National Flat Tax: Is the Consumption tax a dream come true?

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I have just done some reading. Given G.W. Bush gets to push his agenda of a fairer federal tax, would a consumption tax (essentially a national sales tax) be a valid replacement of the current tax code? The following advantages would supposedly manifest themselves:

It lets every worker keep their entire pay check?-no payroll or income taxes.

It allows those at/below the poverty level to have zero or negative taxes.

It lets retirees keep their full pension or Social Security checks?-untaxed.

It lets everyone keep their capital gains and investment income?-untaxed.

It encourages savings and investment, creating greater national growth and productivity.

It encourages repatriation of wealth from tax havens.

It stimulates exports, leading to greater U.S. employment.

It stimulates economic growth and job formation.

It eliminates gift and inheritance taxes.

It makes the federal tax rate very visible, and therefore, politically risky to increase.

It ends personal and corporate tax filings.

It eliminates the IRS.

This from http://www.txfb.org/TexasAgriculture/2003/060603/060603fairtax.htm

Nothing is simple, especially when extrapolated into the future and interacting with variables, both known and unknown (not to mention Rumsfeldian unknown unknowns). Would principle residences and food be taxed? Gas? Could one avoid this tax by leasing a vehicle rather than buying? Just think, one could actually decrease tax by saving more and not be penalized by being taxed on your increasing accumulated wealth. Would withdrawals from IRA's (non-ROTH) and 401K's still be taxed (currently this is perceived by the IRS as deferred income)?

What do you think?

What other form could a fair tax take?

JM

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I have thought about this.

What rate would you propose?

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This tax shifts the tax burden downward. A larger portion of a small paycheck goes toward a consumption tax than a large paycheck. It is in effect regressive. With a progressive income tax it is the reverse, the more you earn the more you pay. The progressive income tax is the fair tax.

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Good point acquiunk

The progressive tax would be fair if it was simply that, with no deductions, write offs etc.

The wealthy generally have many more items they can deduct than the poor.

Do you happen to know the effective rate of tax each income group pays? I wonder.

That's why I'm curious what rate of tax would be imposed under a national sales tax system.

I can see many sides to this....

The wealthy, although they are able to buy more products, many times don't need to.

Wealth tends to be handed down generation to generation. With that come real property, fine furniture, jewelry, art, etc. They don't NEED to go out and buy these items.

The poor NEED to buy many of these items.

On the other hand, if the tax rate were low enough, the poor would have more money in hand each week, and not have to worry about the April 15th tax crunch.

On the 3rd hand, many poor people purposefully have too taxes deducted throughout the year, in order to have a refund check....kind of a forced savings.

How would this impact their ability to save?
Probably not at all. They would still spend what they have, yet not have the refund once a year, and will feel poorer.

If people could somehow aquire the skill of personally saving the difference between what they would have paid in income tax, and a national tax, savings rates would go up.

but.....I don't think that would happen.

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Chai Tea,

Peresonally I have agitated for a flat income tax for every entity, personal, corporate or small business, of no more than 2% with absolutley no deductibles. Perhaps this should be higher but not much.

The tax code is used in lieu of pork to special interests sometimes, Example: small businesses currently recieve a larger tax break if they purchase a large SUV such as a Ford Expedition than if they purchase a ford Econoline van...why ?who benefits? This is not simply to garner federal revenue it is used as as measure to direct business spending in a specific direction, It is not the job of the federal government to encourage or discourage domestic spending habits. Duties and taxes on imports do have their place but this should be limited both in amount and duration.

JM

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I can see a much simplified graduated income tax as useful but 2% across the board is simply another flat tax. A graduated income tax that topped out at say 40% for the high end (in the 1950's it was 95% for some people) but with no deductions other than perhaps children would be in the long run fairer and a more productive tax.

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Acquiunk,

Why is a graduated tax necessary? Some say that the "wealthy" should pay more but a flat tax (based upon a percentage) would accomplish this and not introduce the perception, if not the reality, of punishing those who are more financially successful.
The Bush tax cuts have been credited with increased tax revenues. If so it might be interesting to find realistic calculations that might support both this as an empirical fact and conservative ideology that supports the concept that lower taxes increases economic activity that, in turn, increases tax revenues. That is, what flat tax rate would increase actual tax revenues while greatly simplifying or eliminating the tax code. Given the elimination of all loopholes some have proposed 15%. I think this is way too high and does not include the absolute destruction of all loopholes, tax shelters, credits, or deductibles. I know a strictly flat tax is a paradigm change for the collection of tax revenues but the flip side is that the simplicity lowers cost and fosters high productivity. Anybody seen any such projections?

JM

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National Flat Tax: Is the Consumption tax a dream come true?

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