Tax Cheats

The National Sales Tax: Figures Lie, And Liars Figure.

By Jim Nintzel

DIDJA CATCH THOSE slick TV and radio ads last month pushing the national sales tax? The $5 million national campaign promised taxation salvation: The country could scrap the income-tax system and replace it with a 23 percent national sales tax on goods and services.

If you're like most people, you probably imagined that 23 percent tax meant that when you bought something for $100, you'd pay a $23 tax.

But guess what? The truth is, you'd pay $30.

Currents How does this deep voodoo work? Well, the backers of the national sales tax say their 23 percent figure is "tax-inclusive." In other words, they've arrived at their 23 percent number by figuring that $30 is 23 percent of $130--the $100 price tag on an item, plus the 30 percent tax--"which isn't the way anyone thinks about a sales tax," says Michael Ettlinger, tax policy director of Citizens for Tax Justice, a Washington, D.C., advocacy group.

Laura Dale, a vice-president of Americans for Fair Taxation, the Texas-based group behind the national sales tax, argues that critics of the percentage game are "splitting hairs."

"Most people don't know what tax-inclusive and tax-exclusive is, and when you try to explain it to them, their eyes glaze over," says Dale, who insists on referring to the national sales tax as "the FairTax." "What they want to know is how much we're taking out of their pocket--how much are we taking from their paychecks, how much are we taking from their pockets, how much are they going to pay at the cash register. That's what they want to know."

But the amount they'll be paying at the cash register is something the FairTax's backers themselves don't seem to know. For example, Louis Tuggle, a PR agent working for Americans for Fair Taxation, says flatly that a $100 purchase would result in a $23 tax. Asked about the possibility of a $30 tax, Tuggle appears confused. "I don't know where you got that figure," Tuggle says. "The information we've gotten from Houston, if you had a $100 product, the tax would be $23."

Bobbi Simmons, the 65-year-old leader of the Arizona chapter of AFT, was even more confused about the proposal. Not only did she think the tax would be only $23; Simmons also thought it would include all state and local sales taxes.

Dale says she's not concerned that the fundamental cost of the tax is lost on both its volunteer and paid supporters.

"In fact, you're splitting hairs in the sense that we're talking about the same amount of money," Dale explains. "You are talking about measuring something in meters or in feet. It doesn't really matter. The distance is the same. What we're saying is you're going to pay the same amount of money, whether you call it 23 percent on the tax-inclusive rate basis or 29 percent on a tax-exclusive rate. We want to be comparable to the flat tax. We want to know what the marginal tax rate is going be, comparatively speaking. If we put in a tax-exclusive rate, we can't do that. In order to be able to compare apples to apples and not apples to oranges, we have to state our sales tax rate on a tax-inclusive basis."

But then, as different forms of economic activity, earning and spending are like apples and oranges. And while those on the low end of the economic ladder tend to spend nearly all--and some cases, more than--they bring home, those on the upper end of the income scale rake in more than they could ever spend. So the plan ends up being a tax cut for the wealthy--and the only way it could cut taxes for the wealthy and remain revenue-neutral would be to raise taxes for everyone else.

"As with any sales tax, it's regressive," says Ettlinger. "Middle- and low-income people pay a bigger share of it than do better-off people. It would be a huge tax shift off the wealthy onto the middle and low-income people. Taxes would go up for low and middle-income people by thousands of dollars."

BOBBI SIMMONS SEES the national sales tax as a way to eliminate the IRS. She's the media contact for the Arizona chapter of Americans for Fair Taxation. Reached by telephone, the Phoenix retiree admits right out that she's not that familiar with the details of the proposal. "I'll tell you what I can," she says. "I'm no expert."

Simmons is disappointed that the media haven't given the proposal more coverage. At a recent press conference, only one TV reporter showed up, and no report ever aired. "Of course, this was the day the Monica tapes came out," she says. "So that was much more interesting than people having their taxes lowered. If we could make this campaign a little sexier, we might get some coverage."

Simmons says she has no idea how many members the Arizona chapter of Americans for Fair Taxation has. "It's really a grassroots effort, but there's not a lot of organization to it," Simmons says. "It's mostly just people like me who are interested in getting our taxes lowered and getting rid of the IRS. We don't really have even a titular head at the moment. Everybody's just kind of equal. There's nobody I can even name who's like our CEO."

Dale points to people like Simmons as evidence of the national sales tax's "grassroots" support. Dale pitches the national sales tax as a populist measure.

"The payroll tax is the most regressive, egregious tax in he history of our country," says Dale. "Under current tax law, we have a middle class that has a negative savings rate, that lives on credit cards, that is indebted an average of $6,000 at 22 percent interest. We have the rich that are getting richer and the poor that are getting poorer. We have a middle class that lives paycheck to paycheck and we've got to do something about that."

But in truth, the national sales tax is the pet project of a group of wealthy Texans headed by Leo Linbeck Jr., a Houston construction magnate. Linbeck and his cohorts ponyed up the lion's share of the $15 million the group has raised for a large-scale polling project, economic studies at prestigious universities and the recent misleading advertising blitz.

That investment has paid off. When Congress reconvenes next month, a FairTax bill will be introduced. The legislation would do four main things: Establish a 30 percent national sales tax; eliminate the IRS and all income taxes, including payroll, Social Security, capital gains, corporate and inheritance taxes; establish a rebate plan that would ensure every household received a check at the beginning of the month to cover the taxes on "necessities"; and amend the Constitution to make it illegal to tax income.

Dale says the rebate will ensure that the working poor are completely "untaxed." The amount of the rebate would be based on the poverty level.

Dale says the national sales tax plan was developed after extensive surveys of Americans. That poll data was taken to economists at various universities, who came up with the FairTax system.

Dale says the polling revealed all Americans, regardless of income level, believed that citizens on every other income level escaped having to pay taxes. The middle class thought the poor and rich didn't pay, while the rich thought the middle class and poor got away with low tax bills. In reality, 75 percent of Americans pay an average of 6.6 percent of their income in federal income taxes, while the remaining 25 percent pay significantly more. Curiously, Dale says they've designed their "fair" tax policy on Americans' false perception rather than reality.

"It's not an accurate perception," Dale admits. "But it really didn't matter what the reality was--the fact of the matter is, this is what the marketplace believed. Regardless of the income group they belonged to, they believed they were the only ones paying taxes. It doesn't matter how much you try to convince somebody the rich are paying--and so are poor people. They don't believe it. So that's a reality we had to face."

Dale also maintains that the cost of goods and services--the FairTax will include a 30 percent tax on haircuts, mechanical labor and the like--will not result in goods costing 30 percent more than they do today. Her economists predict that the cost of goods will drop by an average of 20 percent once corporate and payroll taxes are eliminated, because those taxes are now "hidden" in the cost of products.

Tuggle, the FairTax's PR man, is even more optimistic. He says the cost of goods will drop 25 percent. And, since he's under the misapprehension that the FairTax is a "tax-exclusive" 23 percent, he says the average price of goods would actually fall 2 percent under the proposal--a sounds-too-good-to-be-true spin that is, of course, untrue, and frankly absurd on its face.

ETTLINGER CLAIMS THE group's numbers are flawed beyond the funny percentages. "A third of their revenue comes from taxing government, as if taxing government purchases raises any money," Ettlinger says. "Yeah, on paper you could say we're going to raise a ton of money by taxing government, but everything the government buys now costs 30 percent more. So you have to raise taxes more if you're going to do that. If this worked, we could just leave us people out of it and just have government continually taxing itself to pay for everything. It's ridiculous. If you take that out, you're up to about a 40-42 percent rate."

Dale, as you might expect, dismisses that criticism, noting that the federal government already taxes employees' pay, which she considers a parallel for taxing the government for every new billion-dollar stealth bomber it buys.

Whichever side you want to take with that argument, you can count on this: If the federal government institutes a national sales tax, the states will eventually scrap their own income taxes, because they more or less depend on the IRS to monitor income. To maintain a revenue stream, the states would then have to raise their sales taxes.

"I think if you count state and local sales taxes plus this federal tax, you're probably end up around 60-something percent," Ettlinger says. And with that high a tax comes a black-market underground economy and a steep increase of bartering.

"Look, when you start getting up around a 50 percent sales-tax rate, the efforts people will make to evade it would be incredible," Ettlinger says. "And it wouldn't be that hard. To evade the income tax takes some pretty fancy footwork and collusion among the political) parties. Evading the sales tax would be much easier. All of a sudden I think Nogales would have a lot of shopping malls. I don't think Tucson would have many left." TW

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