Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look

weslinder · May 28, 2009

The great thing about the FairTax idea is that it's a complete *simple* replacement of all other taxes, and with the "prebate", it's naturally progressive without being complicated.
According to those that have studied it, consumption is more reliable than income, and it's certainly much more reliable than corporate income. (Our 34% drop in tax revenues this year so far is primarily because of our reliance on that.)
That being said, a sales tax without getting rid of the income tax is a really bad idea. It is a tax on the poor and middle class, a respnse to the reality that you cannot realistically increase tax take by raising income taxes on the wealthy beyond 30% or so.

Bogey · May 28, 2009

I think those that are in favor are under the impression that it will replace income tax?

I don't see how people are in favor of adding more taxes for everyone?

juicystream · May 28, 2009

JuanValdez said:

And why are some of our resident conservatives criticizing the idea? I thought conservatives loved the VAT.
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There is a group of Republicans that favor the Fair Tax, but I haven't really seen them adding VAT to income tax. The Fair Tax hasn't become a party platform, but rather a platform for individual candidates.

I wouldn't consider myself a fan of the Fair Tax or VAT. I prefer a simplified income tax.

juicystream · May 28, 2009

GladiatoRowdy said:

Personally, I would exempt food, medicine, and the first $5000 for each adult and $2500 for each child in a family, meaning that a family of four would have their tax bill reduced by $3750 each year, assuming a 25% rate. These provisions would help to reduce the regressive nature of a consumption tax and would also ensure that the biggest consumers in our society are the ones who are taxed most heavily.
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How are you expecting exemptions to work? Are you proposing that you pay the tax, and then they can apply for a refund?

GladiatoRowdy · May 28, 2009

juicystream said:

How are you expecting exemptions to work? Are you proposing that you pay the tax, and then they can apply for a refund?
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No, I would do it with a card much like is already in use for food stamps, WIC, and other government programs. It would use the existing credit card infrastructure and would be exceptionally simple to manage.

Fatty FatBastard · May 28, 2009

MadMax said:

FairTax movement has popped up over and over again. They boast that people from the poorest to the richest support this idea.

One positive would be....less loopholes. Buy something? You pay the tax. No way around it.

I've seen it proposed as a complete substitute for income tax (which seems to me to be a conservative's dream)....and I've seen it proposed as a substitute for all income taxes except for those who make over a certain threshhold...like maybe over $250,000.
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I'm all for a fair tax, but this seems like an additional tax option rather than an alternative.

MadMax · May 28, 2009

Fatty FatBastard said:

I'm all for a fair tax, but this seems like an additional tax option rather than an alternative.
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The FairTax folks are all about knocking out the IRS....I'm not saying that can be done...but that's their intent.

juicystream · May 28, 2009

GladiatoRowdy said:

No, I would do it with a card much like is already in use for food stamps, WIC, and other government programs. It would use the existing credit card infrastructure and would be exceptionally simple to manage.
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WIC in GA still uses vouchers. I've always wondered why the foodstamps were on a card, but they used such an old system for WIC.

What steps would be taken to reduce fraud, i.e. using someone else's card? If everyone has a card, it definitely makes theft of benefits, or borrowing someone elses card who may not use the full exemption more likely.

juicystream · May 28, 2009

MadMax said:

The FairTax folks are all about knocking out the IRS....I'm not saying that can be done...but that's their intent.
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It wouldn't wipe it out, but it could become more effective, or leaner.

basso · May 28, 2009

bnb said:

Ummm...nope.

Name me a country that's introduced a VAT in place of income taxes. They pay income taxes in Europe, the UK, Canada, Australia etc. What makes you think this will be different?

A Vat is separate from income taxes. It may replace some transfer/excise/manufacturing/other taxes -- but you're still going to have to file April 15.
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correct, this is in addition, not only to federal income tax, but also to lstate and ocal income taxes as well as state and local sales taxes.

there's nothing fair about it.

rhester · May 28, 2009

I have a better plan it is called the 'really' fair tax plan.

Since the government is of the people, by the people and for the people let each person decided for themselves individually what is their fair share of tax to pay and send in that amount voluntarily every April 15th.

Come on politicians trust us to do the right thing like we trust you.

OddsOn · May 28, 2009

JuanValdez said:

Why are people assuming the Obama admin wants this?

And why are some of our resident conservatives criticizing the idea? I thought conservatives loved the VAT.

I don't have a particular problem with it as long as it is modulated to dampen its regressive nature and complemented with a progressive tax.
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I would move to a flat tax tomorrow as long as it did not affect food (as is now the current local sales tax rule) and was a "replacement" for the income tax. This is the fairest way to have a national tax so that everyone pays their "fare share". What would be a problem is if they add the flat tax on top of all the other taxes already in existence.

And to reiterate my point.....why can't the government reduce its spending to balance the budget? This is not rocket science here, I think an audit of the books would show considerable wasteful spending in areas most Americans cannot imagine.

pgabriel · May 28, 2009

juicystream said:

I can't disagree there. I think overall we would be better off with a very simple tax code. When you look at most local tax codes, they simply tax 1% of earnings. No deductions to fudge about.
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found this very interesting, does anyone know the overall percentage of tax on on all income paid in the US?

Marsarinian · May 28, 2009

OddsOn said:

Or maybe they can just quit spending so much money and heaven forbid cut back their budget like the rest of the country? Since when is adding more tax ever a good idea? So are we going to do away with the income tax and replace it with the VAT? Or is this on top of all the other taxes we are already paying?

Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look

Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look
Levy Viewed as Way to Reduce Deficits, Fund Health Reform

By Lori Montgomery
Washington Post Staff Writer
Wednesday, May 27, 2009

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government's budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama's policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

"There is a growing awareness of the need for fundamental tax reform," Sen. Kent Conrad (D-N.D.) said in an interview. "I think a VAT and a high-end income tax have got to be on the table."

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American -- a tangible benefit that would be highly valuable to low-income families.

Liberals dispute that notion. "You could pay for it regressively and have people at the bottom come out better off -- maybe. Or you could pay for it progressively and they'd come out a lot better off," said Bob McIntyre, director of the nonprofit Citizens for Tax Justice, which has a health financing plan that targets corporations and the rich.

A White House official said a VAT is "unlikely to be in the mix" as a means to pay for health-care reform. "While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers," said Kenneth Baer, a spokesman for White House Budget Director Peter Orszag.

Still, Orszag has hired a prominent VAT advocate to advise him on health care: Ezekiel Emanuel, brother of White House chief of staff Rahm Emanuel and author of the 2008 book "Health Care, Guaranteed." Meanwhile, former Federal Reserve chairman Paul A. Volcker, chairman of a task force Obama assigned to study the tax system, has expressed at least tentative support for a VAT.

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. "It's common to the rest of the world, and we don't have it."

Seeking New Revenue

The surge of interest in a VAT is testament to the extraordinary depth of the nation's money troubles. While some conservatives have long argued that a consumption tax would provide a simpler and more efficient alternative to the byzantine U.S. income tax code, this time it's all about the money.

The federal budget deficit is projected to approach $1.3 trillion next year, the highest ever except for this year, when the deficit is forecast to exceed $1.8 trillion. The Treasury is borrowing 46 cents of every dollar it spends, largely from China and other foreign creditors, who are growing increasingly uneasy about the security of their investments. Unless Congress comes up with some serious cash, expanding the nation's health-care system will only add to the problem.

Obama wants to raise income taxes for high earners and impose new levies on business, but those moves would not generate enough cash to cover the cost of health care, much less balance the budget, and they have not been fully embraced by Congress. Obama's plan to tax greenhouse-gas emissions could raise trillions of dollars, but again, Congress is balking.

Key lawmakers are considering other ways to pay for health reform, including new taxes on sugary soda, alcohol and employer-provided health insurance. The last proposal could raise a lot of money -- nearly $1 trillion over the next five years, according to White House budget documents. But options on the table would raise a fraction of that sum. And while it might pay for health care, it would barely dent deficits projected to total nearly $4 trillion over the next five years and to grow rapidly in the future, as baby boomers draw on Social Security and Medicare.

Enter the VAT, one of the world's most popular taxes, in use in more than 130 countries. Among industrialized nations, rates range from 5 percent in Japan to 25 percent in Hungary and in parts of Scandinavia. A 21 percent VAT has permitted Ireland to attract investment by lowering its corporate tax rate.

The VAT has advantages: Because producers, wholesalers and retailers are each required to record their transactions and pay a portion of the VAT, the tax is hard to dodge. It punishes spending rather than savings, which the administration hopes to encourage. And the threat of a VAT could pull the country out of recession, some economists argue, by hurrying consumers to the mall before the tax hits.

A VAT's Bottom Line

What would it cost? Emanuel argues in his book that a 10 percent VAT would pay for every American not entitled to Medicare or Medicaid to enroll in a health plan with no deductibles and minimal copayments. In his 2008 book, "100 Million Unnecessary Returns," Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14 percent would raise enough money to exempt families earning less than $100,000 -- about 90 percent of households -- from the income tax and would lower rates for everyone else.

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor.

Sales Tax Gains Momentum

Burman, who helped House Democrats craft an unsuccessful 2007 plan to repeal the alternative minimum tax, said he's received a number of phone calls from lawmakers interested in his idea, though "they can't quite imagine how to make it happen politically." Burman said the 25 percent rate has caused some sticker shock, and he's trying to figure out how to bring it down.

Graetz's proposal drew an endorsement from Volcker, who last year called it "a sensible plan for reform." (Volcker did not respond to a request for comment.) It also has piqued the interest of Conrad, the Senate Budget Committee chairman who argues that it could be modified to accommodate Obama's pledge not to raise taxes on families who make less than $200,000 a year.

"I think interest is quietly picking up," Graetz said. "People are beginning to recognize that the mathematics of the current system are just unsustainable. You have to do something. And a VAT has got to be on the table if you want to do something big and serious."

Still, the Senate Finance Committee declined to include a VAT among the options it is considering to pay for health reform. And even VAT supporters doubt the tax will find a place among the tax-reform proposals the Volcker panel has been asked to produce by Dec. 4.

Though the nation's fiscal outlook is grim, Burman said "the situation will have to get more desperate" before lawmakers are likely to consider a new levy aimed directly at the pocketbooks of every one of their constituents.

Most lawmakers are still looking for "a painless source of revenue" to overhaul the health-care system and dig the nation out of debt, Burman said. "Who knows?" he added. "Maybe the tooth fairy will bring that to them."
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Deficit spending is key to revival in a recession. Nobody wants to see their taxes raised or new taxes added, but with our country facing more than 10 trillion in debt, everybody has to sacrifice.

Marsarinian · May 28, 2009

rhester said:

I have a better plan it is called the 'really' fair tax plan.

Since the government is of the people, by the people and for the people let each person decided for themselves individually what is their fair share of tax to pay and send in that amount voluntarily every April 15th.

Come on politicians trust us to do the right thing like we trust you.
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What now, you want to resurrect the Articles of Confederation? No one likes to be taxed. Then all the taxes will get abolished and the whole country will collapse. Much worse than California did.

rhester · May 28, 2009

Marsarinian said:

What now, you want to resurrect the Articles of Confederation? No one likes to be taxed. Then all the taxes will get abolished and the whole country will collapse. Much worse than California did.
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"When there is an income tax, the just man will pay more and the unjust less on the same amount of income."--Plato

"In the fifty years after Diocletian the Roman tax burden roughly doubled, making it impossible for small farmers to live on their production (Bernardi 1970: 55). [14] This is what led to the final breakdown of the economy (Jones 1959). As Lactantius (1984: 13) put it:

The number of recipients began to exceed the number of contributors by so much that, with farmers' resources exhausted by the enormous size of the requisitions, fields became deserted and cultivated land was turned into forest."-- Fall of Rome

I don't mind paying taxes
Less the better

insane man · May 28, 2009

sales tax is great if there are reasonable exemptions. thats why sales tax in many states is considerably better than sales tax in texas.

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