Friday, February 14, 2003

Bush's Tax Increase

"It will raise people's taxes by $4-5,000 a year."

For those of us in the middle class, that's the bottom line of the Bush administration's proposal to eliminate the income tax and replace it with a national sales tax.

This estimate comes from Robert McIntyre of Citizens for Tax Justice, a tax watchdog organization that has been piling up the evidence that Bush's tax plans are nothing short of disaster for the nation. I chatted with McIntyre this afternoon and will post some more excerpts from our conversation this weekend, as I try to explore the ramifications of this proposal -- which are more profound than any domestic policy yet proposed by Bush, though it seems hardly anyone in either the press or the blogosphere has figured this out.

This is not merely a radical plan. It is one that will literally turn the nation's economic clock back to 1900 -- the days when the middle and lower classes were completely at the mercy of the nation's corporate leaders -- with a much lower standard of living, much longer hours for nominal pay, and virtually without any real upward social mobility.

Moreover, as McIntyre points out, in order to replace current federal revenues with this plan, the government will have to impose a tax rate of between 40 and 50 percent.

In the meantime, another economist (who goes by the pseudonym Angry Bear) has written me about this proposal -- and in fact has been inspired to start his own blog, in no small part because of it.

Here's the core of his opening post on the matter:
There are a number of reasons, including social justice, why a regressive tax is not a good idea, but that's a topic for a later post. Instead, the question is why a consumption tax is worse than an income tax. First, it will surely cost more than it is expected to. Why? Because naively setting the target consumption tax in a revenue-neutral fashion will actually lead to a decline in revenue. A consumption tax increases the cost of the final good to the consumer, meaning that for any price that stores charge, consumers buy less after the tax is imposed than before. Most states have sales taxes around 8%. To replace all income taxes with consumption taxes would require a federal consumption tax of at least 15% on top of the states' 8%. So things will change from the scenario in which, when a store sells a DVD player for $100, the consumer pays $108 to a situation in which the consumer pays $123. Consumers care about price after tax, not before (question: can you buy a $100 DVD player with only a $100 bill?)! So what happens when the effective price to consumers goes up? They buy less DVD players! But the government can not collect sales (consumption) taxes on unsold DVD players. As an economic aside, some, but not all, of the impact of the tax would be borne by sellers. In the current example, the retail price might fall to $95 ($5 less for stores) and the after tax price to consumers would be $95*1.23=$116.85 (an $8.85 increase). Stores get less and consumers pay more, as a result the total volume of goods traded will fall. More generally, any move to a consumption tax that proposes a neutral tax rate, one such that

"(the value of all goods sold * proposed rate) = Income Tax Revenue"

will not generate the same revenue as under the income tax because it fails to account for the fact that the volume of commerce will fall (economists call this "dead weight loss"). If this tax is actually pursued, look for this factor to be ignored by Fleischer, Rove, et al.

There's more; be sure to read it, and add Angry Bear to your regular reads. (I've added him to my blogroll too.)

This weekend I hope to tackle more of the details of the disaster that awaits, as well as some of the broader ramifications of the plan.

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