Ramifications of replacing income tax with National Sales tax

[c908929c]

Attention, Fellow AARP members:

I want to bring to light and important issue regarding the possibility of the income tax being replaced by a national sales tax system, which could have a significant implication on our financial well-being, particularly for retirees or near retirees.

Many of us have diligently saved for our future, often paying substantial income tax on our earning's over the years. However, under a sales tax system, we could face additional taxation when we spend our already taxed savings. This means every item we purchase with our hard-earned money could be subject to a new layer of taxation effectively taxing us twice.

Consider the following points: Roth IRA which have been touted as tax free will be taxed. Selling personal property or items will be taxed again when you spend the cash. And if FICA is included, we pay FICA again. It crucial that we understand this and make our voices heard for our own sake.      

[WebWiseWoman]

Wait, I just remembered MILLIONS stolen by this tax scheme of a certain elected official... check Clark County, NV, Multiple countries in NY and FL; please, everyone needs to know his scams...

[fffred]

@WebWiseWoman   I can't imagine who this is and it's a point of some interest to me...probably because I got married in LV and my mom lived there for some years, and then I lived in FL for some years.

Thinking of all the financial frauds over the years, remember Michael Milken and the junk bond scandal? I recall that he found religion while in prison and has probably led a good life since then (just guessing). I guess we humans will never learn.

[fffred]

@c908929c    It sounds like another crack at having a "flat tax", a flat rate income tax, not progressive tax rates (tax rates that increase in bands as income increases) as we've had for my lifetime. The principle being to more heavily tax (as % of income) those at the lower end of the economic spectrum than those at the top end. There are those who promote a flat tax, waxing over the simplicity and seeming fairness. Don't buy it.

Further, both of these alternative tax mechanisms (flat tax, national sales tax) will affect all citizens, not just retired people. All the young people, young families, late career folks, they will all be affected (some few favorably, most not), not just retired people. We retirees are not particularly special when it comes to carving up the economic pie.

[GailL1]

WHAT IF it wasn’t a change in taxation methods but an added tax for a specific purpose - say, a 1- 2% NATIONAL sales tax that was designated for debt pay down with the stipulation that it got no bigger - the debt nor the tax.

[fffred]

@GailL1   Many countries have both a national income tax and national sales tax (I am treating sales tax as a VAT - value added tax; both are taxes on consumption). Not an expert but I imagine that having both tax tools provides a greater ability to "fine tune" the taxes based on what the government wants to achieve. And I imagine that would include your point of paying down debt (paying for "past consumption"; sounds like a credit drunk consumer, ha).

Canada, where I am now a resident, has both tax systems and it seems pretty normal to me on a daily basis. Canada, like most countries with a VAT, provides for a number of exemptions on consumer items as well as rebating tax to low income individuals.

I'm sure you know that our US income tax system is progressive. Not in the political sense of the word, but the marginal tax rate goes up as the taxable income goes up. The system of a national sales tax (VAT) is regressive (again, not in the social or political sense of the word), as the effective tax rate is higher for lower income bands than it is for higher income bands. This is one of the criticisms given to VAT systems. But VAT is very popular in Western countries with left-leaning cultures. I assume because they apply all sorts of tweaks for perceived social fairness.

This article from a Canadian commercial site (financial products) provides this really top-notch article on VAT and discusses other types of tax systems and those in multiple other countries (including the US) and the nuances at play. A really good intro to the subject. See https://www.koho.ca/learn/what-is-value-added-tax/

[fffred]

This is certainly an interesting topic! I am surprised to see this here.

I've read just a few articles over the past many, many years describing the idea of a national sales tax. I would say that the view was almost invariably that it would benefit the high income earners and the already wealthy, and would place greater burden on the lower economic classes. 

A number of countries use a VAT (value added tax) structure (a  sort of sales tax) but in conjunction with an income tax, or similar national taxes. These include Japan and India, Brazil, and much of western Europe, and Australia.

Canada (where I am now resident...born and worked my entire career in the US) has a national sales tax ("GST") as well as national income tax. Income tax rates are much higher here than in the US. GST is also high but is rebated to people with lower incomes. These higher taxes in Canada support a retirement benefit system known as "OAS" (Old Age Supplement):  The CPP (Canadian Pension Plan) is similar to our Social Security retirement and is funded by the employer and employee The OAS is an additional payment paid based on income level (decreases as other income increases) and...here is the difference...paid for by the general tax revenues.

With the balances that I described extant in Canada with their version of national sales tax it does not seem to be more burdensome on lower levels of income. 

On the other hand, the few countries that depend strictly on a VAT or national sales tax, without an income tax, are generally those that consist of large highly wealthy class of citizens (often oil countries, including the UAE, Saudi Arabia, Kuwait, Bahrain, and Qatar) as well as other countries noted for wealth (eg: Monaco, the Bahamas, Cayman Islands, etc).

In my view (one that is admittedly not overly well informed), anyone promoting a national sales tax in lieu of income tax would have their concerns more aligned with the super-rich, the billionaires, and mega-millionaires, rather than with those of more modest means.

[BalbonisMoleskine]

A national sales tax would ensure that the bottom 40% -- who pay zero or negative income tax rates -- shoulder the cost of paying for defense, the FDA, the FHA and every other federal program that most of us use every day without realizing it: https://home.treasury.gov/system/files/131/Distribution-of-Tax-Burden-Current-Law-2024.pdf

[GailL1]

But couldn’t the items that the “bottom 40%” buy be declared exempt ?  Like basic food items ?  

I think of the things now that people buy that have a sales tax or some other type of tax which those in the lower income levels would either buy or not buy - like cars above a certain price level or things like boats.  

Isn’t there a difference in what people buy based on need and income that could come into play here on what to tax at the national level and what not to tax?  

Seems when another taxation method was being kicked around several years ago, there was a proposal that based on income, people would be given a credit for some amount over a certain level.  

[BalbonisMoleskine]

They already have plenty of exemptions. For example, refundable tax credits enable them to receive money (e.g., $1,700 per child) even if they don't work. For decades, the amount of people in the bottom 50% who pay little or no income taxes has grown thanks to tax credits, deductions and other breaks that phase out at higher incomes, such as $150K and up: https://www.fool.com/retirement/2016/10/31/heres-what-the-average-american-pays-in-taxes.aspx

It's reasonable and necessary to expect them to help shoulder the load for the services that they and everyone else use. 

[c908929c]

You are correct, everyone needs some skin in the game, or they won't care, My concern is that most retirees have purchased every item we have with after tax dollars. Also, much of our savings is after tax dollars. So, if the income tax is abolished and replaced with national sales tax or similar we will be taxed again on the same money we already paid tax on. So even if you decided to gift your children money to help with a house for example the money spent will be taxed again when they or anyone else spends it. We basically will have been taxed on the accumulation and the deaccumulation of our dollars. If it happens and it is possible it could the only way to be fair is to add the say 26% of the sales tax to our total assets so our savings won't be double dinged.      

[fffred]

I would be totally flabbergasted at a sales tax rate of 26%. This is probably much more than the effective tax rate (income tax / income; not the marginal tax rate) on most taxpayers. I'm guessing that 26% is probably double what the average and/or median effective Federal income tax rate is. (and a quickie Google search seems to show my guess is pretty accurate)

I totally agree that everyone must have skin in the game, regardless if it's taxes, retirement, health care, etc (I could tell you some stories...). But this can be taken care of with modest tweaks to the current tax code; it doesn't require tossing out the baby with the bath water.

Now, sort of a flip side of this, at one point in time, a dozen or more years ago, while reading financial forums here at AARP, and others at Yahoo, MSN, etc, I was fed up and disgusted with so many whiny people I used to joke that for all the cash that the IRS collected from taxes on this tranche of the economic structure, just let 'em pay no tax at all! Tax the higher income people a bit more to make it up (we can afford it). In fact, it would become a point of pride:  "Oh, yes, I have to pay income tax!" (that's called humble bragging). People who had to pay income tax would be looked at with respect and awe.

Now, (again, I use this interjection), my sympathies lie with those at the very lowest tranches of the income structure. They probably pay no income taxes anyway right now, and that's okay with me. (they pay state/local sales taxes and other taxes; but please, let them have auto insurance!) Yes, my sympathies lie more with them, the people cleaning houses, pushing brooms, etc, more so than those making $50K a year, probably way over-extended, and even those who make a lot more than that.

And I say this as someone whose 2014 federal income tax bill was just over $40K in 2014 (I picked this year because it is the one referenced in the Motley Fools article in a prior post). I have no particular dog in the fight against high taxes as a low earner other than what I see as moral and ethical issues.

[WebWiseWoman]

Thank you, fffred, for you thoughtful post. Agree here 100% Can't post here true thoughts but you posted truth! Thank you!