TheChairman floated this idea the other day, worthy of its own thread:
What I’ve toyed with (for at least 10 years) is a combination which I refer to as a National Sales & Transaction Tax, with a much lower rate of 2 or 3 percent… but charged at -every- exchange of money and goods or services.
Sales tax = whenever tangible goods exchange hands, be it a TV or a factory.
Transaction tax = everything else, excepting double taxation on a transaction.
This idea is floated from time to time – usually by the Democrats and/or the One World government types (which might be a hint of its underlying purpose), but let’s kick the tires.
I’m trying to come up with a conversation style to get down to the details of how various tax ideas would work in real life, which is often where the ideas fall apart. People who like the “idea” of the fair tax “like” the idea if they think it takes a 5% tax rate, but like it less when they find out it would need 23%.
So let’s put down a few markers:
– who pays the tax – the person sending the money or the person receiving the money?
– who collects the tax and how do they send it in to the government?
– what does “double taxation” mean?
– are there any exceptions?
Example #1:
Juan Gomez is doing some profit making activity in the United States, and has $5000 in cash. He wants to send the money home to his poor mother in Mexico.
Choice #1:
Juan goes to his local Western Union office and arranges to wire the money to a bank in Mexico. Western Union takes Juan’s $5,000 and subtracts the 3% transfer tax ($150) and wires $4,850 to the bank in Mexico.
Choice #2:
Juan gives the $5k to his sister, who is returning to Mexico next week. Upon arriving home, she gives the entire $5,000 to Mom.
If you think #1 should be taxed, do you think #2 also has to be taxed, and how would you do it?
The Federal Income Tax raised about $1.1 trillion and FICA+Medicare was about $900 billion.
The entire US Economy is about $14 trillion. If we apply a 3% tax rate to -everything-, it would raise $420 billion.
Your move.
Well, that arithmetic is based on a single calculation… we’re talking about chains of transactions as money weaves it’s way through the economy.
How many times does money change hands before and after it reaches yours?
😉
Again, who said Medicare was a ‘right’ and when did SS become ‘retirement’?
We need to cut entitlements by at least 50% before doing anything else.
You are changing the subject. I’m trying to understand your taxing idea.
Is this 3% tax a replacement for the existing taxes or in addition to?
Keep in mind the ~$2 trillion in taxes today doesn’t begin to cover the $3.7? Trillion in Federal spending. For now, this is just a tax issue. The US DoD wants $750 billion for 2011, including $115 billion for fighting wars. That by itself eats up 2/3 of all the income tax revenue.
Choice #1 – if that is a consumption tax (transfer) then the government is paid by Western Union and Juan is done. If there are additional taxes, Western Union must collect them which makes the transaction more expensive.
Choice #2 – Juan’s best option. No tax due to no record of any transaction. It’s none of the government’s business what Juan does with his money (truth).
Hence, this example shows the potential for cultivating a cross border cash courier system. Islam has a similar money transfer system that doesn’t send the money over international boundary lines.
The main factor here is the rate – at 3%, it may not be worth the risk of carrying cash into Mexico At 10%, maybe it will.
By the way, don’t carry large amounts of cash into the United States. The Customs people will sieze it based on the assumption it is the proceeds of illegal activity, and you have to sue to get the money back, proving the source of the cash.
If you withdraw or deposit more than $2500 in cash at any bank, they are going to fill out a CTR on you and submit it to the Feds.
Being that I’ve lived in Arizona for the past 25 years, and watched this stuff first hand: Juan is not going to risk going back, and he doesn’t want to take the risk with his sister eith, that’s why he’s willing to take his chances and pay Western Union’s rates and wire the funds… but that’s not what Pedro does.
Pedro goes to one of the ‘Ace Cash Express’ places (which also offer check-cashing services and loans) and uses their service, which is much cheaper… they also sell international calling cards and other useful services for Pedro.
I want to tax all of Juan’s & Pedro’s transactions, at a reasonable ~3% rate!
Juan’s sister will never make it back with all the money. Federale’s will need to be paid, drug couriers will get word, and she’ll be lucky to live through it all.
What if Juan is an American citizen, earned the money working for the border patrol, and paid taxes on the money. Does that change your answer?
Nope. Western Union is a service, not a bank.
That response confused me. Are we taxing money transfers only if they are done using a bank? Hwo about American Express travelers checks?
Sorry for not being clear:
“nope” it doesn’t change the answer, he pays 3%
It would -replace- all current federal payroll taxes.
Many of your ‘hypotheticals’ (which are indeed realastic examples) seem to revolve around inter-bank transfers and currency conversion… not what I would label consumption transactions. The entire banking and financial transaction system will need to be examined.
In most cases, treat it as you would a sales tax. On Granny’s $50k CD, you tax the interest if she cashes out, but not her original $50k. Walmart TV for $1,000? The buyer pays $30.
I’ll try to answer your scenarios above, in time, but will have to address your remark below in a longer reply… I was not changing the subject; you applied a future tax scheme to current SS and Medicare outlays. We cannot do tax reform without a total overhaul of expenditures, entitlements, tariffs, rules, or the budget. The revenue problem is driven/caused by entitlement programs, subsidies, deficit spending, etc… it’s not just a tax issue.
Personally, I’d like to see a total elimination of almost every ‘act’ created in 1913, but it’s 100 years too late.
I see they just revised the ‘insolvency date’ for SS & Medicare. Why bother? “Just raise the debt ceiling and hope everyone keep buying up our Weimar Bonds… err, U.S. Treasury Notes.”
We’re in BIG trouble, if we don’t fix it, it’ll be done by decree… an Indiana court nullified the 4th amendment.
Partly the point of this thread was to figure out if using WordPress is a workable way to discuss taxes – it is clumsy – the threading isn’t very good (sorting newest first is really bad, but I did that for a different reason)…
The problem with any changes to the tax system – and you’re dancing around it – is you can’t do it in isolation. Every time you change a tax rule, you change people’s behavior. This is the same mistake government constantly makes (perhaps on purpose). If you change the tax on cigarettes from $.50 a pack to $5 a pack you won’t raise 10x the revenue. Some people will quit, others will switch to something else like snuff or chewing tobacco, some will create a black market to evade the tax.
In the case of the fair tax, taxing consumption will mean poeple will consume less. If people consume less, they buy less products that need to be made. If factories lose sales, they lay off employees.
All the fair tax would do is push us into a full fledged economic collapse and would still not raise the revenue needed to match the spending.
Re: WordPress; for a forum it’s probably not the best choice. Nonetheless, for the content you are posting here, WP seems perfect… the ‘narrowing’ column for subsequent replies is not.
Yes, I’m aware that any change in one part of the system will cause ‘reactions’ somewhere else… be it revenue and/or expenditure. Space does not permit, so I merely floated the idea of a ~3% tax, imposed at more points along the money trail.
In your example of a $1,000 TV; the customer pays 3% on the TV (Walmart collects/remits it), but Walmart would pay 3% on their electric bill, 3% on their phone service, collect 3% from their employees’ payroll and remit it, etc, etc…
The -aggregate- of all this would still amount to a 25-35% taxation at the end of the road, but at least you’re leaving the consumer with more spending flexibility and not hitting him with an obnoxious 30% tax on a burger, fries, and coke after he just forked over $1,300 (plus state tax) on the $1,000 wide screen TV at WallyMart.
With the 23% ‘Fair Tax’ he imposes on consumers, I don’t see where Boortz assesses any tax on Walmart, or other business entity.
Somewhere on the Fair Tax site, they even suggest that it is -more- progressive… uh, isn’t that what we’re trying to get away from?
The spending must come down: Granny does not have a right to eternal life at the expense of Medicare (taxpayers); her $3,000 a month medicine on a $5 ‘co-pay’ is unsustainable. As someone else said, it may seem cold, but we have to stop the insanity and balance the books.
At least we agree the ‘Fair Tax’ is fairly taxing…
With that, I’ll sign off on this thread, and look at setting up a ‘neo-tax’ forum on one of my sites.
Hypothetical #2: (assume 3% transfer tax rate)
Art goes to Home Depot with his Credit Card. Art buys a $500 Gift card using his credit card. Art sends the gift card to his sister. Sister goes to her home depot and and buys a $500 high pressure spray washer with the card. She returns the spray washer two days later. Home Depot will not refund the money, except to put it back on another gift card. A week later, she uses that to buy $500 in lumber.
At the end of the month, Art sends $500 to his credit card company to pay it in full.
How many times is a 3% transfer tax paid on this example. Remember, this is TheChairman’s tax plan, not how you would create one.
You would be taxed 3% when you purchased the gift card.
She’s taxed at purchase as with her state/local sales tax… if she returns an item, the tax is handled the same way as it is with the state/local sales tax.
If she has a problem with Home Depot’s policy on the ‘gift card’ usage, then she can take it up with Home Depot, FTC, etc. BTW, many retailers want to ‘expire’ or reduce the balance if you don’t use gift cards within a specified time! Now that’s fair, eh?
As I mentioned before, loans would be taxed at origination but not on repayment… a credit card is essentially a loan. No tax on your payment.
If you think it makes would be better (revenue) to do it the other way around, then exempt the gift card purchase and loan origination up front, and tax the credit card payment and loan payments on the back end. It’s up for debate…
So how many times was the 3% charged? I think I heard you agree that on sales that are undone, the retailer would have a process to recover the taxes paid in order to return the tax back to the buyer.
Being somewhat busy the past few days, I never got a chance responded to your last comment/questions on this in the other thread… so I’ll included it below in italics.
Yes, I’m aware that ‘collectivists’ might love this sort of thing, but they’re already grinding us down with carbon taxes, usage taxes, mileage taxes VAT, and others.
Being a ‘Nationalist’ (gasp!), my single-minded goal with tax-reform is “how do we collect the revenues necessary to operate the nation as originally intended (i.e. no entitlements? How do we keep it simple, equitable, and secure from evasion/abuse?
IMO, ‘health care’ is -not- a right, it is a responsibility. Emergency medical treatment, on the other hand, should be addressed (broken bones, fatal wounds, etc).
Just over 100 years ago, NONE of the ‘federal tax code’ even existed. The same people that brought us the Federal Reserve, factional reserve banking, and inflation… also imposed the income tax, legal tender laws, and the IRS on us.
Indeed, much needs to be clarified, but we need to start somewhere and a 23% ‘Fair Tax’ without major cuts in entitlements, bailouts, and subsidies is spinning the wheels.
Okay Art, here is my comment and clarification (?) to your reply on the other thread:
FWIW, my comments focus on a ~ 3% national sales & transaction tax, and -not- Boortz’s 23% ‘Fair Tax’… other than a ‘flat’ rate, his plan is too similar to what we have.
First, I think you misunderstood my employer example. Regardless of whether it’s a consultant (1099) or an employee (W-2), they both would pay the same rate. The only difference is, the employer would likely handle the remittance for the employee’s tax after deducting it from the employee’s wages/salary. The consultant would be responsible for remitting their own tax. That’s how employment taxes are usually handled anyway…
Regarding GM parts and assembly at different locations: As long as GM isn’t ‘selling’ the engines made in Saginaw to their assembly plant in Flint; then, no I wouldn’t tax it. If they do conduct a transaction, then it is probably being done for a tax-benefit or write-off (out of necessity) due to the current tax code… tax avoidance (not evasion).
In fact, much of what you cite about GM’s model (Brazil, Canada), is the result of unions, the federal tax code, ‘Gobalism’, and other government intervention… it’s a broken model, and it’s why GM went under. Anyone with a brain could see this rise in fuel prices coming 10 years ago, yet GM kept building V8’s. Like IBM, they suffer from a top-heavy management structure; but unlike IBM, they were rewarded for their stupidity with a huge taxpayer funded bailout. Likewise with the banksters.
Foreign parts could be handled with a tariff, import duty, or a sales tax… but -no- VAT (as in EU). My sales to EU/UK have fallen because of VAT penalties to buyers.
Dare I say that Henry Ford would find it nearly impossible to establish a viable industrial operation in America nowadays due to the tax code and EPA regulations.
You mentioned a 23% incentive for GM; which is Boortz’s proposed rate… I’m talking about ~3% per transaction, similar to what the credit card companies charge. Yes, it might result in some vertical integration, but it could also result in more efficiency.
Certainly, a lower rate would be less enticing for GM than 23 percent, as you correctly pointed out.
I don’t like the ‘Fair Tax’ because it’s more of the same, at a rate (23%) which is still confiscatory. I’d rather see something like a 3% tax on every exchange of money for goods & services… it’s definitely consumption based, and it’s more palatable from a PR perspective. As for the Amish: are they a monetary burden on America? Barter is the purest form of trade.
We need to free our minds of the monetary brainwashing inflicted on America in 1913.
Scenario #3:
I go into Wal*Mart and purchase a $1000 TV with cash. My local wal-mart deposits the cash in the local Acme Bank. The local bank uses Fedwire to transfer the money to Citibank, which manages WalMart’s cash. Walmart instructs Citibank to send $500 to Mellon Chase, the bank of the distributor. The distributor sends $100 to the trucking company and $400 to the San Francisco branch of the bank of China, which then uses SWIFT to transfer the dollars to the main bank in Shanghai.
How many times do we tax that $1000 purchase?
Now, Walmart is very frugal. With the motivation of that answer, let’s say Walmart purchases a bank (Target already owns a bank) and creates a bank branch in each store. Walmart takes over the entire distribution operation including running the ocean shipping line, owning the trucks, and the bank of Walmart opens a branch in Shanghai.
My $1000 in cash doesn’t exit Walmart until the Shanghai branch of Bank of Walmart transfers the funds to the manufacturer.
Hypothetical #4:
I think the price of gold is going to drop. I buy a put option that gives me the right to sell 1000 oz of gold at $1400 an ounce anytime between now and December 2011. I pay $500 and now “control” the value of $1.5 million in gold.
My belief is correct and the price of gold drops to $1450/oz (still above my price). As a result, my $500 option is now worth $5000, which I then sell.
How much tax is paid and by whom?
Hypothetical #5:
Granny Smith has $50,000 in a 5 year CD at the First Bank of Washington. The five years is almost up.
Alternatives:
1) Granny leaves the money where it is and rolls over for another 5 years
2) Granny asks for a check and opens a new 5 year CD at 2nd bank for Washington for a better rate
3) Granny asks for a check and sends it to Acme Mutual Fund to buy an S&P 500 mutual fund.
For which (if any) of those alternatives do we charge the 3% tax, and who collects it?
Things got nested too deeply…
This points to the biggest flaw in Boortz’s plan – stipulating I haven’t read his book.
His theory is that if the fairtax was 20%, the decrease on the tax burden and competition would force businesses to reduce their prices something close 20% (since they would no longer be paying a 35% corporate income tax), thereby making things close to a wash.
Neal believes this because he is a lawyer, not a businessman or a person who has any idea of what accounting is. (hint: there were accountants before there was an income tax)
Let’s take a supermarket for example. A typical successful supermarket makes a profit of 1 to 2% on its sales.
So let’s say I buy $100 of groceries. After paying the people who work there, the utilities, the lease, the food, insurance, etc… the Supermarket has $2 in profit. They then pay $0.70 of that in corporate income taxes ($2 x 35%) leaving $1.30 in after tax profit. Eventually, that profit will be taxed on the income to the owners when they take the profit out (dividends or capital gains – let’s assume 10% average rate). so today, my $100 purchase generates $0.87 of income tax revenue to the US treasury.
Now, we replace that with a 20% fairtax. I pay $120 for my $100 in groceries. The store pays no income tax, the owners of the store pay no personal income tax. I pay $20.00 instead of the indirect $0.87 I was paying.
At this point, Boortz will reply – but we will give you a $20 prebate! (but where did that $20 come from?)
So you’re thinking – but everyone down the food chain will also be saving 35% on their taxes, so by the time you add up all the pieces, everyone will have saved a total of 35%!. Nuh-uh. The total corporate income tax paid today for all companies in 2010 was $53 billion. $53 billion is a lot less than $2 trillion. $53 billion implies that the before tax income of all US corporations added together is about $150 billion. You can’t solve the problem of the federal government by taxing corporations. That’s not where the money is, but it does make people feel good.
To piggyback on the Walmart example above, if I buy a $1000 TV and pay 3% tax, and then WalMart pays a 3% tax on its electric bill, the government does not have 6% of the $1000 in its tax account. For that to be true, Wal*mart would have to spending 100% of its gross sales on Electricity.
Let’s assume that my WalMart does $5 million a month in gross sales. They collect $150k/month in the 3% tax. Let’s assume their electric bill is $100k/month. They then pay $3k extra to the power company for the 3% tax, not $150k. If every single thing WalMart pays is taxed, their total tax on everything they purchased would add up to $150k (that’s if you assume they have to pay 3% on the wages to their employees, and 3% of the 3% they paid in 3% taxes, and 3% of the taxes they paid to the State)
That fallacy cascades down through all the assumptions of all the repeaated layers from production through sale. If there were multiple layers of 3% taxes, that would encourage walmart to cut out the layers – grow its own corn, make its own cereal, generate its own power, own the housing its employees live in (I’ve heard rumors they already do that – a lot of the employee cars have out of state license plates)….