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 20 2013: The problem with a sales tax is that it tends to be regressive, meaning that it hits poor people harder. Individuals with less money spend a greater percentage of their income on necessities. On the flip side, taxing luxury items tends to discourage wealthy people from buying them, which means that it isn't nearly as viable of an option if you're trying to create a stream of revenue.

    Also, you mentioned that a sales tax could be a benefit in that it discourages spending, but may encourage saving or investment. Investment is good for the economy, particularly in the long run, but saving money is typically only good for the individual. There is such a thing as excessive spending and consumption, but consumption ultimately enhances the strength of the economy. One person's consumption is another person's income. I'm not saying that saving money is bad, or that spending money is completely good, but I don't think that you can consider that type of incentive to be an advantage of a sales tax.
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      Apr 20 2013: Regarding regressiveness of sales tax, it seems to be #1 objection against it. What do you think of the idea of "prebate" discussed in http://www.fairtax.org proposal?

      Good point about negative effect of holding on to money. I think, inflation does a good job discouraging people to hold on to cash. I believe, cash is only good as a medium for exchange. It does not have intrinsic value. I internalized this so much over years that "saving" to me is synonymous to "investing".

      Also, it's not completely true that saving is good only for individual. E.g. when a person has cash reserves, he does not burden the society to support him in case of hardship or emergency.

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