National Sales Tax (HR3039)

"Taxes would not increase for most taxpayers, just the least fortunate. So according to Hihn's Principle, the NRST must increase deficits, and it does - by $250 billion per year."

"Billionaires would get a tax cut of nearly 80%. But you and I would pay an extra 15- 24% on a home sale. Even more bizarre, the billionaire's current taxes would also be shifted to welfare females, the unemployed, retirees and the disabled."

Copyright 1996 by Liberty Issues and Michael J. Hihn (Sep/Oct '96 edition). All rights reserved

After years of talk, promises and rhetoric, we finally have a sales tax bill. HR3039 would replace the income tax, plus gift, estate and excise taxes, with a new National Retail Sales Tax (NRST).

HR3039 was co-authored by Dan Schaefer (R,CO) and Billy Tauzin (R,LA). There were only 5 co-sponsors at submission.

Taxes would not increase for most taxpayers, just the least fortunate. So according to Hihn's Principle (see Tax Quacks), the NRST must increase deficits, and it does - by $250 billion per year.

Supporters, of course, claim a supply-side effect.

For perspective, personal consumption expenditures increased an average of $82.5 billion per year, in constant dollars, during the 1980s. (Table 709, 1995 Statistical Abstract). The sales tax rate would be 15%. Thus, if the NRST caused expansion equal to the 1980s, revenues would increase by less than $13 billion per year.

We could do better than the 80s. At 7% real annual GDP growth, the first-year deficits would be offset in 'only' ten years (excluding higher interest).

Now the details. Supporters claim their NRST is like current state sales taxes. As we'll see later the NRST is far more complex, and bureaucratic, than any state sales tax. Plus, the NRST would be slapped on home sales - all 15% of it. No state does that now. But HR3039 has an 'incentive' for every state to tax home sales.

To justify their claim of repealing the IRS, the NRST would be collected by state governments. States would receive a 1% administration fee. But to get the fee, states must adopt the federal tax structure, including ... a state sales tax on home sales.

States have no choice on collecting the NRST. That's a mandate. Adding the tax on your next home is ''voluntary'' - they can give up the fee. These are conservatives, the same guys who foamed at the mouth on federally-mandated speed limits.

The bill graciously allows you to pay the home tax over 30 years, at market interest rates. That's part of your monthly payment, and determines how much house you can buy. If you own a house now, your property taxes may go down, as its value plummets.

Billionaires would get a tax cut of nearly 80%. But you and I would pay an extra 15- 24% on a home sale. Even more bizarre, the billionaire's current taxes would also be shifted to welfare females, the unemployed, retirees and the disabled.

Don't get me wrong. I don't oppose tax cuts for the rich. I do oppose the graduated income tax, and 'luxury' sales taxes. But I can achieve my goals without screwing America's least fortunate to give Ross Perot an 80% tax cut.

According to the Wall Street Journal, those with annual incomes over $200,000 consume, on average, 40% of that income. At $1 million per year, that's $400,000 in taxable purchases, for a total NRST of $60,000. At that income, the average federal income tax was $270,000 in 1992 (Table 534). The NRST is a tax cut of precisely 77.8%.

We'd pay a 15% sales tax on everything -- food, rent, home purchases, utilities, etc. Instead of exempting 'necessities' like states do, there would instead be rebates.

Every household, regardless of actual purchases, would get a rebate equal to 15% of their wage income, or 15% of the Poverty Level, whichever is less. Zero times 15% is zero. Zero wage income equals zero rebate.

That means no rebate to the family on unemployment. No rebate to welfare families. No rebate to retired pensioners. No rebate to disability pensioners. But all these people would pay a 15% NRST on everything they buy, including food and rent. But Ross Perot gets a 78% tax cut.

Again: I don't begrudge Perot a huge a tax cut. Where's mine?

If anyone wants to cut taxes by $250 billion a year, that's fine with me. Just don't do it with gimmicks. ''It's spending, stupid.''

Rebates are processed as credits to the FICA payroll tax, on each pay check. The rebate formula is linked to wage income, as is the FICA tax.

The rebate notion has evolved, starting from monthly rebate checks to everyone with a Social Security number. Well, that's 3.4 billion new federal transactions per year. In my case, I'd start collecting sales tax on rent from our basement apartment, sending it in on a monthly tax return, so they could send it right back to my tenant. This is simplification? HR3039 eliminates the checks, but nails the small business owner.

Small business was an early supporter of the NRST, to simplify their payroll headaches. The support dimmed slightly, when they realized they still had FICA deductions to process. The support collapses, when business owners realize HR3039 makes FICA deductions as complex as today's income tax withholding.

As shown in the Rebates Table, poverty levels vary by family size. The rebates, which also vary by family size, are deducted from the FICA tax. The net FICA percentage will thus vary by worker, and through the year.

Recall now, state governments have been doing sales-tax exemptions for much of this century. If rebates made more sense, wouldn't at least one state be doing it? And if the IRS is repealed, then who collects and audits this mess?

HR3039 does propose additional revenues, which I've skipped. The bill would levy a 15% payroll tax - on government workers only. (I am not making this up). The net effect on deficits is zero. Every penny of revenue is also a penny of expense.

The payroll tax would also be levied on state and local government employees - causing local taxes to skyrocket - if it's even constitutional. Recall the bill coerces states into matching the federal structure, so states would also levy payroll taxes on the same employees!

I use only the Statistical Abstract as a data source, especially when taking unpopular positions. Skeptics may then easily confirm the data at any library. I suggest following Ronald Reagan's advice, "Trust but verify." Or doubt but verify.

All data are for 1993, the latest year for which all components are available. HR3039 provides a fee of 0.5%-20%, retained by retailers. This intends to offset their costs of collecting and processing the NRST. I used a conservative 5%. There would also be a 1% fee paid to state governments, for the same purpose.

Keep the tables published here. You can then put other sales-tax plans to the test. The Cato Institute says it can be done with a 16-18% tax rate, less rebates based on $4,000 per person.

We can immediately throw out 16%. In round numbers, also for 1993, 18% will gross $800 billion. We had 127 million people then. So the total rebates are $75 billion.

That alone leaves a deficit of $40 billion. Hihn's Principle says look for tax increases. The Cato plan also includes hefty tax increases -- on most households below median income, especially 1-2 persons.

The full text of HR3039 is available at the Liberty Issues web site .