National Sales Tax - A complete evaluation

I have spent some time gathering data to refine my estimates of the sales tax rate that would be necessary to raise the money required to fund government operations as they are shown in the budget. One can argue at great length about the desire to cut federal spending so the we are living within our means, rather than raise taxes.  But, with a budget of 3.456 trillion dollars and income of only 2.4 trillion dollars it seems that is a chasm that is not going to be spanned easily without significant impact on programs vital to this country.  We are running a deficit of slightly over trillion dollars a year at this time.  The lions share of the budget is taken up by social insurance (SS, Prescriptions, Medicare/Medicaid) and other entitlements, 43% and 12% respectively.


 One of the problems is that the social insurance programs are running in the red. While these programs cost about 1.5 trillion dollars a year at this time, only about 960 billion dollars are collected in taxes, or premiums if you prefer. Anybody who thinks that the congress is going to significantly change this picture is not facing a brutal fact.  The Democrats need those programs. They're the bait the keeps a lot of their constituents in line and loyal to that party. Interest on the national debt must be paid (6%) so that leaves only defense (20%) and other discretionary funds (19%) to play with.  It is my opinion that we must not sacrifice defense on the alter of entitlement programs.

There are some things that could be done to balance the books for the social insurance programs, but that would be a really tough sell for any congress, let alone a Democratic congress. Just a hint that Social Security could be on the table for some change to make it more viable from a cost standpoint, causes a storm from the AARP and it's millions of members, as well as all the seniors who are now on SS or approaching that age. I don't think the congress has the guts to tackle the problem in a meaningful way. Messing around with the social insurance programs is the third rail of politics for any politician. So, it seems to me to be a fact of life that the Social Security, Prescription  and Medicare/Medicaid programs are going to continue to run in the red, in fact escalating as more and more as baby boomers become eligible for the benefits. Exacerbating the problem is the ever increasing life span of the population due to advancements in the standard of living and medical science.  Of course as we get older the cost of medical care goes up significantly.  The deficit funding for the social programs is going to get larger and larger with time in the foreseeable future. When the eligible age for SS was set at 65 years the average life span of the population was about 68 years.  Now the average life span has increased into the high 70's.  The individual that has reached near retirement age can expect to live in retirement almost as long has they worked.


In a sane world the social insurance programs would be separated from the general budget and revised to make them self sustaining.  We tried that with the US Postal Service and you see where that got us.  Congress will not be willing to allow the program to make the changes that would make it financially viable. So, one way or another we, as taxpayers, must shoulder the burden of supporting these programs; they are here to stay.


As a result of that thinking, it is my belief that any tax program must raise the money equal to the budget, including the social insurance programs.  We can not continue to dive deeper and deeper into debt until the interest on that debt becomes so overwhelming that the country moves into bankruptcy. It can happen.  Look at the now defunct Soviet Union and the present situation in Europe, especially Greece and Italy. The Soviets spent their way into bankruptcy funding a military at a rate they couldn't afford and many of the European countries have saddled themselves with social programs they can't afford and are unwilling to support by higher taxes. They want all the government benefits without paying. Sound familiar.  Sweden presents a little different view in that they tax themselves at around 50% of their income to support their social programs.  I don't think that is path a highly industrialized country can travel.


No taxing program is going to be levied  on the citizens without some pain.  The question is what kind of tax program  gives this country and it's citizens both the fairest distribution of the burden and at the same time strengthens our financial picture and enhances our position in the world global economy. It is my belief that a national sales tax, along the lines I have discussed in earlier posts, fits the criteria better that the current model.


Let us reiterate the advantages of a national sales tax as opposed to the current model and perhaps brush against some of the possible consequences of this model.

• All taxes would paid at the point of sale for all purchases made in the US. There is no IRS forms to fill out at the end of the year, you pay as you go. Contract for work would be treated as a sale.  If an individual want's some service, they can either take on the service provider as an employee and pay the SS and Medicare taxes as appropriate, or obtain the service via use of a legitimate contract and force the contractor to pay the appropriate sales tax.
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• Having no taxes on corporations and business, the cost of American made products would become a lot more competitive in the global economy as well as cheaper for internal consumption.  We need every advantage we can get in this world of cheap labor overseas and the consequent flight of manufacturing to these foreign countries.
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• By exempting certain items that are "essential to life" you end up reducing the tax burden on the lower earning  citizens of the country.  Such items as Groceries, Medical Care and Housing  are examples. If the so called poor citizen  buys designer shoes, that 46 inch LCD TV or an IPad, and they do,  then they would be taxed like everybody else.
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• Let's be clear, every item that is bought, except those deemed essential to life is taxed.  That includes the purchase of stocks and bonds.  The exception here would be US Treasury and Municipal bonds and purchases made by government and charity organizations. All stocks,corporate bonds, and other financial purchases would be taxed at the current sales tax rate upon purchase.There would be no capital gains tax on stocks or bonds bought on the American markets and the sales tax paid. You pay your money going in and take your chances. If you win, great; but if you lose that's your problem.  Uncle Sam gets his money going in, win or lose.  After all, what the stock market likes to call investing is really nothing but speculating, i.e. gambling. When you buy a stock from a broker you are not investing in the company, that was done a long time ago.  You're taking a piece of ownership and gambling that it will pay you back for your bet.  Much like Vegas. The liberals among us will really like this one, except the rich liberals of course.  Poor people don't gamble in the stock market, even though they do go to Vegas.  So these taxes will fall mainly on the wealthier members of our society.
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•  The wage earner, the guy who can not  take advantage of the many tax dodges in the present system, gets an immediate raise in pay of something like 15 of 20 percent; depending on how much they deduct as withholding. After all, its the worker who gets a W2 form reporting their income and has few tax loopholes to crawl into. This is really significant and offsets the increase in costs at the checkout counter due to the federal sales tax. The downside of course is that there are no more tax loopholes, for rich or poor.  About the only ones available to the middle and lower class now, interest on the mortgage and excessive medical expenses, will be gone.  That will impact the average taxpayer very little.  The poorer classes not at all because they generally don't buy property and they use the other available means for medical help.
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• While the upper 1 or 2 percent pay about 40% of all the taxes collected by the federal government, their impact on the overall economy is really rather small. Even though it sounds like the taxes are heavily weighted proportionally against the top tier of the wealthy, they in fact pay a much smaller percentage of their true income to the government than the great unwashed masses (the rest of us).  But the middle classes are the ones who support the economy by their consumption of goods and services. How does a sales tax even the field then?  For the simple fact that money is not put under a mattress. The wealthy buy things. Lots of things.  Clothes, cars, stocks, bonds, and so forth. They buy a lot more than the average man on the street.  And everything they buy is taxed. When the government no longer has to sell bonds in order to pay it's bills, then that avenue to escape taxes will be closed. Only short term bonds will be sold. No need for long term government paper. Under the current system the wealthy can hide earnings through a myriad of tax loopholes, but they can't hide consumption. That gets taxed. Many very wealthy people, living in ultra luxury, pay little or no taxes at all. The common bloke however, does not enjoy the use of the many tax loopholes built into the complex taxing system now employed.  
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• The downsides, at least potential downsides.  This system might discourage the frequent trading  of stocks and bonds, at least the short term in and out trading that takes place in order to get a small gain on every buy and sell.  It would encourage the "investment" for the long term. Buy and hold would become more common.  Buying stocks and bonds which return dividends, interest and long term appreciation  would become the basic strategy. To my mind that's a good thing, even though the brokers who depend on the traders won't like it.  It would add stability to the market and discourage speculation to a large extent.                     

In order to compute the required tax rate to meet the budget, some basic information is readily available, but some of the adjustments to that data estimated.  I would hope to refine these estimates later, or maybe someone reading this posting will have better data.


I have said that we want to raise enough money to meet the current federal budget of 3.456 trillion dollars. I would like to plan on raising a little more in order start paying down the federal debt.  But, that is not realistic. Give congress a little extra money and they would spend it.
The government will raise .96 trillion direct from social programs taxes and 26 billion directly from tariffs.
              In trillions of dollars needed to fund the government:
                 3.456 - .96 - .026 = 2.47


The source of taxable sales are:
GDP  of 15 trillion per year.  I estimated that 50% of GDP falls in the non taxable sales category. This is hard to determine.  It is known that 70% of the total economy is due to consumer spending. Not all of that is taxable however, so I used an estimate of 50% as being taxable.


We import about 2 trillion dollars per year to be sold in this country. After taking into account exports which are not subject to sales taxes the trade deficit amounts to 408 billion dollars/year.
                 (50% x 15x10\12) + .408 x 10\12 dollars = 7.9 x 10\12 dollars


The total value of stocks and bonds sold on the US stock market are:
         Stocks            NYSE 19 trillion dollars/year
                               NASDAQ   13 trillion dollars/year
                               AMEX       10.7 trillion dollars/year
                                OTC         4 trillion dollars/year
       Bonds          84 trillion dollars/year  --- We are currently selling about 1 trillion dollars to finance the government.  I haven't found a good figure how much the accumulated municipal bonds would amount to but I would think they would be on the same order.  So total taxable bond sales would be about 82 trillion dollars.
             Total taxable sales in trillion of dollars are:
             7.950+19+13+10.7+4+82=136.65trillion dollars


Direct income from tariffs is about 26 billion dollars.


To compute the required tax rate (TR) then
           ( TR x 136.65x10\12) +.000026x10\12 = 2.47x10\12
                                              TR= 1.8%


This will mean a tremendous tax break for the average American. Only those people that consume big ticket items on a regular basis, and the wall street speculators will likely come out worse off. But, if a buyer of stocks doesn't expect to realize at least 1.8% return on their stock purchase within a fairly short time, they likely wouldn't put up the money to start with.  Just leave it in the bank.


The obvious concern will be that American money will flee "investment" in the American stock market and will use the European and Asian markets to serve as their casinos. I honestly don't think that is likely.  American companies stocks will continue to be traded on the American markets and, I believe, will get a shot in the arm from this tax policy and will thrive. Making American companies more attractive, due to reduced costs, will be an even more attractive place to bet your money. And with no capital gains tax on American market traded stocks and bonds.


What about American money put into foreign paper?  It is my plan that foreign purchased" investments" would be taxed just as if they were bought on the American market. That may take a little work to figure out how to keep people from trying to cheat on paying the appropriate taxes, but I'm sure it can be managed.  The biggest problem of course is that money which is earned overseas and re-invested there will not be taxed.  That is really no different than it is now. 

This would reduce the IRS role significantly, their principle task would be monitoring and collecting taxes on the capital gains on foreign investments.  Of course that bureaucracy won't like that very much.  It would mean a potential work force reduction; something that doesn't sit well with any government agency. Some agency would have to oversee the collection of the sales taxes and enforce their payment.  I suppose that would be a role the IRS would assume. Most states have a sales tax and have mechanism in place to deal with those taxes.  That could be the model for the federal tax.






         

The Race for the Republican Nomination

I, like most Americans, even the Republicans, have not closely followed the debates of the candidates for their parties nomination for President of these United States.  But, we do read the newspapers, watch Jay Leno and the other comedians that appear nightly on our TV screens, and obtain our impression of these candidates from their perspective.  Although it is clear that there is a  bias in the media toward the Democrats in the said media, it also clear that a candidate can not pull a goof that provides a humorous sound bite that can be played over and over again and again by the media.  It is sad that such a moment can sink a presidential hopeful but, that's the way the modern system works.


Good examples of such a slip up is reflected in the rise and fall of Perry and Cain.  Both at the top of the polls at one time, but now sinking rapidly.  And the loss has nothing to do with their policies, which the average voter doesn't understand, or care too, but largely on the embarrassing sound bites that were generated in the debates and in TV interviews.  These brief lapses can be used to make the candidate look stupid, or at the least not very knowledgeable, about various subjects which confront the nation.  Of course the sexual harassment charge against Cain hasn't helped either.


Remember Sarah Palin.  She was sunk in an interview on TV during the last presidential race.  Whether it is justified or not, she came off as totally unprepared for national responsibility as VP. She was sort of sandbagged by the interviewer ( I think it was Dianne Sawyer).  For the Jay Leno types she provided fodder for the humor mill for months, and still does now and then, based almost completely on a few sound bites that she uttered when caught on camera. In reality, that experience sunk any presidential aspirations she ever had.

Michelle has kind of gone the same route.  Opening her mouth too often and putting her foot in it. Remember her. She was once high in the polls, but has sunk like a rock lately.  Tune in to Letterman or Leno and you will get a dose of anti Michelle jokes, that is when they're not bashing Cain and Perry. 

 The two candidates that seem to have dealt with this issue best are Newt and Mitt.  Although both have records that can be attacked, (Newt's is personal, Mitt's is the perception of flip/flopping on issues), and they are attacked almost every night on the late night shows, they haven't provided the sound bites that the comedians love to air.  At least so far.  They are probably experienced enough to understand the problem a national election entails and have managed to not provide grist for the humor mile.  As a result they are now moving to the top of the leader board. Likely one of them will end up with the Republican nomination.  That is if they can keep their respective noses clean.  Of the two candidates Newt has the most consistent record.  You know where he stands and he articulates it well.  So, maybe that will propel him into the nomination.


 Both of them have political records that they can stand on in a run against Obama, if they get a fair shake from the media. But, that is not likely to happen.  So, they need a lot of money to carry a message of their positions to the voters and somehow to overcome their past shortcomings from vicious attack ads that we all know are coming.  Especially if the race develops so the Democrats feel threatened.


Of course it's still a while before the primaries in the various states gets under way, so anything can happen. The question; can they beat Obama in the general election?  Not clear to me at this point that either of them can. Obama has a built in advantage that will be hard to overcome.  But, that's the subject of another post.


Update: 
It seems that Newt is slowly fading in the wind. He just doesn't seem to have the money to spend, or the organization, to overcome the bad publicity being generated by Mitt's backers.  I'm not sure, but it really looks like, at this point, that Newt is dead meat.  But, the same could have been said for Rick Santorum just a few weeks ago. But sudden victories in the last primaries have suddenly raised him up as the true conservative challanger to Mitt.
  


One thing is clear, this is turning into an interesting campaign.  Of course Obama couldn't be more pleased as the Republicans tear each other apart seeking the nomination.
The field is narrowing. There really only seems to be three viable contenders remaining.


From this perspective I don't see any of the candidates overcoming the well financed drive by Mitt Romney to capture the Republican nomination.  He has been ahead in the polls from the beginning and still holds that position.  Right now he leads in delegates and is projected to capture a lot more in the coming primaries. 


The question for Republicans comes down to which of the candidates can win in November. I believe that the support for Rick Santorum is not widespread enough to capture the voters that stand on the middle of the road, especially on social issues. The female vote (over half the voters) seems to hang, rationally or not, on the candidates position on abortion (labeled "choice" in order to take the sting out). They seem to equate the right to an abortion on demand as fundamental to their very overall rights in our society i.e. "Women's Rights".


I just don't see an outspoken social conservative  having enough of a wide spread appeal among the middle of the road voters to carry Santorum to the White House. I believe that the majority of the voters are fiscal conservatives, but much more liberal in their view on social issues. Any candidate the rests their campaign on conservative social issues might win the Republican nomination, but will not win in a national election.  


Of course, it is essential these days to be a television star.  By that I mean the candidate must come over like gang busters on TV. Think of John Kennedy, Ronald Reagan, Bill Clinton and currently Obama. People like Jefferson, Lincoln, Madison, and many other former presidents would never have been elected in today's media driven campaigns. Even Lincoln with his purported raspy voice likely wouldn't have made it against the fiery oratory of Douglas.  


John Paul keeps hanging in there.  Primarily to just get his message across. At least that's the only reason I see.  He is essentially a Libertarian, not a Republican at all. While that approach to government is really much more aligned to the concept of our founding fathers, and the actual constitution, it just doesn't play in today's environment. Like it or not, I just don't believe that the Libertarian philosophy would make a very effective approach to government in today's world and the voters are much too acclimated to government as everybody's caretaker to buy into the almost hands off approach by government embraced by the Libertarians. 


The written constitution almost doesn't exist anymore. Today this nation is ruled by common law more than by the constitution. Court decisions down through the years, especially post WWII, have expanded the role of the federal government way beyond what could reasonably be allowed by the written constitution. Essentially, the constitution has been amended by court decree. The tenth amendment is almost completely ignored. If one reads the constitution you would be hard pressed to find justification for the federal government involvement in education, reproductive issues, gas mileage dictates for cars, how the states handle their prison system, the endangered species act and a host of other federal decrees. Section 8 Article 1 of the constitution spells out the specific powers of the federal government and the first 10 amendments specifically limit that power. 


Let us admit. The next election is all about Obama.  It really doesn't matter who the Republicans run, the issue will be whether the voters are happy or not with Obama. Right now I think Obama is holding his own.  The economy is slowly improving, whether he had anything to do with it or not, he will get the credit. Nothing earth shattering has happened in the world at large that jars the American People to any extent, some talk radio talk show pundits not withstanding. Baring some catastrophic event in the future, my crystal ball says that the Republicans will have to wait another four years to make a legitimate run at the White House. The race against any incumbent president boils down to a referendum on the president and not any real comparisons between the two major candidates. If the economy turns south, then Obama could be in trouble. I'm not sure what the general public feels about Obamacare, but I sense it isn't a big enough issue to get him cast out of office.    


  



   

Regulatory Bodies

One thing you have to admit, Governments love to pass laws regulating the citizens behavior, environment, and limits to what they can do. The general method is for congress to set up an agency to define and enforce these regulations.  Thus we have the FDA, EPA, OSHA and a whole host of other bureaucracies that regulate what we eat, the drugs we are allowed to purchase, working conditions, the limits on land use to avoid impacting some species or other, the standards for the environment in which we live, the contents of materials that we use to make items for sale, the standards for education of our young people, relationship between independent companies and the labor unions, and a myriad of other limits on our choices and freedoms to act on our own.
Are all these agencies really necessary?  Likely not, but one must agree that a whole host of them perform a necessary function that would not be accomplished otherwise. Why?  Simply because private industry, for all it's positive virtues, has no motivation to increase their costs in order to implement procedures that will clean up the environment, assure that drugs should not be prematurely dumped on the open market before adequate testing to assure they are safe, assure that the food on your grocers shelves are not contaminated by deadly microorganisms and disease, and so forth. History has shown clearly that the private sector does contain companies that worship the bottom line to the extent of cheating their customers, putting unsafe products on the market and other nefariousness activities. Right now we are seeing examples of that following the financial meltdown, although the government shares some of the blame, and examples of  questionable  practices played out on the nightly news. Practices that could impact the health of the people on a large scale.
So what's the problem?  The problem is inherent in the workings of any bureaucracy.  That is true whether part of a private organization of one on the public payroll.   Eventually the main goal of any bureaucracy will be self preservation, whether it's function has anything meaningful to accomplish or not. In fact preservation and expansion of the agency will always be at the forefront of the agencies agenda from it's very inception.  This is due to a few factors that exist.

• The importance of a manager is largely determined by their budget and/or the number of people reporting to them. This encourages the manager to look diligently for tasks and additional scope within their charter to expand the influence of the bureaucracy, thus requiring bigger staffs to cover the work load. A perfect example of that is played out in the Endangered Species Act.  At first the emphasis was on the bigger animals (wolves, mountain lions, American bald eagle, etc.) that most people envisioned as the reason for the act to begin with.  But, now the scope is being enlarged to include such animals as rats, in spite of the economic impact of including them in the endangered list and that the species isn't really being impacted all, just in a particular region. There is no end to the number of species that will be found that need protection from "extinction" so that the bureaucracy can continue to live and even grow. You can see this syndrome being played out in the EPA mafia, and any number of government regulatory bodies. 
• Parkinson's Law applies.  "In any organization the work will expand to fit the funds available". The conclusion and "law" as reached by the titled study has been shown to be true, over and over again. This implies that even after all the goals of the agency have been completed, or no longer exist, internal procedures will generate work loads that will keep the personnel busy, even hiring new people, when there is no input or output.  Strange, but shown to be true. Studies have shown that the government is loaded with agencies that really have no function, or that their function is duplicated many times over by other agencies created by congress. And yet they continue to exist as independent agencies, with no motivation to combine their functions to reduce the burden on the taxpayers.  There is no one to step in and decide that the agency is no longer needed or at least should be combined with other agencies to increase efficiency and reduce costs.
• The typical bureaucrat knows that it safer to say NO to any request for change.  Having no responsibility for the bottom line they have no motivation to move anything along.  It is better to make the mistake of being overly cautious than to move things along by quick action and later to be proved wrong. Thus, they become a large bottle neck in accomplishing anything that requires speedy action, or is not following the manual developed by the bureaucracy.  Make sure all the i's a dotted and t's are crossed becomes the mantra. This characteristic is common in private industry, but much more pervasive in the public sector.  The private sector does have overall  leadership concerned with profit, which tends to keep the bureaucracies under control.  The public sector has no such motivations.  In the public sector the employee serves their time, keeps their nose clean,  is advanced up the line in management by seniority and finally to a very lucrative retirement package unmatched anywhere in the private sector.  And, you don't really want to tangle with a government agency to do anything out of the ordinary.  You will likely get stonewalled to death.  

It would be nice if the citizens could do something about all this.  But, unfortunately there really isn't. The bureaucracies are so entrenched in the government that rooting them out, once established, is next to impossible.  Every one of them have a legion of  supporters to jump to their defense at any hint that they should be dissolved or significantly modified.