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DO YOU PAY YOUR INCOME TAX
AT THE SUPERMARKET?(If your answer is no, this information will surprise you!)
By D. Sherman Cox J.D. L.L.M. Taxation
The free market system converts a tax on income into a tax on consumption. Here is how.
There is a mechanism, not found in the Internal Revenue Code, not well understood and almost never discussed, which permeates the entire tax payment system.
We will attempt to give you a look at how the income tax is actually paid.
It Doesn't Work As Advertised
The graduated income tax system was conceived for a Socialist Society and is Item Number Two of the Communist Manifesto. In a free market economy where government can't force labor, product or service inputs nor dictate mandatory purchases at government-controlled prices the income tax doesn't behave in the way these Socialists intend. In fact, in a free market economy there can be no unrecovered tax cost on the input. If we taxed the input without a cost recovery system manifest in higher consumer prices, there would be no imputes. This is why a free market society can produce an abundance of goods and services while a Socialist society survives only to the extent it is willing to allow tax cost recovery by its producers.
How The Income Tax Works
The congress assesses a tax on all incomes of U. S. citizens plus various excise taxes and taxes on business income generated through for-profit entities.
This tax, in the aggregate, caused income to the Feds in 1999 to be 24% of G.D.P. (Gross Domestic Product)
Employers use their businesses as tax collecting and reporting organizations, not tax paying organizations. We say that business is not a tax paying organization in the sense that businesses collect the tax from the consumer and transfer it to the Feds by capturing the imbedded tax added to the cost of the goods and services it purveys. The tax works the same way for the cost of the Tax on employee incomes and owners profit from the business. Researchers estimate that this imbedded tax is about 23% of retail sales. This compares favorably with the Feds 24% take of G. D. P. in 1999.
The Employees Perspective
Assume a Supermarket with one hundred employees. The accountants add up the Federal liability for each employee, for the business and for the owners labor. This total number for Federal Tax liability is usually about 23%. This pool of cash is labeled the Tax account and periodically forwarded to the Feds for the credit to the various employee and other tax liability accounts.
To see this process, follow a can of peaches from the farm to the supermarket. The farmer must have a Tax account to defray his tax liability sustained through labor, etc. to grow the peaches. Of course all of his suppliers, fertilizer, machinery, fuel and so forth must have a Tax account to defray their liability to the Feds. All of these suppliers add these tax cost to the price they pass on to the farmer. The farmer then conveys the peaches to the cannery, which must also maintain a Tax account for labor and various other inputs. The supermarket must purchase the peaches at a cost about 23% higher than would be necessary without the tax cost. The supermarket must then add 23% on its gross margin to feed its tax account when it sells the peaches.
The employee never sees the Fed withholding. He correctly assumes that his real economic value is the stated wages minus the withholding, sometimes called, "the take home pay". He then is willing to support politicians who favor higher taxes on others in the mistaken belief that his employer has paid his taxes and he will receive a free benefit from the Feds. This scenario is repeated thousands of times for all products and services consumed in the United States.
The Real Question
The prior example left one critical question unanswered. The advocates for the poor insist that you not expose their duplicity by asking this question.
The question: How does the business collect the pool of cash necessary to defray its tax liability?
Answer: They increase the price of their goods and services sold by the amount necessary to defray the tax liability.
Question: Who pays these increased prices for the goods and services purchased?
Answer: The consumer, including the supermarket employee who thought his taxes had already been paid by his employer. Now he must pay 23% of his take home pay through higher prices when spent for living expenses. This is where the tax is actually paid; here is where your money is actually extracted from your, "take home pay".
Why do we call it a tax on consumption? Because every participant in the supply chain can recover its tax cost except the final purchaser who actually consumes the peaches or any product or service.
Are We Double Taxed?!
No. The tax payment system is a disguised consumption tax with three integral parts.
First: The Congress levies a tax on income. (The income tax)
Second: Employers add these income levies together and increase prices enough to cover these cost (The Tax account).
Third: The employee in his roll as consumer then feeds the vendor's tax account by paying 23% of his take-home pay through higher prices (The consumer pays the vendor who transfers this payment to the Fed).
Does It Make A Difference?
When we describe how the free market converts what is labeled a tax on inputs, i.e. income for labor into a tax on consumption what difference does it make?
First: It forever changes our common perception about who pays the income tax and how it is paid.
Second: This imbedded and disguised tax cost recovery system is a flat tax in the sense that all people be they rich or poor expend the same 23% on any consumer purchase which they make to feed the vendors tax account.
Third: When the supermarket we used as an example figures the size of the Federal Tax Account, they include all Federal tax liabilities. The tax liability of the minimum wage grocery sacker and the 39.6% tax on the salary of the top managers and owners are all factored into the same pot for transfer to the Fed with a credit distributed to each employee tax filer measured by the employee's earnings.
Fourth: It is the total Federal Tax from all salary ranges and all other taxes levied by the Fed's on the supermarket that determines the total price increase necessary to fund its tax account. The tax is levied on and measured by the employee's earnings but it is paid by the supermarket's customers through higher prices.
Fifth: If congress raises the income tax on wealthy supermarket owners who pays the tax? Obviously all consumers. The more you tax the "rich" the higher the cost of groceries become because of the free market tax recovery system. As you tax the rich, the poor suffer. For example if an affluent consumer comes into the supermarket to purchase $100.00 of groceries, she gets $77.00 worth of groceries and leaves $23.00 for the Federal Tax account of the vendor who then uses the $23.00 to feed his own tax account and to recoup the added cost paid to shippers and suppliers based on their higher prices occasioned by Federal Tax liability calculations. If an impoverished lady with a large family comes into the supermarket to spend $100.00 she receives $77.00 of groceries and leaves $23.00 for the Feds. She may have needed more groceries for her family but her tax contribution is the same as someone more affluent. It is a flat tax in this sense.
The Practical Effect
1. It is the total take of the Feds from all salary ranges that determine the amount of the imbedded tax. To lower the total take through rate reductions would be of great benefit to the economically challenged members of our society through lower consumer prices. It doesn't matter which economic quintile gets their taxes lowered. It is the total impact of all taxes that determine the size of the cost recovery tax, which all consumers must pay.
2. The Democrats will only fight when the total tax take of the Feds is reduced as President Bush has discovered. The Democrats know that the Bush proposal, when implemented will reduce the imbedded tax perhaps from 23% to about 21%.
3. Consider that during the early 90's the Fed's take was increased by raising the tax rate on the most affluent from 28% to 39.6%. During the 90's these top income earners never had such good times while the lowest quintile of income earners struggled to maintain their standard of living. Why? When you raise tax on the affluent it increases the total tax take of the Feds, adversely impacting the consumer prices the financially challenged must pay. The impact is disproportionately negative because of their smaller incomes.
WHY CHANGE THE CURRENT SYSTEM?
In addition to collecting revenue, the other purpose of the income Tax after World War II was to direct economic behavior. This proved problematical at best and led to unintended consequences when a system designed for an agrarian collectivist 19th century economy was grafted onto a free market system starting in the second decade of the 20th Century. Why not switch to the more efficient tax collection system. By the 60's even the most obtuse left wing professors and intellectuals had disavowed the most brutal aspects of communism. So why has this relic of 19th century socialism persisted? By mid century our politicians realized that by offering exemptions and exclusions, credits and deductions, threatening tax hikes and employing a massive I. R. S. intimidation bureaucracy they could punish foes while rewarding friends, Tax filers soon learned that by contributing staggering sums of campaign cash they could ameliorate some of the Congress' most outrageous behavior.
Some politicians love the current system. It allows the Democrats to pit one group of taxpayers against another. We now know that the Tax the rich rhetoric doesn't hurt the rich very much because most of their payment represents a recovery of the imbedded sales tax levied on the goods and services they purvey. Unfortunately, the benefits available from reductions in the reporting requirements on the poor are more apparent than real because their smaller incomes have already been subjected to the higher retail prices occasioned by the indirect, imbedded, cost recovery, sales tax and forwarded to the Feds on the vendor's returns.
An Invitation To Corruption
The entire code with its credits, exemptions, exclusions and deductions is a vast confidence game where each group of tax filers is made to believe that it has some advantage over others, which compels the group to support the corruption of the current tax code in order to preserve their preference.
The tax code itself is based on a major deception that the graduated income tax results in higher taxes as a percent of income paid by wealthy taxpayers. This is false. It is a flat tax paid by consumers at a flat rate, currently 23%.
Unfair? The Feds will always collect their 23% of total retail sales. Unfortunately there is no guarantee that each tax filer will recover the exact amount of those tax cost recovery dollars necessary to satisfy his particular tax obligation. The self-employed and the more affluent are particularly vulnerable to this systemic imbalance. There will always be unfairness until we eliminate the current system.
The Codes corrupting influence permeates the Judiciary, the legislature and the bureaucracy it even adversely affects our ability to sell overseas but much has been written on these subjects. Steve Forbes says the Tax Code is the center of corruption in the U. S. We anticipate that you now may agree that it should be replaced.
Purpose
The primary purpose of this article is to present a clear view of how the graduated income tax is converted from a tax on income into flat tax on consumption by free market forces.
Clarity can be illusive when introducing new thinking while simultaneously inviting the readers to exercise their conceptual abilities. Understanding that the tax is paid by consumers is not obvious to some people who have been told all their lives that the tax is paid on income. Additionally, some people are reluctant to modify cherished beliefs regardless of the accuracy of the observations presented or the unassailable description of how taxes are actually paid!
Secondarily, we did offer comment concerning the multitude of inadequacies of the current system in the hope that a more rational system will be demanded.
If you determine that replacing the existing system would be a benefit, then the question is how do we do it? Practical people need alternatives to examine when committing to reform. There are several proposals. The most interesting involve some form of a Retail Sales Tax. Proponents have written volumes about different versions of a retail sales tax.
The following five notions as outlined below in this separate section seem somewhat persuasive. We will compare them to the current system now that you understand how it actually operates. This will allow you to better assess alternatives.
First: Mechanics
The retailer has collected the full-imbedded tax estimated at 23%. Instead of distributing a portion of this back to suppliers through higher payments for products, just eliminate the income tax and purchase the merchandise 23% cheaper. Add the 23% retail tax and let the retailer send the tax to Washington. The consumer price would hardly budge and the Feds would get the same amount of money.
Eighty percent of all retail transactions are conducted by 11,000 retailers. Even if you added 89,000 more it would only total 100,000. Compare that with the 130 million tax returns and the massive I. R. S. agency with 115,000 employees, which could be eliminated!
Second: Savings?
One of the big differences in the current indirect imbedded sales tax recovery system known as the Income Tax and the direct sales tax system involves savings. The current system assumes all savings were spent by the consumer in the current year and requires reporting accordingly. The National Sales Tax assumes all income was saved in the current year and requires tax payments only upon actual consumer spending. (The 23% sales tax) The National Sales Tax should spur saving by deferring the reporting and lead to a higher standard of living for everyone.
All taxes are part of the cost of doing business and as such are inherently inflationary. Under a National Sales Tax interest rates would probably fall by at least a couple of points.
Third: Power
The congress has the power to perform two primary functions concerning taxes.
First: They can set the rate of the imbedded tax by their levy on the citizen's income. This could be more accurately accomplished by a retail sales levy.
Second: They can complicate the filings through the Tax Code and terrorize the tax filers through the I. R. S. and these would be abolished.
A National Sales Tax could replace the Code with one paragraph. The current Tax Code and the I. R. S. would be superfluous. Congress will determine the details.
Fourth: Efficiency
If tax collections under the present system deteriorate further a change may be demanded.
According to the I. R. S. 20% of income is not reported at all and another 6% is not paid. We are looking at 74% reported and paid. What degree of inefficiency must the present system exhibit before a more rational approach is adopted? Can a critical mass of support be developed for a replacement?
Fifth: Similarities
Both the graduated income tax and the Retail Sales Tax are paid by consumers, collected from rich and poor at a flat percentage rate. The great difference is the National Retail Sales Tax accomplishes this objective without the Internal Revenue Code or the I. R. S.
CONCLUSION
We solicit your assessment and invite your concurrence that our country needs to replace this old 19th century relic we call the graduated income tax. It was designed for a socialist collectivist society and grafted onto our free market economy early in the 20th Century causing untold dislocation and pain. Now as we race into the 21st century information economy, this last 19th century buggy whip has to go! Lose the tax code and the I. R. S. We need a system that brings fairness, efficiency and simplicity. Indeed, we need transparency concerning the imbedded tax recovery system to provide more rational treatment of all consumers. Additionally, it may mitigate the attitude of that 40% to 60% of the Tax filers who harbor unyielding hostility to the current unfair, corrupt and intrusive Tax system. In so doing some form of a National Sales Tax may help promote domestic tranquility as our Constitution ordains.
D. Sherman Cox J.D. L.L.M. Taxation
We are prepared to discuss, explain or defend this article to media outlets or interested groups.
E-mail: dcoxatty@swbell.net
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