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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 18 2013: Income tax please. The sales tax places an out of proportion burden on low income families, plus a low sales tax can be counted on to encourage spending and therefore hopefully create jobs, if you are paying 15% sales tax on your new shoes odds are you'll wear the old ones longer and repair them not buy new ones. With shoe sales down the store doesn't need 3 sales people, and it goes on from there. If 2 families spend 20,000 dollars on taxable items and the sales tax is 8% then both have paid 1,600$ but if one family is earning 50,000 and the other 100,00 then the first family is paying a 3.2% tax while the second WHICH EARNS MORE is paying only 1.6% and a family that earns only 25000 dollars if it could afford to buy so much in goods would be paying 6.4%. a minimum rate of income tax of 3% on incomes over 20,000$ plus 2% for every 100,000$ over 100,000$ with a tax of 50% on heirs of estates should the heir inherit more than 100,000,000$ of real estate liquid capital and assessed value of stocks art jewelry ect, that would discourage the passing of multi billion dollar fortunes to a single heir the odds are better with multiple heirs of smaller estates that the heirs will invest the money aggressively which if capitalism is at all viable should encourage growth and new jobs.Personally I think maybe 20,000,000 is still to much to inherit tax free but you'll see the reaction to any suggestion of such a tax sparks chaotic negative responses its as if people are really worried that it will apply to them. My tax plan has everyone who earns over the poverty level contributing, and if the guy making 200,000 dollars thinks he should not have to pay 10000$ when the guy earning 20,000 is paying 600$ he should remember that it is the commonly owned infrastructure and the maintenance of an orderly law abiding society that allows him to earn that money, and keep it without the expense of maintaining a private army.Don't forget now the guy who earns 190,000$ would only pay 5700$
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      Apr 18 2013: What do you think of the proposal on http://www.fairtax.org?
      What they propose is to replace all payroll taxes with a single 23% sales tax. Sounds like a lot, however, currently, the social security and medicare alone are 7.62% from employee + 7.62% from employer = 15.24%. To make sure that people who live at or below poverty level don't pay taxes, the government would pay every person, including children and dependents who do not have any income, the worth of poverty level (say, $214/month, $2569/year)

      People who spend equal amount of money would still pay the same tax, regardless of income. But let's assume *equal percentage* of spending instead of equal amount. The system proposed on fairtax.org will result in the following compared rates for 3 families of 2:
      Family 1 income $20,000; Family 2 income $50,000; Family 3 income $100,000
      Family 1 spends $10,000 (a half); Family 2 spends $25,000; Family 3 spends $50,000
      Family 1 tax $2,300; Family 2 tax $5,750; Family 3 tax $11,500
      Family 1 prebate $5,138; Family 2 prebate $5,138; Family 3 prebate $5,138
      Family 1 net tax -$2,838 (-14.19%) - tax benefit; Family 2 net tax $612 (1.22%) - small tax; Family 3 net tax $6,362 (6.36%) - larger tax.
      Looks progressive to me.

      And if the family earning $100,000 spends $10,000 and invests $90,000 to create jobs, why is the $90,000 has to be taxed? If it simply sits in the bank, it is penalized by inflation. IMO, that's a sufficient incentive to have savings invested. And if the rich family still holds the $90,000 cash (which is, certainly, the choice of the money owner), it is, in a way, compensates for inflation by keeping cash from circulation and increasing the purchasing ability of the other people's money.
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        Apr 24 2013: I think the "fairtax" proposal is worth serious discussion, but you could improve your example by using more realistic figures. For example, the current federal poverty level for a 2-person household is $15,510, about 3 times your figure. The figure does not go up linearly with the number of persons in the household. Also, a family of two earning $20,000 today would probably spend it all, and those making $50,000 would probably not be able to save more than $10,000, max, spending at least $40,000.

        To me, the main advantage of the sales tax is its simplicity. Income tax, with its many special provisions, is a nightmare for most individuals (the current instruction booklet for our basic tax form runs to over 200 pages), and they are not able to correctly figure their tax without paying to have it done for them. Paying a fee to pay your tax is ludicrous.
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          Apr 24 2013: Re: "Paying a fee to pay your tax is ludicrous."

          Not only that, but forcing everyone to sign under penalties of perjury a paper that people do not understand given that they may go to jail if it is incorrect is strange too.

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