(This is an update to my original work from 1995)
(What You Make Is What You Keep. It Works!)
On April 5, 1995, Senator Richard Lugar (R-Indiana) proposed to eliminate personal federal
income taxes, corporate income taxes, capital gains taxes, gift taxes, and inheritance
taxes. While retaining the payroll taxes everyone knows as FICA SS and FICA MD, Lugar would
replace all of the other taxes with a 17% national sales tax.
The good intentions of Senator Lugar have a minor flaw, but he was almost right in his assumption.
The real answer to the dilemma of taxation which Senator Lugar was alluding to is to remove absolutely all taxes of every kind, including the payroll taxes, and replacing all of those taxes with a national sales tax on all retail purchases by anyone. The national sales tax would be set at somewhere between 25% and 35%, depending on how the economy is operating at the time, ideally at 30% as a standard. This concept, which I developed in 1995 after reading about Senator Lugar's plan is a genuine answer, because it does not tax the citizen at both ends as the original plan clearly does.
With Senator Lugar's original plan, the 17% national sales tax would come after your own income has been taxed at the rate of the payroll taxes, a trap for the consumer with less take-home pay, and a system which creates false hope for the citizen who may not realize the double whammy.
The Lugar concept, however, is essentially on the right track.
My additions in 1995 are the refinement of this concept into a workable plan which actually makes sense to the economy. I can demonstrate that, not only will the system eliminate deficits, but it will also recover much in lost tax collections.
Charles Rossotti, the former IRS Commissioner whose term expired November 12, 2002, was often complaining about lost tax revenue. In a USA TODAY article, September 25, 2002, he was quoted. "The IRS," says the article, "estimates that $207 billion in taxes go unpaid each year. Of that, Rossotti says, $30 billion is money that the IRS has identified as owing but uncollectible for lack of staff and resources."
The reason people avoid taxation is because the government taxes the means, thereby forcing those people who avoid taxes to hide income. Criminals who deal in ill-gotten gains, especially, do not pay taxes on money which is cash and hidden.
Those criminals, however, would be taxed under the new system of a national sales tax when they purchase those Cadillacs, boom boxes, and new beach condos. Spending the money will cause taxation.
Nobody needs to hide income in the new system, because only retail sales are taxed.
Ironically, there are so many retail sales annually, mainly because people buy not only with cash but with credit, that we would never run a federal deficit in the budget with the new system. The only catch would be on two big ticket items which would have to have the sales tax amortized, such as a new car or a new home. That amortization delays the balanced budget by at least 4 years, but prevents any deficit for all years thereafter. In other words, it takes at least 4 years for those installments of the amortization to catch up to the system, because each year a new amortization period begins. Once the amortization periods begin to overlap in the 4th year, no delays are encountered, because each new year brings a new start and a new end to the amortization process eternally. This is the key point in the new system, to have amortization of the car and home payments, which have to be extended.
Everything else in retail sales is taxed and paid for on the spot, even if you use credit cards, meaning no amortization on your lawn mower or dish washer. Those items get taxed and the tax is owed now, although you could charge it on your credit card as usual.
There is only one minor drawback to the new system, but it is handled easily by a voucher system for low income workers.
To explain this needs a little mathematics. If I were to chart all of the taxes and all of the incomes and what is owed, and compare it to what is in place now as the current system, the new system may over-charge certain low income workers up to a certain point, no matter what the sales tax rate might be. I refer to this as the "dip." Nothing removes the dip, because the original payroll taxes that we removed to create the new system are responsible for creating it, whereas all low income workers pay the payroll taxes, and higher income workers get a break after a certain amount of earned income.
This "dip," however, can easily be covered by vouchers handed out, based on the previous year's income. That means, with every purchase, a low income worker can use a coupon to cover sales tax until the coupons run out, whereupon the person would then have to pay the sales tax out of his or her own pocket.
For most people, the new system means more money in your pocket, more savings on taxes, and greater flexibility. There should be no anger at paying those vouchers every year to the low income workers, to make sure they break even on the deal.
To make the case on the elimination of annual budget deficits, the chart below demonstrates how much of an advantage we have by taxing the retail sales. Looking at a past period with huge deficits, we can see exactly what the difference would be, rather than projecting anything new for this year.
BALANCING THE FEDERAL BUDGET
WITH A NATIONAL SALES TAX
CURRENT TAX SYSTEM:
(Amounts in billions of dollars)
|Personal Income Taxes:||475.964||509.680||543.055||590.157|
|Corporate Income Taxes:||100.270||117.520||140.385||157.088|
|Employment (Payroll) Taxes:||385.491||396.939||428.910||451.046|
|TOTAL FEDERAL RECEIPTS:||1,090.453||1,153.226||1,257.451||1,350.576|
|Total Federal OUTLAYS:||1,380.794||1,408.532||1,460.553||1,514.389|
Under the new system,
we would correct those deficits without adjusting any figures.
|30% National Sales Tax:||1,265.940||1,336.230||1,410.270||1,477.470|
|Other Taxes (From Above):||129.453||129.087||145.201||145.201|
|TOTAL FEDERAL RECEIPTS:||1,395.393||1,465.317||1,555.471||1,629.755|
Without changing any figures from those deficit-filled years from the 1990s, we can see how
a national sales tax on all retail purchases can produce a natural surplus.
It is a startling amount of information.
The point I have already made, however, is that once we begin the amortization of car and home sales taxes, those surpluses will wait 4 years to begin to appear, until the amortization catches up to the new system.
As far as social security checks, they will still be in the mail, and they will still be for the same amount without reduction. Instead of the charade that we have now, describing it as a social security insurance, what happens in the new system is we create a huge general fund from the national sales tax revenues, and from this huge general fund, we issue those very same social security checks. The way it is now, we have a "paper insurance" illusion, but we actually "pay as we go" in the U.S. Treasury, issuing money only when there is money available from the Appropriations Committee. There will really be no difference whatsoever in the social security paychecks, and the system will be more honest and more efficient.
Finally, we will all still have to report income every year, to see who qualifies for vouchers, and who could qualify for social security, but it will be a simple postcard entry in the U.S. Mail, filed under penalty of perjury. No income taxes, no payroll taxes. Just report your income annually in all honesty, to see if you qualify for the vouchers, and to update social security. The IRS will still be in business, but it will be a "cut down version."
The vouchers do not amount to a lot of money, so few people will be lying to try to get a book of voucher coupons.
The voucher coupons are the respect we pay to low income workers who lose out in the new system because of the original system which applied payroll taxes to every dollar they made. The low income workers deserve to break even when the new system goes into place. Even a person who makes only $2,600 in a year will have to pay those payroll taxes of $198.90 (6.2% and 1.45% of income), without paying income taxes. Now, in the new system, the same person would see a spending equity of $2000 and $600 at a 30% rate, thus losing $401.10 in transition, the difference between $600 in sales tax and $198.90 in payroll taxes.
This does not happen as the earned income rises. Higher incomes save a lot of money on taxes as viewed through spending equity. But, the low income workers always suffer.
The vouchers would be mandatory requirements in the budget.
In the end, however, after a brief 4 years of allowing the amortization of car and home sales tax payments to catch up to the new system, the federal budget will be balanced with a surplus FOREVER. The national sales tax rate can be adjusted monthly or semi-annually, depending on how good or bad the economy is, and the voucher system can take care of all of the low income workers who would otherwise be cheated. Additionally, all of those criminals who hide their income will no longer be able to escape an equitable tax, because the retail purchases will be taxed accordingly.
I would ask everyone to take up my slogan, "Tax the End, Not the Means."
END OF ARTICLE
Mr. J.V. Presogna is a writer, composer and artist with a background in science and mathematics. "World Almanac & Book of Facts" provided existing figures from the 1990s.