SensibleTaxReform Blog

9. What Expenditures Will Not Be Taxed?

The federal consumption tax (FCT) under Sensible Tax Reform—Simple, Just and Effective will only apply to retail purchases for use or consumption. Neither businesses nor governments agencies will pay it.

Most expenditures by individuals and families will be subject to the tax. However, household expenditures that are not for use or consumption will not be taxed. The principal non-taxable household expenditures will be:

• The payment of taxes,
• Debt repayments,
• Investments,
• Charitable donations and
• Insurance premiums.

Payment of taxes: Other taxes that households pay will not be subject to the federal consumption tax. For example, property taxes, state and local sales taxes, state and local income taxes, as well as excise taxes will be exempt from FCT taxation. A tax on a tax will not occur. Even today, the federal government allows deductions from federal income taxes for state and local income and property taxes. The same principle will apply with the FCT.

Debt repayments: Debt is accumulated from previous purchases. Most of those purchases will have been subject to the FCT. Therefore, the reduction of debt principal will not also be subject to the FCT. That would be double jeopardy. [In fact, from an economic point of view, the payoff of debt is an alternative form of saving.]

Investments: A very major benefit from Sensible Tax Reform will be the great potential that it will offer for increasing personal savings, since no taxes will have been paid on funds that are not spent. The middle classes especially will enjoy a great financial advantage in this area. Of course, there are many ways that investable funds can be employed—for retirement, for children’s education, to buy a home, or maybe to start a business. STR will greatly increase national savings.

Charitable donations: Just as with the increase in savings, STR will allow most households to be much more generous in donating to charities. Financial gifts will not be taxed, since they will be for the benefit of the charity and not of the individual.

Insurance premiums: Insurance can be viewed as a form of investment—the prudent protection of health, assets and investments. Insurance premiums will therefore not be taxed. However, the proceeds from insurance may be subject to taxes: medical expenses covered by health insurance, casualty insurance for an automobile accident or for a house damaged by a storm, and life-insurance proceeds.

Under Sensible Tax Reform non-consumption expenditures will be tax-free.

Tags: #tax reform

8. A Federal Consumption Tax (B)

The federal consumption tax (FCT) that is proposed under Sensible Tax Reform—Simple, Just and Effective satisfies all three of those goals: simplicity, justice and economic effectiveness.

A Simple Tax

The FCT will be a simple tax:

• A single rate,
• Federal tax,
• On retail purchases only,
• Applying to virtually all retail purchases (goods and services),
• Easy for everyone to understand,
• Very difficult for tax lobbyists to manipulate and
• With no longer any annual reporting obligations for households

Very simply, the tax will apply to most of what individuals and families consume. It will be much broader than any existing sales tax in order to keep the tax rate as low as possible. We will pay the tax whenever we shop. The tax will be included in the listed sales price, but shown clearly on the sales receipt. Unlike now, we will know how much we are paying to the government, since it will be primarily the sales taxes that we pay.

A Just Tax

The FCT will be a just tax, applying:

• To all consumers (even those with illegal income, such as drug dealers),
• From any commercial seller (whether in store or online),
• With special provisions for only four high-priority categories of consumption (healthcare, homes, cars and higher education),
• With a rebate of the tax on purchases up to the poverty level.
• Everyone will be treated exactly alike—paying the same taxes and benefiting from the same special provisions.

In sharp contrast to our existing federal tax system, Sensible Tax Reform will treat everyone the same–all consumers and all retailers.

An Economically-Effective Tax

The FCT will be economically effective. It will:

• Apply to retail purchases only and will not apply to businesses;
• Stimulate savings, since savings will all be pre-tax;
• Level the international playing field so that American businesses can compete more effectively in export markets and against imports;
• Reduce the need for the US Government to borrow so heavily abroad;
• Keep American companies home;
• Create millions of jobs in this country; and
• Be phased-in over a five-year period.

Sensible Tax Reform—Simple, Just and Effective will be a workable and easy-to-understand tax system. The next post will discuss several categories of expenditures, such as the payment of taxes and investments, which will be exempt from the FCT.

Tags: #tax reform

7. A Federal Consumption Tax (A)

Federal Taxation of Income

The Internal Revenue Code (IRC) is focused heavily upon income taxes. [In 2012, more than 46% of federal revenues came from personal income taxes, almost 35% from Social Security and Medicare taxes and another 10% from corporate income taxes.] The mass of complications, contradictions, injustices, etc. of our tax system is primarily income-tax based.

Most of the tax proposals coming out of Washington are mere manipulations of that Code (“rearranging the deck chairs on the Titanic”). That is also where the bulk of the intransigence in discussing serious tax reform exists:

• There is great animosity when our politicians discuss tax reform among themselves.
• There is much heat when constituents discuss tax reform with their congressmen.
• And, tax lobbyists throw billions of dollars every year at politicians to influence tax changes for the advantage of their clients–seldom to the advantage of the American people in general.

The result is that little of real value ever seems to be accomplished to this income tax-based system. Much further harm gets done to the IRC every year.

Federal Taxation of Consumption

Sensible Tax Reform–Simple, Just and Effective is a proposal to replace most of our income-tax-based federal tax system with a very new system that is based primarily upon a federal consumption tax—a national sales tax.

Blog #3 compared taxes paid by Americans with taxes paid in many other major countries. In every one of those other countries a national consumption tax, called a value-added tax, is an important part of their tax system. Only in the United States is their no federal consumption tax (FCT). We do have state sales taxes in most states and some local sales taxes as well. However, the federal government has chosen to not use a federal sales tax.

An FCT has been shown to be very workable in almost every other country in the world. It is time for America to seriously explore the feasibility of a federal consumption tax. Yet, we do not want to add more complexity to what already exists. We do not want to add an FCT to our existing code. We should want to very greatly simplify our federal tax code, as well as make it much more just and much more effective.

Sensible Tax Reform–Simple, Just and Effective will replace most of the existing code. Our tax system will be based largely on what we spend, rather than personal income and business earnings. The consumption tax will be very simple:

• A flat rate,
• Applied to the purchase of most goods and services,
• With only a few preferences and
• Coupled with protection for the poor.

Replacing our existing tax code with a consumption tax would have many advantages:

• For the federal government, tax revenue would be more predictable, since consumption varies much less than does income.
• For businesses, the elimination of their existing federal tax burdens would completely end those tax payments (more than $240 billion annually). It would end their tax-compliance expenses too, which also cost American businesses hundreds of billions of dollars every year.
• For households, there would be the end to withholding taxes. The $420 billion of Social Security and Medicare taxes as well as most of the $1.1 trillion of personal income taxes will actually be received by individuals and households. Take-home pay would increase greatly. Also, real income would be much greater.
• The new system would be much more transparent, much easier to understand and very difficult for lobbyists and their Washington clients to surreptitiously distort the taxes as they do now.
• We would all have a much clearer idea of how much we pay in taxes.

The next post will further discuss the federal consumption tax.

Tags: #tax reform