Tuesday, June 24, 2008

Sales Tax vs. Income Tax


By Richard E. Noble

Most people who are against the Income Tax are against the IRS. They want to see the Internal Revenue Service abolished. So if we switch the burden for our Federal Government off the backs of the individual and put it onto the back of the business community, who is going to insure that the business people obey the rules? You will still need a tax investigation system. You can call it the BRS instead of the IRS if that makes you happy. But a similar job is going to have to be done. Business will not be "business as usual" ever again in the United States of America.
Most states have voluntary sales tax co-operation. They have a very small staff. Business people are paid a small gratuity for collecting the tax and no one seriously checks on their honesty. The Federal government will not be able to function in this manner. A huge tax of 25 to 30 percent is greater than the basic profit margins of any business that I have ever owned, managed or worked in. The incentive for dishonesty here would be phenomenal. A smart businessman (maybe not so smart) could make a better living figuring out how to sidestep and pocket the sales tax than he could trying to make a legitimate profit on whatever he is selling. I can visualize a small army of very bright men who would be opening businesses for the sole purpose of swindling the government whether they had products to sell or not. The business community is always smarter or more cleaver than the individual taxpayers. The stealing and fraudulent behavior will be much better paid, more worth taking the risk, much more profitable, more difficult to catch, and more wide spread than any petty thievery we have today in the income tax system and you can bet on that.
Large businesses could be required to install a federal sales tax software program into their systems that would act as a monitor but the small businessman who represents 80% of the employment opportunities today here in America would certainly not be encouraged to get his business up with the times. I could see the old adding machine and pencil and pad having a big revival. I would say inefficiency would make a new revival. More profit will be made by keeping bad sales records than good ones - certainly for the little guy - the heck with the advantages of computerized inventory systems for the accountant. There will be no accountants remember.
That is also rather impossible. The accountants might not be filing income tax forms but they will be learning a new and growing business sales tax return system you can bet.
The income tax goes directly to the Federal Government. It is suggested that sales taxes will be handled by the states and then forwarded to the federal government. I would suggest that the more government bodies and bureaus that money travels through is directly proportional to the smaller amount of money that will end up at the final destination.
"Income tax stifles earning potential" is another big argument for the sales tax. Well, I doubt that is true, but even if we accept such a notion, if you think income tax discourages people from making more money then it would follow that you would have to accept the notion that a sales tax would discourage consumption. We certainly don't want to discourage people from earning more money but I don't think that there is any evidence of that ever happening here in the United States. Not too many individuals refuse a pay increase or a promotion up the ladder of success because it puts them into another bracket. No multimillionaire has ever stopped increasing his millions because his taxes went up.
But if everything you buy now cost 30% more I think that will definitely cut down on consumption. If a new auto, overnight, costs 30 thousand instead of 20 thousand, I think the streets of America would rapidly start to look like the streets of Havana. This will be especially true when one considers that the Fair Tax proposal will only be on new products or first sales. The second hand car business should flourish and new homes would become rarer than a barn raising in today's world. In fact, used everything will flourish. I can visualize the old barter system being looked at from a new perspective - maybe even a religious cult promotion if necessary. There will certainly be a need for new laws in this area. That means more government, not less.
If consumption is cut, production will be cut. If production is cut, jobs will diminish. If jobs diminish and paychecks get fewer you are recreating the scenario for the 1929 Great Depression. The driving engine of the capitalist system is consumption.
Many poor people pay no income taxes. Many lower wage earners pay very little income tax. The people who pay the highest income taxes are the wealthiest and all those who are enjoying the greatest benefits this society has to offer. Even with their income tax burdens those who pay the greatest percentage of the income tax enjoy a much better life in this country than the poor and lower income earners. To cancel the income tax entirely and replace it with a sales tax would probably completely bankrupt the bottom 50% of this nation. On the other hand the top 20% is estimated to receive a savings of 267 billion - millionaires and billionaires do not spend the bulk of their money consuming taxable things.
Already the sales tax people are talking about rebates to the poor and poverty and low earner compensations. Now were back to bookkeeping and loopholes and welfare not the end to bureaucracy but the beginnings of a new bureaucracy - federal and state. They are even talking about what they call "prebates". Prebates will be payments in advance to those whose incomes would be made inadequate by the consumption tax on the necessaries of life. They are even talking about universal prebates to everyone. Figure that one out. Oh brother, wait until the political right and left get into legislating these rebates and prebates. Talk about the pork and special privilege. Huckabee is really and truly going to have to have a direct line to Jesus then. Speaking of Jesus what about non profits and religious exemptions?
Nobody has yet begun to estimate the cost of changing the present income tax system to a consumption tax system. My God, can you imagine?
The Fair tax people are even claiming that prices will decrease with this new 23% sales tax which is really a 30% sales tax when actually figured out by any grade school kid who has studied math. The Treasury Department has actually estimated that a sales tax to replace income tax, corporate taxes and estate taxes as has been proposed would actually require a sales tax of 57%. Some independent groups estimate a tax as high as 80%.
Some who favor this Consumption tax are claiming that prices will actually fall because of the absence of embedded taxes that are already included in prices and at the same time wages will not fall. Yeah right.
There are problems with the income tax system - so correct them.
One big problem is that corporations before Ronald Reagan paid 35% of the federal tax burden. They now pay 10 to 12 percent. When Ronald Reagan got done giving handouts and tax breaks to his old boss, General Electric not only paid no tax for a few years but the American taxpayer owned General Electric money.
The super wealthy before Reagan once paid as much as 70% on their millions. That has been reduced by half. That meant a lot of money no longer coming into the federal coffers. But instead of reducing federal spending, Reagan increased federal spending in amounts greater than the federal government had ever spent in its history. Ronald Reagan increased this country's National Debt greater than all of the previous presidents combined.
So what happened?
Inflation happened and the upper middle class and the lower middle class had to make up for Reagan's cuts to the wealthy, and his excessive borrowing and spending.
The Democrats were once called the spend and tax party. The Republicans are now called the spend and borrow party. They suddenly discovered that running up the National Debt and increasing inflation was a good way for the rich to make more money and the poor and middle class to pay for it.
The rich get to buy the million dollar treasury bonds that float the government borrowing; they tell everyone that there is no inflation so wages stay flat, and COLAs stay low; the poor and the middle then pay for the borrowing with their bread and butter purchases. It is a good scam and it is working.
Isn't the real problem government spending? And the real argument here is do we cut spending money to benefit the American people or do we keep invading foreign countries and promoting war. The bulk of our tax money goes to feed the Military, the Military Industrial Complex - now private and public and both losers, and to pay interest on the National Debt which has been established at its current impossible status due to past, present and even imaginary Star Wars.
I think the folks who want a National Sales Tax may get what they are asking for but it won't come with the abolition of the income tax. They will get both. The rich will get the most benefit, the middle will pay more but into two different pockets and poverty will increase drastically. This seems to be the name of the present game and I guess when we analyze it, it has been the same game all along - it's the smart and cleaver outwitting the not so smart and not quite so cleaver.