National Sales Tax is Double Taxation For Some

First of all, I like the idea of a national sales tax.  It will be fantastic for people to go to the stores and realize how much the government consumes.  When money is taken out of the paycheck in chunks, it isn’t to bad.  Lets see, a few percent for social security (that’s a nice program), a few for medicare (on great financial footing), some comes out as income tax.  When all is said and done, the average tax rate for your average  American is about 25% from the paycheck.  This doesn’t include 5 kazillion other little taxes that build up before you can spend your money.  That’s just for the feds.

Fair tax proposals suggest we generate all the revenue from a sales tax to avoid evasion and to avoid having to file our taxes.  The system really sounds pretty slick.  The fact is, to duplicate a 25% tax on a paycheck, you could have to charge closer to 30% sales tax, assuming all of the paycheck was spent.    This is based on 25% of a slightly larger number (total paycheck, which includes taxes) is the same as 30% of a smaller ( cost of an item, which doesn’t include taxes).

Now here is where I really like the plan.  People are going to be paying 30% federal taxes and 10-15% local taxes (state income tax will most probably be rolled into sales tax also.  That will suck.  People will be ticked.  They will be reminded every day that they are paying for inefficient ethanol production, illegal immigrant education, a DMV that treats us like crap.  All the sudden, people will be demanding the government watch where they spend dollars.  We will only need enough nukes to kill everyone in the world 2 times instead of  10.  Maybe we don’t need fifty overlapping bureaucracies.   Maybe the CIA, FBI, and military intel can all work together to streamline information distribution.  Maybe the military can suck it up and make the marines an special type of army unit.  There are two reasons we don’t do that.  The marines interface with the Navy for transport (hey-  Just like the army.  Hmm) and they have so much “We are so much tougher and um Stuff” mentality.  When the taxpayer realizes that maybe we could drop sales tax a percent, they won’t care.    People will look at social security as a menace to financial freedom, and will demand that we reform the system.  Poeple will look at their neighbor on welfare, thinking, “That guy is why I have to pay 40-45% overall sales tax.”  There will be significant peer pressure for people to get their hands out of other’s pockets.  People think these tax rates look high, but they are reality.  The government consumes a huge amount of resources-  An amount they would like to keep hidden.  I’d like everyone to know

So much for why I like it.

When the government comes out with a new program  to help you save money, you always have to look on it warily.  The Roth IRA is great, in my humble opinion.  But I have a question.  What will be the status of the money in a Roth account if the Fair Tax gets passed?   I have been taxed on the money that I put into my Roth account once.  If the fair tax law is passed, I will be taxed on that money again.  The overall rate will be around 90%, if you look at it like a sales tax, or about 48% if you look at it like an income tax.  Either way, it sucks.  Does anyone know of any alternatives?  Anyway, just throwing in my 2% about making the savers pay 90% tax

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40 Responses to “National Sales Tax is Double Taxation For Some”


  1. 1 Steve October 1, 2007 at 6:44 pm

    The Fair Tax plan has far more advantages than disadvantages.

  2. 2 durch October 1, 2007 at 10:25 pm

    I completely agree with you Steve. I just don’t like this disadvantage. It kind of spreads the idea that you better spend your money now before the government finds a new way to fleece you. Some sort of credit for Roth’s would reassure people that saving is valued. Those savings are what allow us to divert current production into a true increase of capital (production capability).

  3. 3 rhill October 3, 2007 at 7:16 pm

    I’m with Fred Thompson:

    “Dissolution of the IRS as we know it”

    I’m not sure that he has a concrete plan yet but that is the right direction. Check out his website here:
    http://www.fred08.com/Index.aspx

    As a self-described “pro-life libertarian”, Ron Paul would be my next choice.

  4. 4 durch October 3, 2007 at 11:52 pm

    I like how Thompson says “Dissolution of the IRS”. The “as we know it” part always makes we wonder. That means that it will be greatly different. I would like to see him propose a plan for how it will be with specifics. Ron Paul seems to have more of a consistent record for small government in my opinion. Anyway, either of them would be better than the socialist party of America (chills)

  5. 5 Ian October 7, 2007 at 3:05 pm

    While many who are invested in the current income tax system seek to demagog the well-researched FairTax plan (1), FairTax’s theoretical underpinnings have been professionally reviewed (2), and its acceptance in the professional / academic community continues to grow (3).

    Renown economist Laurence Kotlikoff believes that failure to enact the FairTax – choosing instead to try to “flatten” what he deems to be a non-flattenable income tax system – will eventuate into an irrevocable economic meltdown (4) because of the hidden aspects of the current system that make political accountability impossible. Tom Frey, of the DiVinci Institute, foresees the coming collapse of the income tax system (5).

    Here is why the FairTax MUST replace the income tax. It’s:

    • SIMPLE, easy to understand
    • EFFICIENT, inexpensive to comply with and doesn’t cause less-than-optimal business decisions for tax minimization purposes
    • FAIR, loophole free and everyone pays their share
    • LOW TAX RATE, achieved by broad base with no exclusions
    • PREDICTABLE, doesn’t change, so financial planning is possible
    • UNINTRUSIVE, doesn’t intrude into our personal affairs or limit our liberty
    • VISIBLE, not hidden from the public in tax-inflated prices or otherwise
    • PRODUCTIVE, rewards, rather than penalizes, work and productivity

    Its benefits are as follows:

    For INDIVIDUALS:
    • No more tax on income – make as much as you wish
    • You receive your full paycheck – no more deductions
    • You pay the tax when you buy “at retail” – not “used”
    • No more double taxation (e.g. like on current Capital Gains)
    • Reduction of “pre-FairTaxed” retail prices by 20%-30%
    • Adding back 29.9% FairTax maintains current price levels
    • FairTax would constitute 23% portion of new prices
    • Every household receives a monthly check, or “pre-bate”
    • “Prebate” is “advance payback” for taxes payable on monthly consumption to poverty level
    • FairTax’s “prebate” ensures progressivity, poverty protection
    • Finally, citizens are knowledgeable of what their tax IS
    • Elimination of “parasitic” Income Tax industry
    • NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals
    • Those possessing illicit forms of income will ALSO pay the FairTax
    • Households have more disposable income to purchase goods
    • Savings is bolstered with reduction of interest rates

    For BUSINESSES:
    • Corporate income and payroll taxes revoked under FairTax
    • Business compensated for collecting tax at “cash register”
    • No more tax-related lawyers, lobbyists on company payrolls
    • No more embedded (hidden) income/payroll taxes in prices
    • Reduced costs. Competition – not tax policy – drives prices
    • Off-shore “tax haven” headquarters can now return to U.S
    • No more “favors” from politicians at expense of taxpayers
    • Resources go to R&D and study of competition – not taxes
    • Marketplace distortions eliminated for fair competition
    • US exports increase their share of foreign markets

    For the COUNTRY:
    • 7% – 13% economic growth projected in the first year of the FairTax
    • Jobs return to the U.S.
    • Foreign corporations “set up shop” in the U.S.
    • Tax system trends are corrected to “enlarge the pie”
    • Larger economic “pie,” means thinner tax rate “slices”
    • Initial 23% portion of price is pressured downward as “pie”
    increases
    • No more “closed door” tax deals by politicians and business
    • FairTax sets new global standard. Other countries will follow

    (1) http://snipurl.com/taxpanelrebutted (.pdf)
    (2) http://snipurl.com/taxnotes_galerebut (.pdf)
    (3) http://snipurl.com/econsopenletter (.pdf)
    (4) http://snipurl.com/meltdowninprogress
    (5) http://snipurl.com/incometaxcollapse

    It’s well past time to scrap the tax code ( http://snipr.com/scrapthecode ) and pay for government the way that America’s working men and women are paid – when something is sold.

  6. 6 Richard October 16, 2007 at 12:35 pm

    I agree with Durch, but his argument applies to ALL savings that have already been taxed, not just to Roth IRAs!!! I have about $500,000 in a non-IRA savings account that has already been taxed about 40%. It would be RIDICULOUSLY UNFAIR to tax that money again! It is possible to separate money that has already been taxed from money that has not yet been taxed, and that would be the only way to make it fair. This can be done by putting all money that has been taxed into an special account with a special debit card. Anything bought with this debit card will not be taxed again. Very simple, but I have not seen anyone discuss this.

  7. 7 Ian October 17, 2007 at 1:21 pm

    Richard, you’re still going to be paying the 22% embedded tax – so, better to have options (buy used?) than not.

  8. 8 Richard October 18, 2007 at 2:26 pm

    Ian, Since you did not argue against my point and Durch’s point that the “Fair Tax” includes (unfair) double taxation, I assume you agree with us. If you want the “Fair Tax” passed, your time would be better spent trying to make it fair by removing the unfair double taxation. There is no way that such an UNFAIR tax will ever become law. If such an UNFAIR tax ever becomes law, I will protest fiercely. I encourage people who oppose this UNFAIR tax to keep track of who supports it, and vote those people out of office.

    As I mentioned, it is possible to avoid this double taxation. If the “Fair Tax” is modified to avoid double taxation, then I will be in favor of it. I don’t know why supporters of the “Fair Tax” are not proposing this. Maybe they are not aware that it is possible? Or maybe they know the tax rate would have to be significantly higher if double taxation is avoided. In other words, allowing unfair double taxation is a way to reduce the tax rate.

  9. 9 Richard October 18, 2007 at 3:22 pm

    Ian, I will address your point “you’re still going to be paying the 22% embedded tax” (with the current income tax). Your point completely avoids the issue of unfairness that Durch and I are concerned about. The point we are making is that with the “Fair Tax” some people will pay much more tax than others because they will be double taxed on savings that has already been taxed. The issue is fairness, and you have responded by making an irrelevant point that has nothing to do with fairness. Of course, this is because the issue of unfair double taxation is a serious flaw, and therefore the only way you can continue to support the “Fair Tax” is to avoid this issue. But there is another way, the only way you can succeed: Help to modify the “Fair Tax” to make it fair by removing double taxation of savings that has already been taxed.

  10. 10 durch October 18, 2007 at 10:14 pm

    I hadn’t really though of the other savings, Richard. I guess I have a relatively small amount in other savings compared to Roths. I would like to see a proposal from Ian about how you could avoid double taxation. I think one option would be to allow people to move a certain amount from their savings to a Roth type account, and then have them get a credit for everything that they remove from their Roth. The question of if the embedded tax will make up for it is a moot point. The Boston Tea party was not about the level of taxation. It was about unfairness in taxation. Punishing the savers at the expense of the debtors has bothered me during inflation and would bother me with this tax situation.

    Also, the national sales tax would remove the collection mechanism for state income taxes. This would result in states increasing their sales taxes to make up the lost revenue.

    In the end, my favorite part about the National sales tax is transparency. People will recognize how much money the government is taking and will demand more accountability. It’s specter on the horizon, however, will depress short term saving rates and investment, as people struggle to spend their money before the tax.

    Good luck with your quest Ian. If you can answer our questions, you will have a couple more stout adherents

  11. 11 Michael November 6, 2007 at 5:14 pm

    The FairTax does not double tax after-tax savings. When after-tax savings are distributed and spent, the Income tax and payroll taxes that are passed on and embedded in pricing constitute a hidden form of double taxation. The FairTax replaces all those embedded taxes that it eliminates.

    As a simple example a $2 Starbucks latte would cost $1.54 if not for all the tax liabilities passed on by all businesses involved in presenting that latte to the consumer. The embedded 46 cents will disappear under the FairTax and be replaced by the NRST so that the price will remain the same at $2. The only difference is that the level of federal taxation will be transparent

    To say the FairTax double taxes savings is to ignore the fact that the Income tax does the same. The difference is that savings accumulated under the FairTax will not be taxed at all as long as they remain unspent. Once spent, there is a single tax the NRST that is applied.

    One more time:

    For savings accumulated under the Income tax, there is double taxation by both the Income Tax and under the FairTax when those savings are spent.

    For savings accumulated under the FairTax there is single taxation when those savings are spent.

  12. 12 durch November 6, 2007 at 11:15 pm

    Let me simplify what I am saying. People who had saved up money from the income tax era will end up paying a larger net tax on what they saved then those who have been spending left and right.

    Just before the sales tax went into effect, there would be massive purchases, often on credit, I would guess, to get the discount. Then the market would be stagnant for a short period. I say short as in months. If we had enough fortitude to get through that period, we would end up in great shape.

    I am a fan of the fair tax. The fact is that those who saved will have a higher tax burden.

  13. 13 Pedro February 6, 2008 at 9:50 pm

    Listen. I worked 25 years to build a company, taking out enough to live while I owned it, which I sold a few years ago. I paid 7 digits of tax to the Fed and 7 digits to the State. I split the take 50/50 with my employees and now I live off those AFTER TAX proceeds. I don’t care how you slice it, if I spend that money under the (Not) Fair Tax, I get dinged twice. The newbie who is spending his paycheck on the same item I am purchasing pays less. Take out all the BS about “embedded taxes” because the bottom line is people who saved get screwed. So if you want to kid yourself that it is not double taxation, than by definition it is Zero Tax for the newbie and Single Tax for me because I am paying more than he. Not many people seem to care because not many people have saved anything.

    I second the motion about the 2nd Amendment rights. Pass the amunition.

  14. 14 durch February 7, 2008 at 11:54 pm

    Pedro fortifies my point. He is someone who worked his rear off, paid massive taxes, and now people want to tax him again. He earned his money, why shouldn’t he decide what he will do with the fruits of his labor?

    Most people haven’t saved anything. This also makes the tax rebate good for politicians. They are diluting the cash of the savers with this fresh infusion. I don’t think that a government who’s long term policy is to screw the savers can survive.

    Good luck Pedro.

  15. 15 Jess July 5, 2008 at 4:29 pm

    Ian you are the stupidest person I have ever heard. This tax would, by itself, destroy America. I have saved money most of my life and have already paid tax on those saving. Now you want to tax the same money at 23% when I spend it. You are crazy at best and a Looney at worst.
    When those people, such as me, hear about the obvious disparity of the fair tax they will laugh at you.
    The one thing fair tax advocates miss is that our tax system is politically and economically constructed. Politicians use taxes to fuel economic growth and change social agendas. The fair tax, by suggestion, would prevent those actions and therefore infringe on the responsibilities of the people we elect to represent us.
    Forget it, the fair tax will never happen because it is “unfair” to too many people that have spent their lives being responsible and saving for the future.

  16. 16 Jess July 5, 2008 at 5:02 pm

    Money not spent is worthless. If you have several million dollars and never spend it it has no value. It is the spending, on something, that gives money its value. Taxing it at 23% reduces that value by 23% because it buys 23% less. The idea that by eliminating the IRS and all of the companies that help Americans File income taxes would create so much value as to negate the effect of the 23% tax is ridicules.
    The Federal Government would never agree to let the sates collect taxes for them because it would infringe on Federal rights and the representatives we elect to Federal office.
    It is the primary and sole duty of the people we elect, at the federal level, to return the money back to those who pay it, to those that can not protect themselves, through social programs and to regulate taxes based on need and current economic conditions. This is a changeable environment and taxes must change accordingly. To think that a flat tax on goods would ever be adapted and useful is naive because life is constantly changing.
    The system we have now is the best that has ever existed because it you make no money you pay no tax; but if you make a lot of money you pay a lot of tax because you can and not affect your ability to provide for your most basic needs. Simple stated the amount you pay is directly proportional to your ability to pay. I doesn’t get any better than that.

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