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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: So flat taxes and sales taxes are basically ways to increase taxes on the poor and decrease taxes on the rich. So I ask this question. What impact do you think this would have on the wealth distribution of the United States? I assume from your point #4 that you think the rich pay too much taxes and should be taxed less. So I guess I would also ask if you feel the tax code should be structured to make the poor pay more and the rich less and if the problem with our country is that the poor have too much and the rich too little?

    You may believe in a tax system that maximizes pain. So you may believe that you should tax a family deciding between heat and food for their children $200 instead of taxing a "frugal billionaire" $200 that will not impact his life. Or perhaps you work for a credit card company because this would be a windfall for credit card companies and would in effect raise the rate of taxation for the poor.
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      Apr 18 2013: William, I'm not sure how you assume what I think from #4 beyond what it says. This is a debate. I presented my position in order to hear opposing arguments, not to push any agenda. I'd like to open my mind, consider things I have not considered before, and other people to do the same. Have you read the proposal on http://www.fairtax.org? I have not heard any opinions on the idea of "prebates". It seems to me that people approach the question with preconceived opinions and are not willing to consider any alternatives or or facts.

      I understand the argument that taxing consumption instead of income, people who spend most of or more than what they earn will pay larger percentage than people who spend a fraction of it. But... I also believe the following (let me know if you disagree):

      1. I believe that "us vs. them" mentality is harmful for society. Blame games grow into mutual hate and violence - wars between classes, religious groups, etc. I believe, "1% vs. 99%" is a harmful view, in principle.

      2. I believe, "taxing the rich" is an illusion. It's like having a "no smoking" area in a restaurant where smoking is allowed in the same room or an area in a swimming pool where people are allowed to pee in the water. Krisztian has shared a video below http://youtu.be/P6hzEodMAyU. The video has an example of who ended up carrying the burden of a 10% sales tax on yachts and private jets over $100,000 imposed by Bush I. One might think, such tax wouldn't affect "the poor", right?

      Tax burdens have a way of leveling across the society. You tax corporate income, and the corporation will either lay off workers or increase prices on its products passing on the buck. If it does neither, it may go bankrupt and close altogether. You tax the billionaires with either income or sales tax, and they will move the money and the jobs overseas leaving "the poor" at home without either. Am I incorrect?
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        Apr 19 2013: I can speak to the effects on the boat industry which is tru dat

        It is an interesting idea to privatize everything at the very least we should consider the venerable Mr Rothbard.
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      Apr 18 2013: Moving and managing money and business overseas to avoid income taxes is risky and costly. Buying products overseas and paying high shipping costs or buying the products on the black market to avoid sales taxes is risky and costly too. When people prefer such risk and cost to paying taxes, it means that taxes are too oppressive. They need to be adjusted to maximize the revenue. Maximizing the tax revenue should be the goal, not "justice". Justice cannot be measured. Revenue can.

      So, given that taxes flatten themselves anyway, and the question is not "who to tax?", but, rather, "how much?" without killing economy, I believe that sales tax allows for better and faster economic feedback than income tax.

      I like the idea of "prebates" from http://www.fairtax.org. It creates a guaranteed income for everyone. The poor who make less than the poverty level will have tax income, the middle class would effectively pay a small tax, whereas the rich will pay the largest percentage. That's what it seems. I have not heard any reasonable arguments to the opposite. I'd love to.

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