Replace income, payroll taxes with sales tax

[el Gusano]

It doesn't matter who "scores the proposal". It's the same amount of taxes, just shifted to a different and more equitable payment. Instead of those costs being built into the product beforehand, they are added on after the fact, and you, the consumer can decide just how much you are going to pay in taxes. You can save all your money and never pay a penny in taxes.

But, what would that benefit you?

OTOH, the rich will be paying much, much more in taxes than the poor, so although more fair to the rich, you're "really socking it to them" for being successful.

BTW, has the proposal stated that used items would be exempted or is that an assumption?

[legaltender]

elgusano said:

You can save all your money and never pay a penny in taxes.

What happens to the family of twelve getting no assistance you told us about? Getting by on $12,000/year.

[el Gusano]

They pay no taxes either. They are below the poverty level.

Why would you want them to pay taxes?

[Justin Thyme]

elgusano said:

BTW, has the proposal stated that used items would be exempted or is that an assumption?

No assumption, HR25, as written, would not require any federal tax be paid on used items.

[legaltender]

justinthyme said:

HR25, as written, would not require any federal tax be paid on used items.

Would you put into place a system that says businesses can't sell used items?

Let's say my company buys a state-of-the art computer system for $5000, not paying a cent of taxes, since it's a business purchase. We use the computer for business purposes for a month, then sell in on eBay, for a price of, say, $5500. It's clearly a used good, so FairTax should not apply. If a consumer wanted to buy the computer at a store, he'd have to pay $6500 ($5000 for the computer and $1500 in tax). Buying the computer is a great deal for the consumer, but it's also a great deal for the business - they get to use a computer for a month and make $500 in the process. It's a bad deal for the government as it now collects no tax.

What measures would be put in place to prevent such a system? Even if HR25 specifies that a used good is one on which the tax has previously been paid - it does not mean it would not happen and (probably) go unpunished.

The FairTax calculates a tax rate based on the assumption of no avoidance, no evasion, and no additional exemption of goods and services, all of which currently occur.

[Justin Thyme]

legaltender said:

justinthyme said:

HR25, as written, would not require any federal tax be paid on used items.

What measures would be put in place to prevent such a system? Even if HR25 specifies that a used good is one on which the tax has previously been paid - it does not mean it would not happen and (probably) go unpunished.

The FairTax calculates a tax rate based on the assumption of no avoidance, no evasion, and no additional exemption of goods and services, all of which currently occur.

I'm not sure right off the top of my head that your example could be sold without adding the FairTax to the system but whether it is or not I wouldn't put any measures in place to prevent this. It's a loophole, I'll admit, but our current system has many, many loopholes. Some of those loopholes in our current system are intentionally placed there but many more are just as unintentional as the one you illustrate above. I would suggest that with the simple structure of the FairTax that any evasion would be more straightforward and easier to detect and enforce than the convoluted tax evasion schemes that our current system has a propensity for.

But I also wouldn't say that the FairTax tax rate was calculated with an assumption of no avoidance or evasion. Somewhere in my readings I recall some level of evasion was assumed but I can't recall right now what that level was or where I read it. I'll do some digging later on to see if I can locate a reference to it for you.

[daworm]

Let's say my company buys a state-of-the art computer system for $5000, not paying a cent of taxes, since it's a business purchase.

I don't think that applies. If that computer were a component in a larger system for resale, then there would be no tax. But it is the end user who pays the tax, and in your example the business is the end user and thus would pay the tax.

[Felix]

I have been wondering what will happen to charitable donations if deductions for contributions goes away, as I believe is intended in the Fair Tax proposal. The income tax deduction for such donations is a bulwark of most charitable organizations.

[traveler]

I don't think that applies.

That is correct. Businesses are not exempt from sales tax.

[Justin Thyme]

daworm said:

Let's say my company buys a state-of-the art computer system for $5000, not paying a cent of taxes, since it's a business purchase.

I don't think that applies. If that computer were a component in a larger system for resale, then there would be no tax. But it is the end user who pays the tax, and in your example the business is the end user and thus would pay the tax.

Worm, under the FairTax businesses pay no taxes on items purchased to operate the business. This is the one area of the FairTax that is ripe for abuse but you won't be able to write any tax legislation that doesn't have some weakness. Surely the current tax code is full of weaknesses that can be exploited. Compare that to the one area of weakness in the FairTax and I don't see how this can be used to condemn the legislation.

[daworm]

Ah, I was under the impression it was based on the supply chain. If it isn't, perhaps it should be, if that would easily avoid a know loophole and didn't have too many other undesirable side effects.

If a consumer wanted to buy the computer at a store, he'd have to pay $6500 ($5000 for the computer and $1500 in tax).

Shouldn't that $1500 be more like $850 to $1200? Also, using a high-end example is somewhat misleading, as those who pay high end prices will want brand new, not 1 month used.

[legaltender]

Businesses are not exempt from sales tax.

That's a little vague.

Ineligible people declaring themselves to be businesses to qualify for the business exemption is not an implausible riddle, to suggest a related issue.

A dealer "demo" car with 5000 miles on it is clearly a used car, but the dealership does not pay taxes on it, since it's a business. It seems to me that consumers could avoid paying high taxes by buying "slightly used" goods and businesses could find a way to offer them to the public. If it has not been sold, it is new. The car has not been sold, therefore it is new regardless of the number of miles on the odometer.

If that computer were a component in a larger system for resale, then there would be no tax.

How is that? I can find no circumstantial variable between used items sold by consumers and used items sold by businesses. If an individual makes $500 re-selling a computer on eBay, you could at least argue he will go out an spend the $500 on an IPOD, paying the 23% tax on the $500. Even if the law stipulates a "used good" is one on which the tax has previously been paid, the inventory police and the rules they apply would be - pun intended - incomputable.

[Justin Thyme]

marvell said:

I have been wondering what will happen to charitable donations if deductions for contributions goes away, as I believe is intended in the Fair Tax proposal. The income tax deduction for such donations is a bulwark of most charitable organizations.

The deduction is gone because the tax is gone. People often gave away more money than the deduction saved them in taxes just to avoid giving it to the government. As a percentage of income it has been shown that the wealthy and the working poor give the bulk to charity anyway^*. These two groups benefit less from the charitable deduction in the tax code than all the middle class put together.

[daworm]

How is that?

For instance, it could be a part of a digital audio studio package, packaged along with mixing software and audio recording hardware. In that situation, it would be the same as a steel ingot bought to make sheet metal roofing, and untaxed.

Now, it could be possible that some businesses would try some sort of trickery to get around the sales tax. How long do you think they could get away with it, should they be doing it on any meaningful scale? You think Circuit City or Best Buy would try it?

[traveler]

That's a little vague.

Businesses pay sales tax on items purchased for business use, including computer equipment, unless they can present a tax exempt certificate to the seller. They cannot present a tax exempt certificate unless they hold non-profit 501(c).....status.

Businesses do not pay sales tax on items bought for resale as they then collect the sales tax from the retail sale and forward to the state.

[Justin Thyme]

traveler said:

That's a little vague.

Businesses pay sales tax on items purchased for business use, including computer equipment, unless they can present a tax exempt certificate to the seller. They cannot present a tax exempt certificate unless they hold non-profit 501(c).....status.

Businesses do not pay sales tax on items bought for resale as they then collect the sales tax from the retail sale and forward to the state.

Traveler, are you talking about the state sales tax or the proposed Federal Sales Tax known as the FairTax or HR25?

[traveler]

Justin, I am only talking about current sales tax structure in most states and the presumption that it would work the same way under the Fair Tax. Especially in small businesses, exempting businesses from paying sales tax on business use items would not be a good idea. It would be too easy to manipulate.

[legaltender]

You think Circuit City or Best Buy would try it?

You think the 139 "Computer & Equipment Dealers" listed in the Manhattan yellow pages wouldn't? That's leaving out computer graphics, network design and systems and data recovery outfits.

[daworm]

I can't see it being worth it to any of them, actually, at least not the scenario you propose where they use the system for a month then sell it. It costs a lot of money, in software licenses and manpower, to configure computer systems to do a specific job. As such, most companies tend to hang on to systems as long as they can. I can't see it being worthwhile to go to the trouble of setting a system up only to have to wipe it out and do another one a few weeks later.

[el Gusano]

as those who pay high end prices will want brand new, not 1 month used.

As would be the case on new cars, etc.

Do you think that Signal Mtn. Barbie wants a used Hummer where someone else's weimeraner (sp?) has been rolling around and defecating in the back floorboard?

There's a reason that you can buy an old Rolls Royce or Lotus inexpensively: They're prestigious items, but only when they're new.

[Justin Thyme]

traveler said:

Justin, I am only talking about current sales tax structure in most states and the presumption that it would work the same way under the Fair Tax. Especially in small businesses, exempting businesses from paying sales tax on business use items would not be a good idea. It would be too easy to manipulate.

The FairTax can't be compared with state sales taxes for a couple of reasons. The FairTax is meant to take all Federal taxation off of the creation of wealth an placing it on the disposal of wealth. State sales taxes are just another form of grabbing our money and putting it to use by the state. State sales taxes do not eliminate other taxes, only adding to them. The FairTax is written in a way that it does away with all other forms of federal taxation, except those taxes that can be considered users fees, and replacing them with a national retail sales tax. Retail is the operative word here. Any money spent to create more money would not be taxed, only retail sales of all goods and services in the United States. The idea is to take the tax components that are passed on to the consumer and replacing that tax component with a retail sales tax.

Read HR25 to find out exactly what the FairTax is. That is the legislation that will create it.

[legaltender]

They'll have to repeal the 16th Amendment, of course. No prob, right?

Consumers could avoid paying high taxes by buying "slightly used" goods and businesses could find a way to offer them to the public. The problem with final sales taxes is that, at the end of the day, they rely on both the buyer and the seller—both of whom have incentives to evade paying the tax—to report the tax payments properly. The FairTax doesn't have significantly different reporting requirements than state sales taxes have. And, in both cases, simple collusion between a single buyer and seller makes the paperwork requirements irrelevant. They just won't keep any paperwork.

What do you do with an enterprising businessman who uses his tax exemption to buy a few extra computers, or office supplies, then sells them at a 10% markup to his buddies. He makes an extra 10%, and his buddies get a 15% reduction from the retail price. A little cash changes hands, and no records—of course—are ever kept. There's no way to track the disposition of consumable or capital items through the FairTax's reporting requirements.

[Justin Thyme]

legaltender said:

They'll have to repeal the 16th Amendment, of course. No prob, right?

The 16th amendment did not create the income tax, it just gave the federal government the authority to create it. Repealing the 16th amendment would be nice so that the federal government wouldn't have the authority to reinstate an income tax but it isn't needed just to repeal the income tax.

legaltender said:

The problem with final sales taxes is that, at the end of the day, they rely on both the buyer and the seller—both of whom have incentives to evade paying the tax—to report the tax payments properly.

And that's different how from all the day laborers getting picked up to do construction and landscape work and being paid under the table? How is that different from the people giving away items that are worth nothing to them to Goodwill and claiming a $500 charitable gift as a deductions? How is that different from any of the other 947 ways of cheating on your income tax with little to no way of being found out?

[Jay]

I don't think the government should be able to collect taxes twice for the same good. Namely...cars... When the car is bought, the government collected taxes on it. They then have the audacity to try to collect taxes again when it's resold... It's pure lunacy if you ask me.... I can't see why nobody has allowed this to happen. It's pure EVIL!

~J

[legaltender]

How is that different from the people giving away items that are worth nothing to them to Goodwill and claiming a $500 charitable gift as a deductions?

Peanuts. You must fill out Section A of Form 8283 if your total deduction for all noncash contributions is more than $500. If you make a contribution of noncash property worth more than $5,000, an appraisal must be done. You can't claim contributions in excess of 20% of your adjusted gross income. Compare that to a system where consumers avoid paying high taxes by buying "slightly used" goods and businesses could find a way to offer them to the public. What measures would be put in place to discourage, much less prevent that? There's nothing fraudulent here. It calls for a lot more complexity than I've seen in any FairTax proposal.

[Justin Thyme]

Peanuts. You must fill out Section A of Form 8283 if your total deduction for all noncash contributions is more than $500.

Yeah, but there's enough of those peanut sized loopholes in the IRS tax code to keep an elephant fed for life.

Okay, before we get into areas that HR 25 has already addressed I went back to the document and grabbed some definitions

Section 2(16) Defines used property.

`(16) USED PROPERTY- The term `used property' means--

`(A) property on which the tax imposed by section 101 has been collected and for which no credit has been allowed under section 203, or

`(B) property that was held other than for a business purpose (as defined in section 102(b)) on December 31, 2006.

Property held for business purpose isn't considered used under HR25. Also, you can find in the bill that credits are given to people claiming an exemption from the tax so everyone pays the tax and then sends in the paperwork for the exemption. That can be found under Sections 103 and 201 of the bill.

The bill isn't perfect but imagine if we were currently taxed under the provisions of HR25. Would you argue in favor of scrapping it in turn for being placed under the provisions of the current tax code? What would be your arguments to move from a tax code described by HR25 to the tax code we are currently under?

Can you find problems with HR25? You bet you can. It is still a better plan than the one we are currently under or any other currently proposed tax codes.

[legaltender]

What would be your arguments to move from a tax code described by HR25 to the tax code we are currently under?

I guess I missed the signing ceremony.

Where shall we start? Evasion would go largely unchecked. The government would rely on retailers alone to report their own taxable and exempt sales. Retail purchasers might try to fabricate exemption certificates or otherwise masquerade as tax-free buyers of retail products. The bigger the evasion rate, the bigger the tax becomes and vice versa.

Bill Gates would get a prebate check under a Dickensian plan that would eliminate an earned income tax credit to low-income working people.

People are not going to want to calculate state income tax once the federal tax has been voided. So states would have to rely entirely on sales taxes. And that's problematic. State sales tax bases are already losing out on Internet commerce. States might have to substantially cut services.

From the President's Tax Reform Panel (2006):

"Replacing the current income tax with a stand-alone retail sales tax would increase the tax burden on the lower 80 percent of American families, as ranked by cash income, by approximately $250 billion per year. Such families would pay 34.9 percent of all federal retail sales taxes, more than double the 15.8 percent of federal income taxes they pay today.

The top 20 percent of American taxpayers would see their tax burden fall by approximately $250 billion per year. Such families would pay 65.1 percent of all federal retail sales taxes, compared to the 84.2% of federal income taxes they pay today."

[Justin Thyme]

legaltender said:

What would be your arguments to move from a tax code described by HR25 to the tax code we are currently under?

I guess I missed the signing ceremony.

And more importantly you missed the point of my question. Defend the income tax to me as though we were currently under the FairTax and you wished for us to adapt an income tax. You haven't defended the income tax at all to me.

I'm asking this because I will freely admit that there are problems with the FairTax. It isn't perfect, but I will maintain that it is much better than what we have now. I would like for you to defend the income tax to me as a better system. I don't think you can.

[el Gusano]

How is the EIC, which is nothing more than legalized theft from one person to give it to another, fair?

What could possibly be more fair than charging everyone the exact same rate, but exempting necessities?

How is legalized extortion (the way we do it now) fair?

[legaltender]

justinthyme said:

You haven't defended the income tax at all to me...I don't think you can.

I don't intend to and I couldn't if I tried. You're countering with IRS censure applause lines. The FairTax is a deeply-flawed alternative.

"Taxes," as Oliver Wendall Holmes said, "are what we pay for a civilized society." There's nothing civilized in forcing millions into a black-market economy which the oxymoronic FairTax would usher. And specifics outlined above deserve more than a wave-off.

Does Larry From Lawrenceville go to the Nissan dealer selling 800-mile "demos" and save $5,750 on a $25,000 MSRP vehicle, or does he patriotically help out his government, drive down the road and buy "new?"

Only six countries in the world have tried to collect a sales tax north of 10 percent, and four of them eventually adopted alternatives like a VAT.

It is logically impossible for the government be collecting the same amount of money as before and have everyone suddenly be better off.

Say your salary is $100,000 a year today, but you take home $80,000 after taxes.

Your company is still paying that extra $20,000. In a FairTax world, it will save that money, and be able to lower its prices accordingly, only if it can reduce your salary to $80,000. In other words, your take-home pay is the same as before. You don't think you're overpromising?