seem to think it would result in much lower tax rates and a much smaller tax bill for them? Does this make any sense? The tax system will not change how much is spent and the money has to come from somewhere.

I suppose there is the idea that rich people do not pay taxes and now they would. This is a myth. Rich people do not pay taxes on money that is invested in tax deductable business ventures. The rest of it, they pay taxes on, some of it up to 35% at the federal level. They would now pay a lower rate on that high bracket money and if they didn't spend it all (which they don't) they wouldn't pay any tax on it.

The result is going to be a much more efficient and less complex system. But its not going to result in big reductions in tax bills for middle class Americans. In fact, close evaluation may show that it results in an increase in actual taxes paid by the middle class. I don't know what it would show as I have not evaluated it to that level. But I have given this idea considerable thought.

It probably saves me money because I am a saver but average Americans probably will pay more. But its all academic, just like what it would be like if we switched our elections away from the Electoral college system. In 2040 the Presdient will be elected by the Electoral college and he (or perhaps she by then) will pay taxes on the income they receive not on the money they spend.