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Arkady Grudzinsky

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Would you prefer sales tax to income tax?

The power to lay and collect taxes is, perhaps, the greatest power of the government. With this power alone, the government can encourage or prohibit certain behaviors without passing additional laws - it can effectively ban alcohol, tobacco, firearms, etc., can coerce people to marry, to have or have no children, buy gas or "green energy", buy real estate, lock up their money for decades in retirement accounts (both policies make people return a large percentage of their income straight back to the banks withdrawing huge amounts of cash from circulation). Taxes inhibit the taxed activity.

I see several advantages of sales tax compared to income tax:

1. Sales tax inhibits spending, income tax inhibits earning. When money are taxed when spent, not when earned, it may encourage saving and investing rather than spending and incurring debts.

2. One can avoid paying a sales tax on discretionary items by not buying these items - sales tax is less coercive.

3. Sales tax on discretionary items appears to be self-regulating. When it is too large, people stop buying the taxed items, and the tax revenues drop. It's easier to determine the economic effect of sales tax and optimize the sales tax percentage. Whereas, the economic effect of changing income taxes is a lot harder to determine.

4. The tax code would be extremely simple - just a look-up table of tax rates (this may be a naive statement).

5. "Taxing the rich" would mean taxing the excessive luxurious lifestyle. Why would a frugal billionaire who leads a lifestyle of an average citizen be taxed more than an average citizen?

I understand, there is no "correct answer". This is why I post this as a debate. I'd like to know how many people think this way and to hear cases for or against both types of taxation.

Edited 4/13/2013: This seems to be a similar idea: http://www.fairtax.org

Topics: economy taxation
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Closing Statement from Arkady Grudzinsky

I'd like to thank everyone for the discussion.

There were good points made:

- that sales tax would make "the rich" pay smaller percentage of their income than "the poor";

- that no matter what type of tax we have, "the rich" will still have an opportunity to avoid it - either by spending money overseas or by making money overseas bringing into consideration the necessity of a uniform wold-wide taxation.

- A good discussion whether charity should be voluntary or compulsory and whether people should contribute to society voluntarily or forced to do so.

- Good references to other resources such as Mises institute.

- Interesting point in a video referenced by Krisztian Pinter that taxes have a way of distributing across all layers of society - often what seems to be "a tax on rich" becomes a burden on "the poor" bringing up the idea of a uniform tax (sales or income) with equal percentage for the rich and the poor.

- A good discussion with Pat Gilbert of how government intervention in free market creates artificial incentives and "bubbles" which are unlikely to exist otherwise.

These are just some points worth noticing. I appreciate having a civilized discussion on such highly politicized topic involving social justice, economy, and morality. This is where TED community stands out.

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    Apr 17 2013: Regarding 5th.:
    If said millionaire lived the life of an avg person thered be even less reason for him to hold on to a large portion of his money. Why would we tax him lesss another point is that this DEFINATELY would lead to a spread of wealth, because inorder to get the same amount of tax back youd have to do an enourmous increase in sales tax, the point being that someone with less income will spent a larger portion of his income (for the avg citizen i guess itd be more then 100% of their income, if you also look at debt) whilst the rich wouldnt have to tax 99% of their income (which stays at the bank because its never even needed would accumulate more and more money)

    I have got no idea at all how you can expect this to be an in any way fair system! Your basically going to fund schools and infrastructure things which are equally important to each citizen and thus each citizen should allocate the same percentage (tax progression for higher income makes sense too, but for simplicity ill go with same percentage of income in this example) of their ressources to funding those projects. What your proposing would be funding said projects through the 99% mainly whilst leaving the 1% free to use 1% of their income (in an extreme case) on funding those.

    So no i absolutely reject the idea of pure income tax thank you for making me think about how ridiculous this system is.
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      Apr 17 2013: I believe, the concerns that those who spend all or more of what they earn would pay larger percentage in taxes than those who spend a small portion of their income making the tax regressive is the main objection to the sales tax as opposed to income tax. Initially, I thought that exempting basic necessities from taxation would solve this problem. However, this page
      http://www.fairtax.org/site/PageServer?pagename=FAQs points out that this would lead to all kinds of lobbyists pushing exemptions for taxes on their products while allowing the rich to gorge themselves on expensive delicacies. How about the idea of "prebate" (see the same link)? The idea is that everyone would receive a monthly "prebate" from the government for spending "at the poverty level". This way, people spending at the poverty level would pay no tax at all, people spending below would have "negative tax" or income, and people spending above the poverty level would pay progressively larger percentage. Are there any obvious "gotchas" for such system? I'd say, such system eliminates even the need for social security. It seems to be fair for everyone because it does not allow preferential treatment of any group of the population.

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