Re: Tax (was: "Dick Armey: Scientist?")
Tue, 3 Feb 1998 13:02:13 -0500

EvMick wrote:

> why do you think [the consumption tax proposal] is inane?

I am a tax lawyer here in the United States. I have analyzed the various tax
proposals (flat tax, consumption tax, national sales tax, VAT, etc. in a
variety of vicissitudes) and have found them wanting. A consumption tax is
especially distasteful on a variety of fronts. The central idea that people
get hooked on when talking about replacing the current system is not what its
being replaced with but the fact that its being replaced. Most Americans hate
the current system so much that they would take anything as substitute for it.
This notion is misguided and unwise.

A National Consumption Tax (NCT)

A NCT sounds great when generalities are discussed. It would reward saving and
penalize consumption. The capital generated from the additional savings would
allow the economy to grow and so on. But when this proposal is analyzed in
detail it becomes obvious how completely ridiculous it is from a real-world
standpoint. For the NCT to raise as much revenue as the current income tax
system, it would have to tax final sales at a rate of 28% (this rate does not
incorporate the need to also raise funds that payroll taxes currently
generate). This is higher than many NCT advocates quote, but that is because
their proposals include huge cuts in federal spending. But there is a deeper
problem with this 28% figure and that is the tax base that is used in deriving
that rate. The 28% rate would have to be imposed on every single expenditure
by individuals. This means that individuals would have to pay 28% tax on
groceries, rent, house payments, automobiles, gas, auto repairs, donations to
charitable organizations, health care, etc. Everything. Many proposals exempt
several of the aforementioned categories from tax. All this does is increase
the necessary rate on the remaining taxable expenditures. If you exclude
"necessities" then you end up with a rate of 63% on all remaining
expenditures. So when you go to buy that $5,000 P6-300mhz computer,
remember... it will cost you over $8,000.

Regardless of the rate, there is another crucial problem with the rate that is
initially determined. The tax will reduce the amount people buy. If you could
buy $100 worth of "things" before the NCT and the NCT is 30%, you will only be
able to buy $75 worth of "things" now. Sure you'll have more money because you
will not be paying income taxes but the average American pays only 16% federal
taxes. 16% is lower than any estimate of the NCT rate needed meaning consumer
demand will diminish. What does this mean? Tax revenues will go down which
will result in higher NCT rates (which will consequently diminish spending
more) or an explosion of the federal deficit (which will gobble up all the
extra capital generated by the NCT and then some).

The real push behind this is by ultra-wealthy individuals who would benefit
from the NCT. Steve Forbes would (based on his current financial position)
save over $1 billion in federal taxes over his lifetime if the NCT was
implemented. No wonder he supports it and is willing to spend millions to get
it implented. Wealthy individuals, generally, do not consume most of their
income. They invest it. Thus the tax burden on the wealthy will plummet while
the tax burden on the lower and middle classes will increase dramatically. The
NCT will become an extremely regressive tax and have a severe negative impact
on the economy.

Ask any NCT proponent this question: Why not simply the tax code in this
manner: Create a flat rate of 40% with a universal exemption of $100,000.
This would reduce the tax code to a couple of pages and raise the same amount
of revenue that the currrent system creates. Consumer demand would skyrocket
as hundreds of billions of dollars is put back in the hands of the lower and
middle class thus creating wealth for the upper class. They will balk at such
a plan because it does one thing: Raises the tax burden on the wealthy.

Doug Bailey