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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 20 2013: Regarding the poor it should be noted that this is a category of income very few people stay in the same category for long poor or rich. A category is not flesh and blood people.

    People talk about how unfair the taxes are on the rich with the loopholes. By the way a flat tax would eliminate a lot of this thus raising revenue.

    Another thing to look at on this is that the poor don't pay taxes either. For starters 50% of all income tax payers pay 0, this is a fact. Additionally public transfers (welfare) does not show up in the statistics so the income of the poor is about 35% higher than is reported. Not to mention how much they make by working for cash.

    So the regressive notion is very debatable. Not to mention the fact that when you pay people to be poor they get good at being poor just as when you pay people to be disabled they get real good at being disabled. This is great for politicians seeking votes but it creates a sense of entitlement which is probably worse in the UK but we are not far behind in having enslaved citizens who have less lived lives.
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      Apr 20 2013: You make some good points Pat.
      One thing I'm curious about is the fact 50 percent of the money they pay in tax is reimbursed in the form of tax returns. They don't get all the money they pay in back in taxes via the refund.

      The govenment keeps some of it so they do pay taxes. A typical family making $40,000.00 a year pays in 40000 X .28 = 11200.00 dollars in taxes. Of this amount they receive an average of $3,000 in refund. That's $11,200 - $3,000 = $8,200 in taxes they pay each year. So these people are payiing 8.2/40 x 100 = an effective tax rate of 20.5%

      To pay zero tax, you would have to earn $24,200 a year, and will pay no taxes because the $11,600 standard deduction plus four exemptions of $3,700 each will lower their taxable income to zero [source: Williams].
      A married family with only 1 child will pay a $3,700 in taxes.
      These families still have to pay sales tax which eats up the remainder of their funds, mostly leaving them with large debt (in one form or another) each year.

      The solutions is to raise the lowest income to $40,000 so everyone will have to pay taxes, or live with these lower income families paying zero taxes, which seem fair to me. It's impossible to live on just $24,000, send you kids to college and save money. That comes to: housing ($800)+ utilities (200) + auto insurance (110) + junky car payment (250) + transportation gas of (125) = $1,485. Leaving them $285 in the red each month. Lets not forget the have to pay the governmet a total of 300 each month in take out taxes leaving them a total of $585 in the read each month.

      These are the people who need a hand up in our society. The reast of us are doing great and should stop trying to force taxes on them. If there is a difference in revenue - expenses the tun the governent then we can raise taxes on the upper earners as well as the upper middle class. The reast are barely making it as it is.
      Seems simple to me.
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        Apr 20 2013: I thought the marginal fed tax (on 40k) was 15% not 28%?

        It is commonly known that 50% of the people pay 0 tax on the federal level. Even if that exact number is debatable the fact that a percentage approaching 1/2 is true.
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          Apr 20 2013: It's true. About ½ don't pay any taxes but not all these people are poor.
          Approximately 71% of the working population (92,594,960 people) made between 1-50k last year.
          Income Number of people % of us revenue.
          $50,000 – $75,000 17,396,916 13.374%
          $75,000 – $100,000 9,247,839 7.110%
          $100,000 – $200,000 8,422,603 6.475%

          The total of people who actually paid tax revenue is 130,076,445 out of an eligible to work population of 170 million people. *interesting note: (170M-130M)/170 X 100 = 23% unemployment rate.

          With a population of over 300 million people paying sales taxes whither or not contributing this money to the general tax fund would be an alternative system would depend on how much tax they payed in.

          Does anyone have an idea how much money this is?
      • Apr 25 2013: I think that Pat is right. The tax rates for gross income of $40,000 before deduction of the standard deduction and exemption for a young couple amount to $19,000 in 2011 tax rate, and $19,500 in 2012 rate. The actual tax for 2011 would be $2,304 for a rate of 5.8%, and tax of $2,229 for 2012 and a net rate of 5.6%. Even if you count the $40,000 as after the std deduction and the exemption, the actual tax would only be $6,131 which is 15.3% of the "taxable income" of $40,000. In either case, the tax amounts could easily be found in a table at the end of the "Tax Guide" for 2011 or 2012, no computation is needed.

        So the amount of tax as $11,200 for a gross income of $40,000 is way off the target.

        Let me propose a tax system of the combination of the income tax and value-added-Tax (VAT), the latter is easier to manage than sales tax. The Federal Income Tax could be 0% for income of under $25,000, and 5% for $25,000 to $50,000, and 10% for $50,000 to $120,000, then a flat rate of 20% for all income over $120,000, all are based after reduction of exemptions and standard deductions but no itemized deductions. The tax rates and deductions will be adjusted for inflation. The shortage from the income taxes would be supplemented by the VAT.
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          Apr 25 2013: How much revenue would this generate for the running of our country?

          How much revenue do we need to properly fund the operating costs of our country?
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      Apr 20 2013: I like your points that people get better at what they are paid to do. A good point also that "rich" or "poor" is a subjective term. The limits between "rich" and "poor" constantly move, usually up. For example, if we define "rich" as making $250,000 per year today and make them pay through the nose, in 5 years we will find 50% of the population paying through the nose due to inflation.

      I, personally, don't like counting other people's money and making judgments. E.g., my family, perhaps, spends more than average on food because we buy, mostly, organic and gluten-free food. So, someone looking at my monthly expenses might consider such spending a luxury and advise to shop in lower-end grocery stores. But consider that I have 3 kids allergic to gluten, fish, eggs, and many other things. On the other hand, I know people who live very frugally to afford, say, a family vacation or to buy expensive (from my point of view) bicycles for the whole family. Everyone has different priorities. I don't like to make a judgment of what to consider a luxury or a necessity for others and don't like when others make such judgments as well - something I hear a lot in discussions regarding who is rich and how much they should pay. That "rich" person making $1,000,000 a year may have a sick and disabled child and a wife with cancer. I don't want to tell people that they "ought to contribute to society".
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        Apr 20 2013: Inflation? Didn't you hear what Morgan Stanley said? Inflationis on the slide. :)

        I agree with you inflation is going to eat us alive before consumers quit buying all together just to eat. This, of course, means another crash is on the way.

        I agree about people's privacy concerning their money. I think what ever tax system we have it should be fair and take the facts into consideration that no one person is an island unto themselves. We all pitch in and should have a fair share of the profits.

        A world without garbage collectors is a real stinky place to work and live, in fact, it could be dangerous to our health.

        An idea without laborers is soon blown away by the wind of time. Laborers with no direction or guidance are living on their savings.

        For many decades now, there has been a sense of disparity about how the working class is loosing value and the upper class is buying up all the assets. 2009 showed us this was indeed the case. Now, the wealthy own everything and control the ebb and flow of commodities, including housing. We are at their mercy. The only way we can show our discontent is to stop being consumers. Rich people who depend on consumerism are severely affected by consumers who keep their money in their pocket.

        Yes this is a two edged sword. manufacturing, employment, vs consumerism are locked in a battle of survival. I think if more money is put into the pockets of consumers and an environment is created that alleviates their fear of economic collapse, things will get better.

        The government needs to scale itself down while accomplishing the same amount of work.
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      Apr 22 2013: A flat tax would not raise anymore money than the progressive system we have now. It would, place an even greater burden on those making $24,000.00 and less each year, reduce the amount paid by the rich and increase the burden on the middle class.

      I think the progressive system we have is more flexible, that is, it can be changed easily to deal with the fluctuations that occure in our economy and geopolitical climate.

      There is no real solution but to have a constitutional amendment that calls for a balanced budget each year, with a ceiling on borrowing. This system would only work if everyone pitched in and did their part, in their own private economic situations, that is, keep personal debt to a minimum and bite the bullet during hard times.
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        Apr 22 2013: The poor get about 30% more than is reported as income because of the way they report government transfers. This in conjunction with the fact that very few people stay in any one category overstates, makes this concern more conjecture than reality.

        The very idea of income tax is backwards as it discourages people from producing. Sales tax is the corollary and discourages consumption and encourages production.

        It eliminates a huge expense doing your tax return.

        The balanced budget idea imo would not work as it would just encourage accounting contortions.

        The solution is an educated constituency that would force the government to shrink (think emaciate)
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          Apr 22 2013: And I should take your word for it because?

          How do they report government transfers?

          I agree people are financially fluid, economiclly speaking, but what exactly does that mean to you?

          Sales tax is a means to gather revenue to support local governments -period. There is no traffic control attached to it's function.

          A balanced budget is necessary. any contortions can be dealt with by the legal system. Those obeying the law outnumber those who don't.

          Good luck educationg the world and converting them into honest hard working, emphatic human beings. That is the ultimate idealism but we are far from that epoch.

          We have to deal with what is ubtainable and pertinate to the situation at hand. More taxes on the rich will help out, but not solve the problem. We need to cut down the size of govenment without decreasing it's effectiveness, if that's possilbe.

          Technology can help but it will require initial expenditures. We need to look at it like this:

          I can't cut my lawn because the lawnmower is too heavy and I have a sloping run. I need to convert my lawn mower to a remote controlled machine. I can't afford to buy one so I need to build it myself. It takes time to save the money and time to do the work. In the end, I will be able to more effectivley deal with my lawn without hurting my body. I can also let my neighbors (in simular circumstances) borrow my lawn mower so they won't have to suffer the expenses. This will reduce the cost of cutting many lawns, producing more effective work).

          We need to bond together and help one another in a more effective manner - a real ideal that we can manufacture- other than everyone going out and buying (one) device that can serve many. This will, of course hurt our consumer economy but it will, in the end, make us more effective for less money. The economy will adjust, eventually.
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        Apr 22 2013: Just read the first paragraph of this:

        http://www.census.gov/hhes/www/income/about/index.html

        I'm sure there are more references but I have heard that 30% of the lowest quintiles income is in transfers that don't show up as income.

        Regarding the balanced budget there are always unintended consequences with this sort of legislation. As they say the devil is in the details and it will likely not get what it is stated to get which is typically the case EG the department of energy, education, homeland security, etc

        It can easily be reduced without losing ANY benefit

        The education is inculcated by the culture which is the real problem as it teaches instead entitlement.

        A remote control lawnmower is a cool idea.
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      Apr 22 2013: There is always a reason for how people behave Pat. Note this comment:

      "Yes: On net, average federal income tax rates are negative -- post-tax income exceeds pretax income -- for the two lowest income quintiles. But that's not the same as marginal tax rates, which measure the amount of money taken out of each additional dollar earned. It's the marginal rate, most importantly, that creates the disincentive to work." ~http://www.bloomberg.com/news/2012-11-25/the-working-poor-pay-high-taxes-too.html

      When you have a couple of million dollars to make some deals, your odds of making a profit increase. When you are a hard woking, lower income person, trying to get ahead in the world and change your lifestyle it's almost impossible to do because you can never make enough money or qualify to borrow to move ahead.

      So, why even try? Why not just sit where you are (still working hard) and get used to the situation? They are not slaves. In the US, everyone has the opportunity to get ahead and become rich. As long as their marginal rate is so high, they will continue to be at the bottom of the pile.
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        Apr 22 2013: To give you an idea of how specious Bloomberg's conjecture is consider that only 5% of the people who were in the lowest quintile in 1975 were still there in 1991.

        What is wrong with this thinking (of this successful businessman who is a stupid economist, similar to Warren Buffet) is that they are comparing categories instead of people. Would you compare baseball hitters the same way ie by a category instead of the hitter? Of course not yet people listen to this or Elizabeth Warren which is pure propaganda.

        Again politicians only care about getting elected and will make up anything in order to achieve that end.
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          Apr 22 2013: I understand you suggesting. But, since the crash, many more people make up that quintile. It's probably higher. War manufacturing helped to create jobs in 1975 and the war ended that year also -those jobs went away.

          We have the internet Pat. We don't need politicians anymore. We need to come together and work things out ourselves. There is a large movement taking place that concerns sustainably living. All that is required to get in the game is to start a garden at home, by any means, and learn to live frugally. Better health, less expence, and more effecient use of energy are some of the benifits. We don't need our politicians permission to get in the game.

          As these people come together, they also form a large voting lobby that will control the politicians, forcing them to do our bidding. We have to start the ball rolling, not the politicians.

          They have control because we gave it to them, We can regain that control by using effective communications and individual persistance and hard work. The great thing about growing food is the initial capital costs are almost negligable.
        • Apr 24 2013: Pat,

          I can't believe you called Warren Buffett (mispelled) a "stupid economist."

          Clearly you know little about his economic knowledge, which is undoubtedly far above your own (mine too)
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        Apr 22 2013: The Keynesians would have you believe that the economy should be an even level line and that they can keep it that way. This is funny because the Austrians will tell that the bubbles are created by the very ones who claim to fix it.

        If left to it's own devices the free market levels things out right quick as this is just a natural phenomenon. Which is controlled by the incredibly elegant mechanism of self interest.

        Yup the tail wags the dog, what I'm saying is that we need to dock (cut off) the tail
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          Apr 23 2013: Yes indeed.
          We know how the course runs because we have run it before. I remember 73 and 82. Now I can say I remember 09 and 10.

          Our economy today is driven by greed, which is not necessarily a bad thing for those who win the game. Every now and then some companies come along and start to dream and we are soon chasing asteroids or putting together the first Mars colony. The problem is that those who have established their empires don't want to see them fade away or disappear all together. They have a hard time living with what they have made because they see it wither and along with it the power the money gave to them.

          In the end it's all about Dreams or Power.
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        Apr 25 2013: Nicholas Heins

        OMG I'm so embarrassed to have committed such a faux pas, btw if you really want to rub my nose in it write it like this Warren Buffet [sic], that is the epitome of scorn from a superior.

        Warren Buffet is not an economist at all. He is an investor and from what I hear more lucky than good at investing. You bet I know more about economics than he, not that he raises the bar.

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