30% federal sales tax?

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Recent reports have indicated that Bush is looking into scrapping the current federal income tax program, and instead instituting a 30% federal sales tax, which would apply to everything from luxury items, to necessities, like food and housing.

An article containing a lot more detail can be found here

My big problem with this is it seems like it will cost the average American a heck of a lot more money to do it this way. Currently, there is no way that the federal government is taking the equivalent of 30% of my paycheck. Also, in my state, purchasing items that are considered necessities (most notably food) are exempt from sales tax, but wouldn't be under this plan.

The other issue I have with it, is it says nothing regarding state and local income tax, but I assume those would still be enforced. My state income tax and local income tax are considerably lower than my federal income tax - currently both are about 3% of my annual income. So under this system, I'd lose about 6% of my annual salary to state and local taxes, and then have to pay a 30% federal sales tax on everything that I buy, which is nuts. Effectively, that's 36% of my salary, as opposed to the current 28% I'm paying now. EDIT: A quick calculation of my last paycheck shows that I'm paying a total of 28.2% of my salary in taxes. The breakdown is 21.7% is federal tax, and 6.5% is state/local tax.

(Additionally, there's still a state income tax of 5%, so on non-necessity items the total sales tax is effectively 35%. No matter how your slice it, it's worse under this plan. On non-necessity items, it's 33% now, versus 36% under this plan, and for necessity items it's 28% now, versus 35% under this plan. Best case scenario - it's costs me another 3% of my salary to buy the same stuff I'm buying now.)

The thing that is the real killer for me is that the current system would also include the purchase of houses - and my wife and I are probably going to be moving into a bigger house in the next few years. It is one thing to say that my $65 weekly grocery bill will increase to $85. I don't have a major problem with that considering I won't be paying federal income tax. However, I do have a problem with having a $200,000 home now cost $260,000. This does two things: 1.) How big of a loan you can get is determined by your income. The 30% tax effectively reduces the amount I can spend on a house. Maybe a bank would approve me for a $200,000 loan, but may not approve me for a $260,000 loan. 2.) You're going to be paying interest on that tax throughout the life of your loan. Over the course of a 30 year mortgage, that extra $60,000 will increase the amount you pay over the life of the loan by over $150,000. So, effectively that tax is going to cost you an extra $210,000 - or more than the initial cost of the house!

Fortunately, this is just in the proposal stages, and nothing about this is going to be done (if it is ever done at all) until well into Bush's second term, if he in fact has one. Kerry does not endorse such a plan, and would increase the federal income tax by 2% for the top 2% of the population to bring in additional money to the government. One more reason Kerry gets my vote.

[ September 15, 2004, 15:37: Message edited by: Aldeth the Foppish Idiot ]

 

Flat taxes and sales taxes replacing a graduated income tax have been talked about so many times over the years that I just whenever I hear someone propose it.

They are talked about for a while but the proposals never actually go anywhere. Sooner or later someone always pipes up the old saw about the lower and middle class people paying a higher percent of their income in tax compared to the rich who can afford to save and thus don't have to pay tax on that income.

After that the public outrage from the lower and middle classes quickly kills the proposed tax change - until someone else comes up with the same idea a year or two down the road.

The housing issue that Aldeth mentions is an unusual wrinkle. I have never before seen the proposed tax include housing (or essential food items for that matter). If such a system did go into place the impact on the U.S. housing market would be very interesting. Not only would buying a house become more expensive in terms of paying the sales tax on the purchase price but also if I remember U.S. tax law correctly the is currently a mortgage interest deduction which would vanish along with the income tax act thus making the after tax cost of the mortgage even higher.

So, do we think that such a proposal stands a real chance given that we would probably see the low/middle income people against it, prospective home owners and people with outstanding mortgages against it, and high income people with large savings who probably already own their real estate in favour? I don't think so.

 

He, he, he. I love that. The comeback of the "tithe", but as "thirte". The only country I know that had a flat-tax was the Soviet-Union. A great idea. A 50% percent sales tax on Vodka and other food stuff. Or read what Adam Smith has to say about Spain. Bah, anyone with a calculator and some basic understanding of economy knows that a flat-tax is crap. There's an optimal price for anything. And that includes taxes. And the social-justice thingy is just a strawman. No reasonable goverment will risk the loss in tax-income and the strain put on the economy.

Show me the accountant that would like to balance his sheets so he can pay an approx. equal amount of taxes, instead of the pay more in the good years, pay much less in the bad years system.

And a lowering of taxes is achieved through lowering of goverment expenditures. And there is no other way. Lowering taxes withouth lowering expenditure isn't lowering taxes, just postponing the bill to St. Neverday. And everyone knows, St. Never is always coming a lot sooner than expected.

 

As a CPA (certified public accountant) I can tell you that this is all a load of bunk.

First of all a national sales tax would be harmful to the lower income levels as they bear little if none of the tax burden.

Second the concept of a flat tax makes a lot of sense. What doesn't make sense is how to calculate the base to multiply by the flat tax rate. The flat tax people say it would be tax simplification. I don't see how. For someone who is an employee it would sure be easy as all you would do is add up your earnings. What are the people who own businesses, have trusts, or are in partnerships supposed to do?

 

CPA would be the equivalent to a federal diplioma in accountancy, I guess. And you'd be the first of them to seriously consider that a good idea. I've went to "economic lyceanum" and had my share of macro- and microeconomics (and I figure that's the way to say it in English). And with "you" I mean you mean "me".

Thanks for supporting my point. The loss in tax-income would be too much for any goverment to handle. Without lowering expenditure first, taxes can't be lowered.(I'm implying here that most people instinctivly and wrongly think that a flat tax would be something lixe a lowering of taxes). And further, I conclude that the USA has some, at least faintly ressembling them, federal structures like Switzerland. That would mean, taxes are paid to the community fist, the canton second and the federation last. That means the basic tax burden lies on the cantonal and not federal level. No wonder, if there's nothing there, there's nothing to tax. If the people have no money left, they can't give to the state. That's the essence of don't having a lot of money. I don't need to see a statitistc to know that. But that's completly irrevelant, because the main problem is the taxation of businesses. Which would be impossible and kill any starting enterprise with a 99% chance off and lay a heavy burden on enterprises, having a bad year. I see we agree here. That's completly incompatible with the workings of a modern market society. So, to me, the tax-justice is just a strawman. The state has figured a way to take from those who have to finance fancy things like roads and fighter-planes. You can't take that aways before the goverment has stopped to spend that money for things like that.

 

Iago,

Like I said in the intial post, we are taxed on different levels, but all are handled independently. We don't have cantons though. There are three levels of taxes most people pay: The federal income tax (that's the biggest one), a state income tax, and a local income tax (sometimes paid at the level of the county, sometimes at the level of a city depending on how the tax structure is set up).

Additionally to this, most states also have a state sales tax, usually somewhere in the range of 4%-9%. If you're lucky and live in Delaware, there is no sales tax because they make loads of money in tourism (beaches) and tolls (a major interstate runs through Delaware for only about 10 miles, but it connects Maryland to New Jersey, so they charge every car that passes through $6).

 

Yes. What I am trying to say is, that I have problems to evaluate the level of the American federalism in the field of taxation. Superficial google yields me tax-cut on federal income taxes advertisements en masse. I am inclined to think that federal taxes are likewise irrelevant in the USA as they are here. That means, changing your village or canton can be equal to a rise of lowering of taxes in the 50% realm. Otherwise sais, would your taxation system similar to concept like this. You get a value depending your taxation circumstances from your state, that would be canton. That value can be named 100. Then the community you live in, has it's on taxes, that would be somewhere in the range of 70-130. And then there would be additional federal taxes. Like 50. So, if had a taxable income of 1000. 1000 go to the canton. 1300 go the community and 500 go to the federation. Would be 1800 in the whole and the federation would take about 18%. Meaning, that a statement about federal taxes is saying more or less nothing about the actual tax-burden of the individual or artificial person. That's true for Switzerland, as your domicile in a canton or villigae can double or half your taxes in cases. I am inclined to think it's similar in the US. That would mean, the main bulk of taxes go to the community. Then to the state. And if somethings left, to the federation. Ok, and that's leaving the plethora of other taxes out of the picture, that would screw any imagination of getting a grasp of it anyway.

 

I understand what you're trying to say, but I'm telling you it is the exact opposite in the U.S. Federal taxes are NOT irrelevant in the U.S. In fact, that's the biggest chunk of the tax burden, and accounts for about 2/3 - 3/4 of all the tax you pay.

 

Hm. Then the US has the same false label problem as Germany. No federalism inside as publicised on the outside. How can a state be federalistic, if the memberstates don't control the money. But it explains of course a lot. For one, the carelessnes in tax-questions and the absence of fiscal-conservatism. Dam, our cantonal finances are in deep red and that's the number one headline in the papers this week and was the last. And the expenses of the communal swimming bath are publicesd in the local paper. I think such awareness of govermantal expenditure and the sources the money comes from are the consequence of federalism and direct-democracy. I don't think any other country has it, like we have such things. Too bad, as your system once was pretty federalistic, I guess.