Michigan legislators correctly send sales tax increase for roads to the voters

Mlive.com reports the story here.

As I've argued before, here, an increase in the sales tax for road repairs is far less regressive than the gasoline excises as they currently stand, so I support this if I only had various tax increases to choose from. Governor Snyder's plan to raise excise taxes even higher to pay for roads was a non-starter for this reason. Commuters to minimum wage jobs shouldn't have to bear the brunt of a consumption tax on fuel which is at least twice what it is on a roll of toilet paper.

Paying prevailing wages for road repairs under Davis-Bacon laws to union shops, however, guarantees that we pay the highest prices for roads. We shouldn't have to put up with that. Competitive bidding by non-union shops is called for.  

It is also regrettable that the excise tax isn't being eliminated altogether, because, as I've said, it's about twice as onerous as the current sales tax of 6%. That it is actually being expanded somewhat under the bill is moving in the wrong direction. Maybe we can work on eliminating that in future.

Opponents of the sales tax increase should consider whether now is the time to pick a fight with the unions to get better roads at a lower price, and should also lay out what could be cut from the current budget to otherwise accomplish the goal. But the roads have been allowed to get so bad for so long it is difficult to accept the idea that we can afford to wait any longer.

The current compromise may be the best deal for everyone involved.

Perhaps The Most Important Argument Against Consumption Taxes

Perhaps the most important argument against consumption taxes is Murray Rothbard's critique of them here, noting their time-preference prejudice:

"The major argument for replacing an income by a consumption tax is that savings would no longer be taxed. A consumption tax, its advocates assert, would tax consumption and not savings. The fact that this argument is generally advanced by free-market economists, in our day mainly by the supply-siders, strikes one immediately as rather peculiar. For individuals on the free market, after all, each decide their own allocation of income to consumption or to savings. This proportion of consumption to savings, as Austrian economics teaches us, is determined by each individual's rate of time preference, the degree by which he prefers present to future goods. For each person is continually allocating his income between consumption now, as against saving to invest in goods that will bring an income in the future. And each person decides the allocation on the basis of his time preference. To say, therefore, that only consumption should be taxed and not savings is to challenge the voluntary preferences and choices of individuals on the free market, and to say that they are saving far too little and consuming too much, and therefore that taxes on savings should be removed and all the burdens placed on present as compared to future consumption. But to do that is to challenge free-market expressions of time preference, and to advocate government coercion to forcibly alter the expression of those preferences, so as to coerce a higher saving-to-consumption ratio than desired by free individuals."

Rothbard goes on to ascribe this prejudice to "Calvinism", which may be entertaining to the libertarian who is interested in wine, women and song now and has a devil may care attitude about present frugality as a defense against want later. But this assumes there is no moral difference between savings and consumption, which there certainly is when the penniless old man turns up on your doorstep, hat in hand. The libertarian has his own time preference prejudice, were he to admit it, which life teaches us has serious consequences, more often than not.

Be that as it may, it is important to recognize that standard measurements of economic activity in the United States have for some time shown, in something like the following formulation, that "70% of GDP consists in consumer spending", and were it not for schemes like Social Security and Medicare there would be far more ringing of the bell going on at the front. This is quite a remarkable fact in a supposedly Calvinist civilization, a fact which argues for the moral superiority of savings over consumption because despite our better natures we in reality live otherwise. This suggests that we still ought to do everything we can to encourage the former and punish the latter, for the simple reason which the observation of human nature teaches. We are mixtures of good and evil, but unfortunately too often it turns out to be a bad mixture.

The ancient Greeks, among other things, notably taught us "nothing too much", by which we may infer that the preponderance of present spendthrifts demonstrates individual and social excess which ought to be remedied by tax policy encouraging the increase of savers. To right the ship would mean achieving a better balance between the two, and to Rothbard's main point, which is that under a consumption tax savings would inevitably be taxed in the long run anyway just as consumption is in the present because that is what savings becomes, we therefore ought to have no compunction about taxing savings in the end. That is what the death tax accomplishes, the final message to an excess of savings.

In the present context this recommends taxation of consumption in some form to encourage marginally less of it, better mechanisms of rewarding savings of which we have too little, and a death tax which approximates the same level as a consumption tax would operate at. This means that draconian schemes of estate confiscation by the government at death are in principle unjust because as consumption taxes we would never think of imposing similar levies on the living.

Unless, of course, we subscribe to The New Republic.

The Broadest Tax Base Which Can Possibly Be Imagined Implies a Tax Rate of 6.2%

Herman Cain's 999 Plan is focusing attention on the perennially perplexing problem of taxation for the American electorate in 2012. His plan has brought questions about broadening the tax base for tax reform front and center, including: What tax base is large enough to generate adequate federal revenues? and: What rate of taxation is fair?

Herman's big idea is to scrap the entire tax code and start over with three new bases taxed at the same low rate for a temporary period of time, eventually transitioning the country permanently to just one of these bases, taxed at a much higher single rate.

His scheme is quite conventional in that it looks to the existing traditional bases of taxation with which we have been familiar for decades: corporations and individuals.

What is new, however, is the national sales tax, the base for which was fairly sizable in 2008 at $10.1 trillion in personal consumption expenditures [PCE], and running at almost $10.8 trillion annualized through August 2011.

Currently the overwhelming burden of taxation falls on the individual filer whose personal income is taxed in order to provide Social Insurance and Federal revenues, which in 2011 are currently running at an annualized rate of $2.3 trillion, as shown here by the Bureau of Economic Analysis. Corporations, excises and tariffs provide puny sums by comparison: less than $500 billion in 2008.

This means that in 2011, Herman Cain's ultimate idea of taxing consumption to replace current revenues of approximately $3 trillion would imply a national sales tax rate of 28 percent on $10.8 trillion in goods and services expenditures this year. That's a pretty hefty rate by comparison with present conditions.

Currently the personal income base on which we exact that $2.3 trillion in Social Insurance and Federal taxes is just over $13 trillion. This implies an overall tax rate of 18 percent. If personal income in that aggregate amount had to do all the pulling to generate the full $3 trillion in revenues, personal income would have to be taxed at a rate of 23 percent to do the same thing as the consumption tax. Not as high, but still much higher than the 9 percent Herman Cain has called for currently, if only temporarily, in deference to the God of the Bible who asked for just 10 percent from his chosen people.

By way of comparison, if there were some way to easily tax GDP, currently running at $15 trillion, the effective tax rate would have to be 20 percent.

So is there a tax base which is broader still, from which we can derive the necessary sums and get that rate even lower?

Given that people by definition receive income in consequence of the conduct of business of one kind or another (aside from gambling, prostitution and bank robbery), it seems reasonable to look at the size of the various tax bases available strictly from businesses, without whom none of the other tax bases would exist in the first place. If we really mean it when we say we want to tax income only once, we need to go to its source, and for nearly everyone in our society, that source is business.

Corporations in 2008 had total receipts of $28.5 trillion, 2.8 times the size of Herman Cain's PCE tax base. It would have taken a gross receipts tax of merely 10.5 percent on this sum to have generated $3 trillion in tax revenue in tax year 2008, a year when revenues were actually lower at $2.5 trillion. That implies a gross receipts tax of only 8.8 percent on corporations in 2008.

In such a world, there would be no more income taxes on individuals, no Social Security or Medicare taxes either, and no capital gains taxes nor taxes on investment income or savings of any kind, and government would not go wanting. Nor would business be constrained by other taxes and fees imposed on it if we were to throw out the current code and replace it with this simple levy.

But the base could be made broader still in order to lower the effective rate even more.

Add in partnerships, which had $5.9 trillion in total receipts in 2008. And S corporations, which had $6.1 trillion in total receipts in 2008. Both of these added to corporation total receipts yields a gargantuan tax base for 2008 of $40.5 trillion in gross receipts.

All of that could have been taxed at a mere 6.2 percent to meet the federal revenue of $2.5 trillion collected in 2008.

No more talk of a flat income tax, nor of a progressive income tax, nor of a consumption tax. No more compliance costs of $450 billion because of the current code. No more lost time equivalent to 3 million full time jobs.  Just one, low, simple, rate on business. That's it.

In addition to God, John Tamny might go for it, too:

"The answer as always is for the government to simply get out of the way. If it must tax corporations, its taxation should be blind in the way that justice is. A flat gross receipts tax would make all corporations equal before the IRS. That would ensure the most economic allocation of capital on the way to rational, market-driven growth."

Herman Cain's Consumption Tax Is Firmly Rooted In The Framers' Original Intent

Lawrence Hunter for Forbes provides an excellent primer on the Framers' argument for indirect taxation, which is to say taxation on consumption, showing how such taxation was chosen by them on purpose because it is by nature self-limiting, which is a necessary predicate to limited national government:

Hamilton’s exposition in Federalist #22 illustrates the sophistication of the theory of political economy that informed the original constitutional design, which gave rise to a constitutional pincer holding the national government firmly in check.  History has borne out the Framers’ expectations that taxes on consumption are to a large degree self-limiting, while direct taxes know far fewer limits.  In the case of the original Federal design, the self-limiting tendency of indirect taxes on consumption augmented the other arm of the constitutional pincer—limiting the national government solely to the exercise of delegated powers—to make unnecessary other specific constitutional limitations on the national government’s taxing and spending authority, i.e., explicit taxing, spending and borrowing limitations.

The whole thing, here, is must reading.

The Collection is Eluded: Consumption Taxes Allow YOU to Control How Much Government Gets

And that's why the FAIR TAX has gone nowhere so far. Neither Democrats nor Republicans want YOU to kill the golden goose.

But now we have the very likeable Herman Cain, who advocates the consumption tax, the tax the Founders advocated. Even Alexander Hamilton, to whom we owe our strong central government, advocated for it in Federalist 21:

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

Two important commentators at Forbes are coalescing around the perfections associated with a consumption tax, Lawrence Hunter and John Tamny, but Hunter is clearly the constitutional originalist in this matter.

John Tamny, who has argued for a gross receipts tax on corporate business if there must be a corporate tax, however, has caught the spirit here:

As Larry Hunter, another fellow Forbes contributor has noted recently, the beauty of a consumption tax is its limiting nature. Quite unlike taxes on income that are paid no matter what, with a consumption tax individuals would be able to limit the amount of money handed to the government by virtue of spending less.

This is particularly important during times of economic hardship. While with income taxes we pay regardless, if a consumption tax were implemented Americans could put the federal government on a diet at the same time that economic uncertainty is forcing them to tighten their own belts.

At present, and as evidenced by the boomtown that Washington, D.C. currently is, the government industrial complex is gorging at the same time that most Americans are reducing expenditure. This is wrong on so many levels, and as it’s true that during downturns individuals tend to spend less (their savings once again an economic stimulant), so should Washington be forced to. 

Herman Cain's National Sales Tax Might Make Renters Better Off, With Transitional Problems For Existing Owners of Residences and Rental Income Properties

An important study published in 2008 here simulating the effects of the Fair Tax, Herman Cain's ultimate goal, namely a consumption tax to replace all other federal taxation, concluded the following about its impact on housing:

The enactment of H.R. 25 thus causes the homeownership rate to gradually decline as the demand for housing falls. Demand for owner-occupied housing decreases because of the elimination of the tax on normal returns to capital in the nonresidential and rental housing sectors (which reduces the relative tax advantage of owner-occupied housing) and the elimination of the tax deductions for mortgage interest and property taxes. Note that under H.R. 25 all consumption goods are treated roughly the same since most nonresidential consumption is taxed, rental housing payments are taxed, and the tax on new investment in the owner-occupied sector is roughly equivalent to a front-loaded or prepaid tax on the flow of housing services from such investment; only housing services from existing, owner-occupied housing are untaxed. As a result, there is no preferential tax treatment of new investment in owner-occupied housing under H.R. 25. Because of this, a portion of the investment in owner-occupied housing that would have occurred under the income tax is shifted to the nonresidential and rental housing sectors. Rental capital as a share of the total capital stock increases from 13.4 percent to 13.7 percent in the long run and the output of rental housing as a share of total housing output increases from 24.9 to 26.2 percent. This decreases the real price of rental housing services as the stock of rental housing increases, which makes renters better off. ...

Our results indicate that such a reform would generate significant overall macroeconomic improvement in both the short and long runs, reflecting the labor supply and savings responses to lower overall tax rates on labor income and the elimination of the taxation of normal returns to capital income (a marginal effective tax rate of zero on the income earned by new investment). In particular, the model simulation results indicate that GDP would increase by 3.8 percent in the long run, reflecting a 2.9 percent [increase] in labor supply and a 5.3 [percent] increase in overall investment. However, the implementation of such a reform would raise some significant transitional issues, especially in the housing sector. These can be grouped into effects on the owner-occupied housing sector and the rental housing sector. ...

[T]he simulations suggest that the prices of existing homes would fall by 10.1 percent in the year of enactment of H.R. 25, although this effect would dissipate rather quickly, with declines of only 2.6 percent two years after reform, 1.2 percent five years after enactment, and no effect in the long run. ...

[T]he real value of existing rental housing would decline by 25.7 percent in the year of enactment of reform, and this decline would remain roughly constant, with a long run decline of 25.8 percent. These declines arise because investments in rental housing were made on the assumption of continued depreciation deductions under the income tax, but these deductions disappear under the sales tax while rents are fully taxed under the new regime.

Americans Today Pay An Average Gasoline Consumption Tax of 10.2 Percent to States

The current average state excise and tax per gallon of gasoline is 30.4 cents, according to the American Petroleum Institute, here.

The federal excise is 18.4 cents.

Today's national average price per gallon is $3.464, as shown here.

This means that today's national average base price per gallon is $2.976 per gallon.

That yields an average state excise of 10.2 percent at today's base price, and an average federal excise of 6.2 percent. 

Dick Morris Loves The 999 Plan, But Slaughters The Arithmetic

Trillions. Billions. They're all the same, right?

Here.

He was much better on Hannity today, where he nailed the consumption tax's grip on the neck of big government.

Not very many people have been making that point, that I know of, except me.

Herman Cain's 999 Tax Idea is a Pipe Dream

Total retail and food services sales, according to the US Census Bureau here, in 2008 came to $4.4 trillion. (For 2010, the annualized estimate based on 8 months' of data is running at $4.6 trillion).

To replace the federal tax revenue of $2.5 trillion in 2008 solely on the back of consumption taxes, such as a national sales tax, would imply a national sales tax rate of . . . 57 percent. Unthinkable, unless you are Greece.

Herman Cain doesn't advocate that. But his idea of a 9 percent sales tax would have generated, at most, a paltry $400 billion in 2008. Coupled with about $765 billion from a 9 percent income tax on about $8.5 trillion in total adjusted gross income in 2008, the business community would have been on the hook for the missing $1.3 trillion in 2008 federal revenue, when it actually contributed only $300 billion in taxes that year.

A 333 percent increase in the tax liability of American business sounds like something only a commie like Obama would propose.

Herman Cain's numbers don't even come close to matching the problem which we are facing.

High Tariffs Allowed Domestic Producers To Get Really Rich Off Captive Consumers

So says John Steele Gordon, who provides a short history of taxation for The Wall Street Journal, here:

After the Civil War, nearly all the wartime taxes—including the nation's first income tax—were repealed and the federal government relied mostly on the tariff for revenues. It provided the government with more than ample peacetime income. In 1882, the government had revenues of $403 million, but expenses were only $257 million, a staggering budget surplus of nearly 36%. The reason the tariff was so high was, ostensibly, to protect America's burgeoning industries from foreign competition.

Of course, the owners of those burgeoning industries—i.e., the rich—were greatly helped by the protection, which enabled them to charge higher prices and make greater profits than if they had had to face unbridled foreign competition.

But the tariff is a consumption tax, which is simply added to the price of the goods sold. And consumption taxes are inherently regressive.

Which ought to get more attention on the right when one considers that liberals like Paul Krugman, Nancy Pelosi and Barack Obama and so-called conservatives like Herman Cain, Rick Perry and Mitt Romney all seem to like consumption taxes in one form or another.

The move would raise more revenues off the rank and file, and preserve the fortunes of the rich, which is why so many politicians support them. The better to eat you with, my dear.