The internal revenue tax code

[Mr. Desmond]

But again, who doesn't consume at the retail level? No one. That's the wonderful thing about a consumption tax. You catch everyone, and you still get a progressive tax, with those who consume more, paying more, and those that consume less, whether by virtue of less income, or because they chose to defer spending in order to save, pay less.

The gubbment also captures tax from all the heretofore untaxed. No more "working under the table", untaxed criminals, illegals, etc... Even your local drug dealers are now contributing, whether they're buying a pair of shoes, or a new Mercedes. Very cool.

It's cool, that's why I like the sales or consumption tax.

Typically, the elderly will not consume much at the retail level. You can imagine the exemptions that Congress will offer -- food, drugs, TVs under $500, drivers under $299.... lol.

The reason I'd do both forms of tax is that if the tax gets to double digits on consumption, I believe it has a negative effect on manufacturing and employment (too high of a rate, but then what is too high?)

[acerimusdux]

But again, who doesn't consume at the retail level? No one. That's the wonderful thing about a consumption tax. You catch everyone, and you still get a progressive tax, with those who consume more, paying more, and those that consume less, whether by virtue of less income, or because they chose to defer spending in order to save, pay less.

There's nothing at all progressive about that. It's a flat tax. For a tax to be "progressive", you need to have progressive rates.

The gubbment also captures tax from all the heretofore untaxed. No more "working under the table", untaxed criminals, illegals, etc... Even your local drug dealers are now contributing, whether they're buying a pair of shoes, or a new Mercedes. Very cool.

Except that with sales tax rates of 20%+, there would be black markets for shoes, clothing, and maybe almost everything but new cars.

I'd also point out that rates that high could actually discourage consumption, and cause people to save more, which also would be bad for the economy right now. Around the world right now, in the wealthier nations, we have ageing populations, who in the aggregate tend to want to save more than consume, and that is still causing very low interest rates and low rates of employment.

Personally, I don't see why the current income tax system can't be greatly simplified, while still keeping progressive rates. Having a few different tax brackets is not what is making things complex.

But if you want to go in the direction of replacing it all, I think the only way to do it without shifting a substantial portion of the current tax burden from the rich to the poor (as a flat consumption tax would do), would be to include a flat financial asset tax. An annual tax of 1.5% on all financial assets would raise over $1 trillion a year.  This would end up being fairly progressive, because nearly half of the country has less than $10,000 in financial assets.

Do that, keep the current payroll taxes (lifting the income caps in order to bring SS and medicare nearly into long run actuarial balance), and then you could get away with a 10% flat income tax (with $1,000 refundable credit), and 10% VAT (or consumption tax).

[David in FL]

There's nothing at all progressive about that. It's a flat tax. For a tax to be "progressive", you need to have progressive rates.  Except that with sales tax rates of 20%+, there would be black markets for shoes, clothing, and maybe almost everything but new cars.  I'd also point out that rates that high could actually discourage consumption, and cause people to save more, which also would be bad for the economy right now. Around the world right now, in the wealthier nations, we have ageing populations, who in the aggregate tend to want to save more than consume, and that is still causing very low interest rates and low rates of employment.   Personally, I don't see why the current income tax system can't be greatly simplified, while still keeping progressive rates. Having a few different tax brackets is not what is making things complex. But if you want to go in the direction of replacing it all, I think the only way to do it without shifting a substantial portion of the current tax burden from the rich to the poor (as a flat consumption tax would do), would be to include a flat financial asset tax. An annual tax of 1.5% on all financial assets would raise over $1 trillion a year.  This would end up being fairly progressive, because nearly half of the country has less than $10,000 in financial assets.  Do that, keep the current payroll taxes (lifting the income caps in order to bring SS and medicare nearly into long run actuarial balance), and then you could get away with a 10% flat income tax (with $1,000 refundable credit), and 10% VAT (or consumption tax).

A progressive tax is one in which people who earn more, pay more. A consumption tax absolutely does that. What your other arguments forget, is that the consumption tax is simply a replacement collection method. If there is a 20% consumption tax added to the purchase of goods and services (just to pick a number), it has virtually no affect on what people will buy, because they will have that much more hard $'s available to them in their weekly paycheck by virtue of no federal tax having been withheld. In fact, by the very nature of collecting tax from consumers who previously didn't pay ANY tax, the overall individual tax rate could be reduced and still maintain revenue neutrality to the federal government. The challenge, as it is now, is to convince those in government NOT to use it as a vehicle to increase government revenue to help pay for out of control spending. Over-spending continues to be the issue, regardless of the method by which our taxes are collected. BTW, if you want to see how a VAT affects the average guy, you need look no further that the debacle of the short lived luxury tax on yachts, airplanes, and expensive cars in the early 90's. Companies almost immediately went out of business and everyday workers lost their jobs. Let's not have to relearn that lesson.

[saevel25]

Except that with sales tax rates of 20%+, there would be black markets for shoes, clothing, and maybe almost everything but new cars.

Why?

I'd also point out that rates that high could actually discourage consumption, and cause people to save more, which also would be bad for the economy right now.

Saving more would be a good thing in the long run. It promotes a feeling of security which allows people to spend more later. Also you forget if you get rid of the income tax then you are dumping 1.3 trillion dollars back into the market.

This is from consumer spending reports,

I took a random percentile column. All these values are close averages on spending and tax payments for a person or household that make this amount of pre-tax income.

Average Income: $67000

Average Taxes Paid (Does not include Social Security & Medicare): $6000

Average after tax income: $61000

Average Spending: $49700, which includes sales tax from states. I took out mortgage interest and charges and Property taxes.

Really the pre-sales tax spending is $46200

Average percent spending from available income is 81.5%

Lets say they get to keep $6000

Lets say they spend the same percentage. $54500. Now you have 27% of it is in sales tax.

So actual pre-sales tax spending is $42913

Yea, there would probably be less spending. If you wanted to keep the buying power the same. Then you would need a national sales tax around 10%. You could do it. That was with out touching the money taken out for social security and medicare.

But if you want to go in the direction of replacing it all, I think the only way to do it without shifting a substantial portion of the current tax burden from the rich to the poor (as a flat consumption tax would do), would be to include a flat financial asset tax. An annual tax of 1.5% on all financial assets would raise over $1 trillion a year.  This would end up being fairly progressive, because nearly half of the country has less than $10,000 in financial assets.

So you want to tax me if I want to put my money in a bank?

Nah, I don't support that idea. I think it's better to not inhibit saving money. I think saving money gives people security to spend money later on.

Originally Posted by acerimusdux

Do that, keep the current payroll taxes (lifting the income caps in order to bring SS and medicare nearly into long run actuarial balance), and then you could get away with a 10% flat income tax (with $1,000 refundable credit), and 10% VAT (or consumption tax).

Nope, no income tax.

VAT tax is stupid. If you just want to drive up the price of a product.

Lets say the progression of an item is

$100 for raw materials

$50 for labor to make, sold to stores for 10% profit, $165 value

Sold for 10% profit in stores, $181.5 value

If you add a VAT of 10%

$110 for raw materials

$110 + $50 labor = $165 cost, sold for 15% (upped to cover the added tax paid) = $189.75 value - $110 = $79.75 x .10 = $7.95 tax

$189.75 x 1.10 = $208.73 - $189.75 = $18.96 x 0.1 = 1.90 tax. Really the retailer would go for around 12% profit to cover the tax cost added = $212.52 to the consumer

The consumer would see an increase value of $31 dollars on this item. A consumer would see a 17% increase in the cost of this good.

You talk about not being friendly to the poor. This type of thing depending on the item and how required it is could hurt the poor more than a sales tax.

[No Mulligans]

Agree, except I don't really even see the need for the second piece. Who "doesn't spend"....and why not encourage, rather than penalize those that choose to defer spending to save for the future?

It is unfair to those who have paid a lot of income tax and saved a lot during their working lifes and are now retired.  They were fully taxed when they earned it and now are going to be taxed again when they spend it.  That is unfair.

And, they now find themselves with less spending power and their retirement budget has changed.

[David in FL]

It is unfair to those who have paid a lot of income tax and saved a lot during their working lifes and are now retired.  They were fully taxed when they earned it and now are going to be taxed again when they spend it.  That is unfair. And, they now find themselves with less spending power and their retirement budget has changed.

You're right, and as someone closing in on retirement age, I would be affected by that too. I like to think that we could figure a way to manage that for a period of time though. Maybe some form of limited tax exempt card. Should be an easy workaround .

[Mr. Desmond]

It is unfair to those who have paid a lot of income tax and saved a lot during their working lifes and are now retired.  They were fully taxed when they earned it and now are going to be taxed again when they spend it.  That is unfair.

And, they now find themselves with less spending power and their retirement budget has changed.

The tax code is not about fairness.

Besides raising revenue, it's about social and economic objectives.

People are taxed on social security above a certain income level - taxed twice.

But your argument fails because they are not taxed twice based on income in your example - they are taxed for purchasing an nonexempt item for consumption.

[saevel25]

It is unfair to those who have paid a lot of income tax and saved a lot during their working lifes and are now retired.  They were fully taxed when they earned it and now are going to be taxed again when they spend it.  That is unfair.

And, they now find themselves with less spending power and their retirement budget has changed.

You could always transition that. Just give those who are retired a tax credit to cover it. There is some level of payment that could ease the transition.

It's not like they are stealing money anyways. They get to cash in on social security and medicare before it crashes and burns ;)

[David in FL]

But your argument fails because they are not taxed twice based on income in your example - they are taxed for purchasing an nonexempt item for consumption.

I actually agree with his point. Early on, retirees would be purchasing goods and services with already taxed dollars. In effect, paying income tax twice. That's a relatively short lived problem though, and easily addressed.

[Mr. Desmond]

I actually agree with his point. Early on, retirees would be purchasing goods and services with already taxed dollars. In effect, paying income tax twice. That's a relatively short lived problem though, and easily addressed.

Okay, I'm only the lawyer with an advanced law degree in taxation, and give responses based on my knowledge, experience, and logic and/or illogic of the tax system. Admittedly, I don't have all the answers, but I do know something about the law and its reasoning.

People have a choice in a consumption tax to take their taxed or untaxed income (remember that income accumulating in Roths or certain annuity type products are not taxed), and make a purchase. This is a different tax than a tax based on income, it is a tax based on a choice to purchase a nonexempt item. And I believe, based on experience, that most essential items will be exempt from the consumption tax.

So when people assume that all income has already been taxed, they are in error. The system is so complex that one cannot make blanket statements. And it is so complex that people do not understand it, which is why I advocate they trash the current code and give us one that works at low rates and simplicity for a 21st century global economy.

[saevel25]

So when people assume that all income has already been taxed, they are in error. The system is so complex that one cannot make blanket statements. And it is so complex that people do not understand it, which is why I advocate they trash the current code and give us one that works at low rates and simplicity for a 21st century global economy.

I would agree with that.

If there was no deductibles then could you say that all income is taxed? Then your AGI would just be your max income correct? This is assuming you can't take money pre-tax and move it to a retirement account.

[No Mulligans]

Okay, I'm only the lawyer with an advanced law degree in taxation, and give responses based on my knowledge, experience, and logic and/or illogic of the tax system. Admittedly, I don't have all the answers, but I do know something about the law and its reasoning.

People have a choice in a consumption tax to take their taxed or untaxed income (remember that income accumulating in Roths or annuities are not taxed), and make a purchase. This is a different tax than a tax based on income, it is a tax based on a choice to purchase a nonexempt item. And I believe, based on experience, that most essential items will be exempt from the consumption tax.

So when people assume that all income has already been taxed, they are in error. The system is so complex that one cannot make blanket statements. And it is so complex that people do not understand it, which is why I advocate they trash the current code and give us one that works at low rates and simplicity for a 21st century global economy.

Middle class tax payers who were savers and are about to retire and who didn't have a lot of deductions other than mortgage interest from a mortgage that was paid off long ago, and state income tax dedections, and IRAs and 401ks... The tax code is not that complex for someone in that situation.   They will be clear losers if we go to a national sales tax (and I'd bet the states will follow), it's simple math. Unless there is some exemption or other work around for those in that situation.

(I'm a CPA but that shouldn't matter, this discussion should be based on logic not credentials).

[David in FL]

Okay, I'm only the lawyer with an advanced law degree in taxation, and give responses based on my knowledge, experience, and logic and/or illogic of the tax system. Admittedly, I don't have all the answers, but I do know something about the law and its reasoning. People have a choice in a consumption tax to take their taxed or untaxed income (remember that income accumulating in Roths or certain annuity type products are not taxed), and make a purchase. This is a different tax than a tax based on income, it is a tax based on a choice to purchase a nonexempt item. And I believe, based on experience, that most essential items will be exempt from the consumption tax. So when people assume that all income has already been taxed, they are in error. The system is so complex that one cannot make blanket statements. And it is so complex that people do not understand it, which is why I advocate they trash the current code and give us one that works at low rates and simplicity for a 21st century global economy.

Was that directed at me? You and I agree on this, except that I wouldn't exempt hardly any items from the tax. I like the idea of an an annual rebate to cover basic living expenses to ensure the poor are somewhat protected, but beyond that, anything gets the consumption tax. The only issue is when I as a retiree, having paid income tax on my earnings, now spend my previously taxed savings. I should be able to avoid paying a second tax again via the consumption tax. As I said though, that's an easy work around for a relatively short period of time for a group of people who are no longer generally paying a lot of income tax anyway.

[Mr. Desmond]

Was that directed at me? You and I agree on this, except that I wouldn't exempt hardly any items from the tax. I like the idea of an an annual rebate to cover basic living expenses to ensure the poor are somewhat protected, but beyond that, anything gets the consumption tax.

The only issue is when I as a retiree, having paid income tax on my earnings, now spend my previously taxed savings. I should be able to avoid paying a second tax again via the consumption tax. As I said though, that's an easy work around for a relatively short period of time for a group of people who are no longer generally paying a lot of income tax anyway.

It's just directed at the general discussion and for general explanation - apologies for the misquote direction. I have a client memo that I am drafting at the moment. In a hurry.

[jamo]

... which is why I advocate they trash the current code and give us one that works at low rates and simplicity for a 21st century global economy.

And what would that be?

[newtogolf]

I am not against a consumption tax but it's harder for the government to track versus income which is reported directly from their employers.  How would consumption work on resale of items such as Craigslist.  Would paying cash for items allow for the circumvention of the taxes?  No tax system is perfect but I can see more areas of abuse than the current income system.

States have issues with their sales tax revenue where they border states that have lower sales tax rates.  People will go to great lengths to save money, especially on taxes.

I'd much prefer a flat income tax combined with severely high penalties for employers who hire undocumented workers or do not report income.

[Mr. Desmond]

And what would that be?

Off top of my head -

Business: Expense everything even buildings and autos after a phase in period, low rates, tax US Income - make it attractive to do business here - it is a global competition.

Individuals: low progressive rates, deductions for low and middle class income earners - motivation for one home, car, etc.; no deductions for wealthier people except for charitable contributions and then only cash, securities, and appreciating assets counts towards a deduction. I would go for a low rate consumption tax to ensure products are not taxed at high rates that discourage consumption and the economy, and then leave a low rate income tax.

I think TR started the estate tax .... not in favor of dynasties so I would, and this is admittedly socialistic (so is the present and any future tax code), I'd find a way to get some of that money into the grubberments' hands while not breaking apart a family business. Hey, that's why you have tax attorneys -- to plan around a tax code.

[saevel25]

And what would that be?

We had 1.39 trillion in income tax revenue in 2014, not including Social Security and Medicare/cade

Average income in 2014 was $66877.  Total income in the USA was $8,493,780,000,000.

If you wanted the same tax revenue on income in terms of a flat tax with no deductibles you'd need a straight up 16% tax on all income. Not sure if that works out.

I wouldn't mind getting rid of a ton of deductibles. GE submitted a 57,000 page tax return. That is absurd.

Originally Posted by Mr. Desmond

I think TR started the estate tax .... not in favor of dynasties so I would, and this is admittedly socialistic (so is the present and any future tax code), I'd find a way to get some of that money into the grubberments' hands while not breaking apart a family business. Hey, that's why you have tax attorneys -- to plan around a tax code.

I hate estate taxes the way they are now.

Trust fund distributions, absolutely should get taxed.

A farm that wants to keep the business in the family, but the estate tax would put them under, not so good.