Loren Pechtel

I haven't heard of there being any big holes, I would like to hear of any if there are some.

Note that there are *BIG* holes in applying a flat income tax to business.

theyeti

Basically, one of two ways:

First, wholesale goods will have to be exempt from sales taxes, otherwise they'd be double taxed once they got to the retail level; hence, retailers will do everything in their power to claim their goods as wholesale. Restaurants, for example, are already exempt from sales taxes on products they buy as ingredients for their food (at different restaurants I've worked at, I've had to run to the grocery store or bakery at times to grab things, and have always had to bring a form and/or a receipt for sale tax exemption). Now what's going to happen when the tax rate is 50%? Suddenly, everyone finds a way to claim that their stuff is being purchased for later resale, and so they avoid the taxes. Or if the tax is being taken from the other end, the baker just claims that all of the bread he sells is going to restaurants and not end consumers. Either way, both the baker and its customers have a mutal incentive to pretend that they're making a wholesale transaction. Given that a lot of businesses straddle the line between wholesale and retail (think Sam's Club), this is an exceptionally acute problem.

Secondly, every special interest and then some will lobby to get certain items exempt from the sales tax. Then you have everyone scrambling to have their goods categorized as being exempt. If you exempt food for example, then candy makers will try to take advantage and claim themselves exempt. If you exempt medicine, then deodorant makers will try to take advantage. And so on. Pretty soon, you've got a mess where every single item has to be labeled as one kind of particular good that may or may not fall under one kind of exemption.

It's not that these problems can't be fixed. It's just that in doing so, you end up introducing the very complexity that a national sales tax was meant to get rid of in the first place. The government would pretty much have to track all purchaces in order to catch people cheating in such a scheme, have people fill out forms to see if they qualify for wholesale exemption, make sure that someone wasn't purchacing wholesale but not reselling, and so on. The problem isn't just that people have an incentive to cheat -- heck, that exists now. It's that in all of these cases, both retailers and consumers have an incentive to go along with the deception, as is true with any black market venture. So instead of pitting individual tax payers against the government, with everyone else wishing that the other guy would pay his taxes, the national sales tax pits everyone working together against the government. Who's going to blow the wistle on the cheating when everyone wins?

National sales tax rates will need to be close to 50% or more to equal current revenue. (The 23% rate claimed by sales tax proponents is hopelessly flawed and dishonest.) At those rates, there's a major incentive for businesses and consumers alike to do their transactions "off the books", through informal trade clubs, or through the aforementioned loopholes. Pretty much all throughout history, any time sales taxes go above about 12% they become unmanagable. National sales taxes tried elsewhere have always been repealed outright or been reformed into a VAT. Perhaps I will give my thoughts on a VAT later...

theyeti

excreationist

In Australia it works something like this:
Businesses pay the full price for things, then keep the receipts to see how much GST (goods & services tax) they're paying. Then when they sell things, their customers are charged GST, which the business has to then pay to the government. The GST they paid to their suppliers is subtracted from the government's GST bill so they're not paying the government GST twice for the things they got from the suppliers - just once for the supplier's GST, (that is paid to the supplier) and GST on their profits (paid to the government).
Maybe it's not exactly like that in Australia - but that's a solution anyway.

Wyz_sub10

So how should roads and schools get built? Who pays for the military? No subsidies for tuition? A national art gallery sponsored by Pepsi?

Soul Invictus

I'll check out the link; I'm curious, is this what you do personally?

excreationist

theyeti:
Like Loren Pechtel said, this tax could be applied to EVERYTHING. And as I explained earlier, it is possible to make it so the tax isn't compounded when businesses resell products.

Well let's assume that there is a 50% GST (goods & services tax) on everything. Say a company bought some goods for $150, including tax. (The price without tax is $100). Let's say they sell it at a 30% markup. That's $195. If tax wasn't included in that selling price, the company would make $45. If it was included, the company would make $30. (The buyer would think the original cost of the item was $130 and the GST was $65) The company would get $65 in taxes from the buyer (and say their product was sold for $130 excluding GST) but only owe the government $15 - because if they show the government the receipts for the $50 item then they don't have to pay that part again.
This is already in effect in Australia, though the GST is 10%.
I'm not sure which kind of 50% tax you meant though... maybe you meant the other way.... so if some goods were sold at $100, $50 would be tax ($50 goes to the company) - that would be a 100% GST rate. (The original price + 100%)

Well in that case, the company would buy the goods for $200 ($100 would be tax), and sell it for 30% more, which is $260. That's $60 profit (assuming there are no labour expenses, etc) if no more tax is paid to the government. If the buyer pays $130 tax (50% of $260) the company would send $30 of that to the government ($100 discount)... so they'd get $30 profit...

I guess you're right, that's a big incentive to avoid the tax...... assuming it really was that high...

But is such a high GST really needed? I think the top tax bracket in the U.S. is about 30% or something and then there are lots and lots of tax deductions that the rich can get... and a large number of people would pay less than 30% on their income. And existing sales tax isn't that much is it? I mean for expensive things like houses, cars, electronics, etc - and food - which is a major part of the budget.

excreationist

JohnR:
If an American decided that they didn't want to pay taxes and told the IRS, do you think the IRS would do anything? Would the IRS just say "please pay!" Or maybe the IRS would eventually sell off your possessions to pay off the money you owe them.

seanie

Suppose you rely on a sales tax. Say it's 30%.

I want to buy something. Somebody else wants to sell it.

He offers it to me with only a 10% mark up.

I don't pay the extra 20% and he gets to pocket the 10%.

We're both happy.

Who's gonna tell the Government?

excreationist

seanie:
Maybe the accountants would find out... but on the other hand you could use crooked accountants.

seanie

How are the accountants gonna find out?

In the UK one of the biggest sources of tax evasion is in the area of VAT. All kinds of self employed and small businesses take cash in hand. It doesn't go through the books.

How does the government detect that?

It occassionally swoops down and does an audit. It assesses all their income all their outgoings and assets and trys to determine discrepancies. An unaccounted for car. A suprisingly large house on such a small income.

With a sales tax you'd have to do a similar thing. You'd have to track people's earnings and expenditures, purchases and sales, to have any hope of cracking down on evasion.

Deducting income tax is a piece of piss compared to that.