posted
Earlier today I saw an congressional campaign ad in which the candidate said that he supported getting rid of the IRS system and wanted to establish a simpler, sales-tax based system. I thought about this, and I know there has to be something wrong with this idea, but I can't seem to think of it. The sales taxes would be much, much higher but it would be essentially the same kind've income based tax bracket system we have now, right? People with high incomes would tend to buy more things and therefore would be taxed more often and higher, whereas people with low incomes who purchase mainly food and clothing would be taxed less. One issue I have, though, is that I suppose a rich person could stick to buying the same things a poor person would, and would save a lot of money that way; but, I mean, he has to spend that money sometime, he doesn't want to just let it sit.
What do you think of this? There has to be more complex problems with this, because if it was so simple we would have done it already.
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posted
Among many, many other things: stocks, bonds, Certificates of Deposit, other financial instruments, second "homes", real estate, etc would not be subject to the sales tax.
Posts: 8501 | Registered: Jul 2001
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posted
One of the arguments I've heard against using sales tax exclusively is that the purchase of goods takes up a larger portion of a poor person's income than does a rich person's income. For example, I make $3,000 a month and maybe 1/3 of that ($1,000) goes towards purchasing goods. Shaq may make $500,000 a month. Maybe he spends $100,000 a month, which is 100 times more than I would spend. However, Shaq will only get taxed on 1/5 of his income.
Posts: 4116 | Registered: Apr 2002
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posted
Sales taxes almost always result in more regressive taxes. Also, they invite using the tax system for influencing social policies even more -- don't like condoms? make the tax on condoms much higher.
Furthermore, sales taxes are vulnerable to the economy even more than income taxes -- when the economy is down, people buy much less. Its a good way of "taking less of people's money" when in a recession/depression, but the problem is it gives a huge incentive not to spend -- and the only way people having more money will get us out of the recession/depression is if they spend money. So not only would the money people be keeping not be fighting the recession/depression, government safety nets would be underfunded at one of the times they are most useful and necessary (not to mention other government programs).
There are some benefits, but on the whole a sales tax based system would likely be a bad thing.
Posts: 15770 | Registered: Dec 2001
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posted
I disagree - I think that economically speaking, the sales tax would be somewhat superior to the current tax system.
The regressive problem can be fixed by selectively taxing some things more than others. If you tax diamond rings or stock purchases, rather than food and shelter, the burden on the poor will be alleviated. Furthermore, even if it were regressive, it can always be countered by a lump sum refund given to the poorer members of society.
I don't think the whole "incentive not to spend" thing would really hold true, since there's really no use for money other than to spend it. It's either spend it or it is worthless. There might be an incentive to spend LATER if there is some notion that the tax might go away or decrease in the future, but if that expectation is not there, there should be no negative incentive.
Yes, there are some problems with the sales tax (an increase in potential organized crime trying to circumvent the tax is one other), but on the whole I think the benefits outweigh those costs. The biggest benefit that I see is the simplification of the tax collection system. Rather than individuals having to prepare tax payments, that responsibility would fall to businesses, who have expertise in that area and can do it much more quickly, accurately, and efficiently. It also, presumably, could allow us to simply the tax code, and eliminate many of the costs associated with collecting the taxes.
quote:Among many, many other things: stocks, bonds, Certificates of Deposit, other financial instruments, second "homes", real estate, etc would not be subject to the sales tax.
Only if we CHOOSE not to tax them, which we certainly don't have to.
Maybe we should tax ONLY these financial instruments... Posts: 2432 | Registered: Feb 2001
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quote:Yes, there are some problems with the sales tax (an increase in potential organized crime trying to circumvent the tax is one...)
Um, we have organized criminals trying to circumvent the income tax right now. They're called lawyers. Posts: 4116 | Registered: Apr 2002
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posted
Tres, it doesn't matter what you think will happen, it matters what does happen. In recessions and depressions, people historically have socked as much money away as they can in order to protect for eventualities. A high sales tax will make the incentive to do that even greater.
Posts: 15770 | Registered: Dec 2001
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posted
Also, that holds even more true for luxury items -- which is what you have to put the highest sales taxes, and thus rely on the most income from, if you don't want the tax to be regressive. As for the lump sum refund to counter that, the entire purpose of moving away from an income tax is to remove the income bookkeeping. Add that lump sum in and your bookkeeping just skyrocketed.
You should consider taking some courses in economics.
Posts: 15770 | Registered: Dec 2001
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quote:If you tax diamond rings or stock purchases, rather than food and shelter, the burden on the poor will be alleviated.
fugu13 touched on it, but luxery items are notoriously "changeable." When they taxed luxery yachts, people stopped buying them and bought private planes, jewelery, whatever.
If the tax will be higher on things only the rich are likely to buy, the things chosen will by necessity be luxuries and, hence, easily replaced.
quote:Tres, it doesn't matter what you think will happen, it matters what does happen. In recessions and depressions, people historically have socked as much money away as they can in order to protect for eventualities. A high sales tax will make the incentive to do that even greater.
Ah, but what I think will happen IS what does happen.
People save money for eventualities during recessions, yes, but how does that show a sales tax will create a greater incentive for them to do so? There's no additional benefit to saving now if the sales tax later will be the same as it is now, even if there is a recession now.
There would be a negative effect on spending since a sales tax makes the cost of transacting higher, but I think that should be constant across the business cycle, and it should be offset by the positive effect on spending created by putting an equal amount back in paychecks.
Furthermore, since working would not be taxed, it would create an incentive to work/produce more - which also helps the economy.
quote:You should consider taking some courses in economics.
I have a degree in economics. Do you?
quote:If the tax will be higher on things only the rich are likely to buy, the things chosen will by necessity be luxuries and, hence, easily replaced.
posted
One other benefit I forgot to mention before - a sales tax can do the same thing that an income tax, but it fits much better into our natural way of thinking about rights. People feel entitled to the money they earn, and thus that the government doesn't have a right taxing their income without their agreement. They feel they have lost something. By taxing business transactions instead of individuals, we raise prices to have the same effect, but people don't feel like they have lost anything. It's a big psychological benefit.
The flip side is that this might result in less incentive to cut taxes.
Posts: 2432 | Registered: Feb 2001
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posted
I just wonder at the auditing requirements that will be required to ensure everyone entity that conducts business isn't skimming a bit off the top.
posted
Tres, I know you have a degree in economics.
As for the disincentive to spending, do I really have to spell this out? The amount people spend on necessary items will not change greatly, though a re-evaluation of what is necessary does occur (as has occurred historically). People will still spend on "better" things -- that is, luxuries, but they will be even more sensitive to price than before (again, this is just what's known to happen historically). Luxury goods, already elastic, will be even more elastic. A sales tax is the equivalent of a price increase from the perspective of the consumer. Hence, a sales tax will lower demand (the goods in question being elastic). This is a disincentive.
The total amount spent will likely remain the same as if a sales tax did not exist -- but that is not the case in a normal economy where the goods in question are less elastic, resulting in less movement along the demand curve due to changes in price because the value of the money to the consumer is lower (its easier to come by). This means the sales tax is more of a disincentive in a recession/depression than in a normal economy.
Is there some part of my assertions above you would like to dispute?
Also, the example Dagonee pointed out isn't an abstract one -- the luxury boat tax is a classic real life example of when people tried a higher luxury tax. People just bought fewer luxury boats and bought more of other things.
You intend to tax all luxuries equally? Fascinating. What if something is both useful and is a luxury, like nicer chairs or tables?
Also, there are no positive effects on spending by not having anything taken out of your paycheck in a recession/depression as compared to a normal economy. You're already getting everything in a normal economy, so when you continue to get everything in a recession/depression your incentive hasn't changed a bit.
In fact, because in a recession/depression nowadays many people's incomes go down, lowering their tax bracket and increasing the percentage of money they make that they get to keep, in a society with an income tax a recession/depression will create a higher incentive to spend than in a society without an income tax where people's salaries just go down.
There certainly is an incentive to save even if the sales tax will be the same later. Your opportunity cost (that is, necessities now or later in the recession/depression if you've lost your job) in the recession/depression is much, much higher.
And this totally ignores one thing that will happen whenever you have a big sales tax -- black markets. When the means of production are not taxed but the results of production are, there is a huge incentive to take some of the (relatively unmonitored) means of production and sell it without the tax. For one thing, I predict you'd find "yard sales" would suddenly be doing booming business, as would stores selling lesser taxed items (perhaps "neighborhood groceries").
Another big problem with a huge sales tax -- exports. Either we tax exports with the sales tax (effectively creating a trade barrier for our own trade), or we don't tax them and watch our luxury good producers suddenly find it much more profitable to sell abroad, raising local prices even higher.
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quote:A sales tax is the equivalent of a price increase from the perspective of the consumer.
This is the mistaken assertion. A sales tax is only equivalent to a NOMINAL price increase. But since the income tax is gone, nominal income should rise in proportion to the nominal price increase. This means that REAL prices don't change.
Suppose you work an hour for $12, pay $2 in income tax, and buy two apples for $5 each with the remaining money. This is no different than if you work an hour for $12, pay nothing in income tax, buy two apples for $5 each and pay $1 each in sales tax. There is a NOMINAL price increase for apples (from $5 to $6) but since income goes up by $2 at the same time, there is no REAL price change - you can buy the same number of apples with the same amount of work.
quote:You intend to tax all luxuries equally? Fascinating. What if something is both useful and is a luxury, like nicer chairs or tables?
Not necessarilly equally, but it's by no means going to be impossible to set sales taxes in such a way that can't be circumvented by buying one thing to replace another. If we couldn't then our current sales taxes wouldn't work.
quote:And this totally ignores one thing that will happen whenever you have a big sales tax -- black markets.
Yes - this is true. But income taxes also have tax evasion problems.
quote:Another big problem with a huge sales tax -- exports. Either we tax exports with the sales tax (effectively creating a trade barrier for our own trade), or we don't tax them and watch our luxury good producers suddenly find it much more profitable to sell abroad, raising local prices even higher.
I don't think producers face a choice between selling here or selling abroad. They can always sell more abroad but also continue selling in America too.
The bigger problem is imports, because Americans could import untaxed goods and not buy the taxed ones. Even this, though, might be rectified with some sort of import tax equivalent to the sales tax.
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quote:Either we tax exports with the sales tax (effectively creating a trade barrier for our own trade), or we don't tax them and watch our luxury good producers suddenly find it much more profitable to sell abroad, raising local prices even higher.
Taxing exports isn't really an option: "No tax or duty shall be laid on articles exported from any state." Article I, Section 9.
posted
I dispute that real prices would remain the same, because we're already assuming that we're taxing goods disproportionately in order to prevent a regressive tax. Luxury good costs would go up beyond the proportion of the extra income received, while non-luxury goods would go up less. It would become easier to survive, but harder to be rich (in the sense that richness is defined by the ability to buy luxury goods).
Posts: 15770 | Registered: Dec 2001
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posted
There are 50% taxes on items in other countries (not all, but for electronics and stuff) and the economies don't entirely shut down. In Greece, this is the case, and they are apparently told that Americans have it much worse because of all the taxes we have to pay.
The trouble I have with this idea is that the sales tax would not require a bureaucracy similar to the IRS to administer, collect and disburse.
I've had more than the usual insight into the "ugly" (read: armed) side of the IRS, and I still think there's no guarantee that any replacement wouldn't be worse.
P.S. it's pretty safe for a congressman to say he supports getting rid of it. It's like me voting green in Utah.
posted
Economy entirely shut down? Of course not. I just think it would be slightly worse than the current situation.
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quote:Luxury good costs would go up beyond the proportion of the extra income received, while non-luxury goods would go up less.
Yes, this is true I suppose. It would probably result in less spending on luxuries.
...
Incidently, aren't there other options available for trying to cut down on administration? Suppose we did something like keep the income tax, but instead make employers pay it rather than employees. Ultimately it would have the same effect, but it would probably be easier to verify the records of a company since supposedly they are supposed to already be keeping good records. I guess it would make it hard to tax the poor less then, but it might be worthwhile.
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posted
As a former small business owner, I beg you please do not advocate anything other paperwork requirements for business. They have more than enough!
posted
The employers already pay it for the most part, the employees just calculate how much of a refund they get -- withholding is what its called nowadays.
The problem is that people get income from non-employer sources, so in order to equitably tax income one must go to the one receiving the income.
I'm personally for a much simpler income tax -- two fairly widely spaced brackets, very high standard exemption, very few additional exemptions. No income to be exempt from reporting, non-monetary asset transfers valued at a moderate discount (say, 85 or 90 percent). Corporations taxed only on income that is used to pay for personnel expenses (transportation, training, jelly donuts, that sort of thing) (this is to prevent the obvious loophole of giving perks on corporate monies, effectively allowing for untaxed income on the part of the employees).
Posts: 15770 | Registered: Dec 2001
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posted
VAT, ValueAddedTax. Removable from export goods by VAT rebate to the manufacturer(s) under international trade agreements, while a nation cannot subsidize export by rebating the income tax portion of the price of labor.
A flat income tax with only a single deduction per person-in-household for the median cost of survival -- food, clothing, housing, insurance, education, with 100% of the cost of medical care -- combined with a flat property tax on all property (including financial instruments such as stocks, bonds, certificates of deposit, pension funds, savings accounts, etc) would be a better measure of the cost of a person's economic activity to the society. Repaying society for the benefits received from living in that society is pure TANSTAAFL: There Ain't No Such Thing As A Free Lunch.
Corporations should pay the same rate as individuals, and receive no deductions, credits, or subsidies whatsoever except 100% deduction on the median cost of compensation (salary, wage, pension, medical insurance, and transportation) per employee: eg if Walmart pays a median compensation of $10thousand and the CEO makes $10million, $9.99million of the CEO's compensation is taxed.
100% inheritance tax (excluding survival costs for legal dependents). When a person is dead, s/he is dead, and the dead should not make economic decisions which affect the living. Inheritance is more absurd than allowing dead people to vote. Wealth is accumulated through the accommodations of government. So again, TANSTAAFL or for the Economics-minded: Render unto Caesar that which is Caesar's.
posted
I wonder if aspectre has ever spent any real amount of time with someone trying to run and keep running a small business.
You do know, don't you, that the majority of people in this country are employed by small businesses, not the giant corporations like WalMart? Do you have any idea the amount of paperwork it takes to operate a business legally?
Sure, don't give businesses any deductions, and let them collect and send in a national sales tax in addition to the paperwork load they currently have. That'll work out great for about one month, until every small business owner in America closes up shop because they can't afford to stay in business.
Posts: 14428 | Registered: Aug 2001
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posted
Here are my problems with this well thought out idea.
1) Increase in cost. Take your apple idea. Instead of charging $2 / hour in taxes to the worker, you add $3 to the cost of an apple. Assume you do the math and get it all balanced out.
However, the guy selling the apples now has to report and verify the sales tax he's collected. This requires much more time from his accounting staff. His costs go up. He passes that on. The result is an additional $.50 cost for that apple.
2) right now businesses lobby to get better tax breaks for themselves. Do you honestly think there will not be even greater lobbying to get tax breaks for businesses in need? The Salmon industry is having a bad year, so they lobby their congressman to lower the tax on Salmon. THis has to be made up somewhere, so the apple price goes up again. Another $.50 for that apple.
3) Joe sells Lexus's and Mack sells Yachts. They see a 40% sales tax added to thier products. What do they do? They open up a Mexican Lexus dealership just over the border, and a Canadian Yacht sales office up north. Wouldn't you fly down to Tijuana to save $20,000 on your car? If we are lucky, they will still produce those items here, and not worry about the costs of shipping them out of the country. If we are not lucky they will begin the manufacturing down in Mexico and up in Canada. Either way the massive amount of income from luxury sales that we have planned drops as people purchase these items from overseas. This money has to be made up somewhere. Another $2.00 to the cost of that apple.
5) Jane works hard at a minimum wage job, refusing to go on welfare. She barely makes it by. Suddenly, the costs of everything she buys, from food to rent, has increased due to these new taxes. If she survives until the end of the year she will get a check from the government that is supposed to allow her to cover these increased costs, yet her land lord and the electcric company and the grocer demand payment now. Its a long cold wait without heat in the winter, hoping for the arrival of your government check.
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You do realize that businesses have other expenses besides salaries, don't you?
