TED Conversations

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

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: Sorry, typo. My assumptions were based on #5 where you basically imply that you feel billionaires should receive massive tax breaks. I think prebates is an awesome idea. It is similar to the notion of a basic guaranteed income and does make the tax structure more progressive and shifts that "Fairtax" from burdening the poor to burdening the middle class, but still represents a massive tax cut for the 1%.

    1. Yes, "us vs. them" is generally harmful. Strangely, I have heard this talking point before. You may have heard my talking point. Massive wealth gaps are an indication of an unjust society and are bad for society. You can't convince people struggling to pay for food and heat that they are in the same boat as the guy putting in a car elevator in his house who earns what they do in a year in a day. Especially when they are working 40 hours a week and the car elevator guy is not working at all. Closing your eyes and pretending there are no income differences seems insane. Economics impacts every aspect of your life from your education to whether you marriage will last.

    2. I think your point is that taking taxing takes money out of the economy and could be harmful to the economy. But then the government spends that money stimulating the economy. The question is where you take money from. Like I said above, you should take money out with a few general goals in mind. Like how to cause the least suffering and how to discourage or encourage certain things (i.e. smoking, marriage).

    Look, you made it clear you don't believe that we should not tax rich people or corporations and I would agree that the Fairtax is a good way to do that. I assume since you didn't answer my questions about wealth distribution that you do feel that this is a good way to make the rich richer and the poor poorer and that that is your goal. I also assume the goal is to not tax stock purchases to further enrich those who can afford to purchase ownership.
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      Apr 18 2013: Economy is a system with "positive feedback". Any economic process tends to enhance itself. A drop in stock prices causes people to sell stock which causes the price to drop further. It works in the opposite direction too. It's nobody's fault, but rather the nature of capitalist economy that rich are getting richer and poor are getting poorer. Capital concentrates, monopolies form, etc. At some point, the system adjusts itself through recessions and revolutions. That's how things are whether we want it or not.

      Health means continuous circulation and renewal. In biology we talk about circulation of blood, nutrients, oxygen, excretion of waste. In economy we talk about circulation of products, services, and money. To sustain healthy economy, we do need a mechanism of circulating wealth.

      I agree with the notion that wealth needs to return from the rich to the poor. It is not my goal to make the poor poorer. I don't like the idea of making rich poorer either. I'd rather see everyone prosper.

      Taxing stock purchases seemed to me as a good idea some time ago. Stock speculations don't create products or services for society. A sales tax on stock purchases would inhibit day-trading and stock speculations, encourage long-term investing and may serve as a damper on those self-feeding exponential bubbles and crashes.

      Assumptions usually turn wrong. I don't think, I have an agenda here. I just want to learn what people think. #5 is just a notion that what people despise about rich is the excessive luxurious life style, not necessarily the ability to generate wealth. I can't see how ability to make money per se can be bad. It's all how we use it. Note that the hypothetical "frugal billionaire" in my #5 would not be putting a car elevator in his mansion. He would live in a 3-bedroom house or an apartment and drive a 15-year old Honda Accord while using his untaxed billions to create jobs. (An extreme example to illustrate the point).

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