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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 21 2013: Arkady, how about a consumption tax? We can use energy equivalent of consumption or a resource equivalent of consumption - a ubiquitous resource like, say, water.
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      Apr 21 2013: Taxing water consumption does not seem like a good idea to me. There are many forms of consumption taxes. Sales tax is one of them. I'd say, this debate is about the principle - is it better to tax consumption (expense) or production (income)? Of course, one person's expense is another person's income. So, at the end of the day, it does not matter much. Perhaps, the difference is which side of the transaction should pay? I think, it affects our motivations.
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        Apr 21 2013: Arkady, I understand your point. But it seems by extension of your own logic (one person's expense is another person's income) sales or income tax will not make much difference. I think the question about consumption and production goes more fundamental. Yet more fundamental is whether one is trying to control the supply side or demand side.
        I think it will be better if we work on the demand side. We must be aware about the real cost of our demand and consumption. A tax system which constantly reminds us of that will, IMO, work in our best interest.
        I am no economist but I think taxing the consumption on the resource side is more logical. When I say water, I don't mean free water only but the embedded water (virtual water too) part of our consumption. Technically we can calculate the water footprints of most commodities. For example production of one cup of coffee requires 35 litres of water. Please check this.
        http://www.waterfootprint.org/?page=cal/WaterFootprintCalculator
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          Apr 22 2013: Interesting. I don't trust these calculations much, though. How is this 35 litres number determined? Who writes the formulas?

          Taxation is a fascinating topic. It combines economy, morality, social justice (reaching into religion). Few things reflect the philosophical principles of "unity of the opposites", "yin-yang", etc. as prominently as economy and taxation.

          I think the tax system needs an inherent balancing mechanism. It seems to me that the ability to "vote with the money" against burdensome taxes by not buying the taxed products can serve as a natural regulator for taxes.
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        Apr 23 2013: Dear Arkady,

        Please don’t trust the calculations without checking by you. As to your questions:

        1. How the water footprints are calculated – By following an internationally accepted manual and referring to data maintained by international bodies.
        http://www.waterfootprint.org/downloads/TheWaterFootprintAssessmentManual.pdf
        http://www.waterfootprint.org/?page=files/WaterStat-ProductWaterFootprints

        2. Who writes this formula - Arjen Y. Hoekstra, Ashok K. Chapagain, Maite M. Aldaya and Mesfin M. Mekonnen. For information about the lead author check this.
        http://www.utwente.nl/ctw/wem/organisatie/medewerkers/hoekstra/arjen_hoekstra.doc/

        I agree that taxation is an interesting subject. It is deeply linked with governance. And sadly, governments will hardly be creative enough to think in the direction I indicated.
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          Apr 23 2013: Interesting. I may agree that 228 pages is shorter than the current U.S. Title 26. But, by its nature, it's still a book of rules to which most of the people need to agree, not just an international body of experts in the field. Title 26 was also written by a "body of experts" called "Congress".

          Interesting information. I'm not sure how to apply it to taxation. It's also not clear why "water" and not "oxygen" or "energy" or "man-hours".
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        Apr 23 2013: I will put my money on a technologist and visionary than Congress. :)
        I am not sure either. I pitched the idea because I thought taxation could be a great tool to conserve resources just not control it's flow in a preferred direction.
        It doesn't need to be water but water is the most ubiquitous resource used in economy. Oxygen does not qualify. Energy in watt-hours can work too. Man-hour cannot as it's output is not standardized.

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