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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 25 2013: A sales tax is much fairer and the government technically should not have the right to audit you. 4th amendment, secure in your papers. A sales tax would yield more taxes from wealthier people because of loopholes.
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      Apr 25 2013: U.S. income tax has a multitude of problems with Constitution. Article I Section 2 says "Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers,..." - to avoid "taxation without representation" which was one of the main grievances in Declaration of Independence. Tax on income from property was considered to be the same as direct tax on property and was considered unconstitutional until 1913. Amendment XVI does not change Article I Section 2 but makes income taxable. I'm still puzzled whether income tax is still considered to be direct. The government states that income tax now has "the nature of indirect tax". Well, tax on wages can be considered a tax on transaction. But tax on property income has not changed its nature. Weird.

      You are right about Amendment IV. The government cannot rummage through our papers without a warrant. This is why everyone needs to sign a return under penalties of perjury waiving this right.

      Amendment V prohibits self-incrimination. The back side of form 1040 clearly says that we can go to jail if anything in the form is incorrect. And many people do not understand what they sign. But it's not considered "self-incrimination" somehow. And don't mention Amendment V in a conversation with IRS. Such people are treated by IRS in a special way.

      Amendment XIII prohibits involuntary servitude (slavery). Yet, income tax means that part of my time is spent serving the government without my consent. Etc.

      I learned these things along with legal cases arguing them in favor of the government some time ago, when I was younger and more naive. I do not advocate any of these arguments. By all means, "do not try this at home". But I'm still in awe of the absurdity of this system.
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        Apr 25 2013: 16 is on the top of my list of amendments that need to go. I am also really adamant about 17.
        The states gave up their influence in the federal government. So, 16 gave them hands in our back pockets and 17 left the states in the dust... with states rights gone and most individual rights on the line (consider the bill of rights issues) can the worse case scenario be far behind? Or am I being to worrisome... it could never happen here.
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          Apr 25 2013: It's somewhat scary to watch how easily people give away their rights and are eager to give more power to the government in exchange for "security". It's like sheep trusting a wolf to protect them or appointing a goat to guard a cabbage orchard. The wolf loves any stories and incidents that instill panic and fear of horrible "dangers out there" and, usually, exploits them to the full extent.

          I was reading comments to Yahoo news regarding the Boston bombing. Most of the commenters are eager to throw away the IV, the V, the VI along with the 1964 Civil Rights Act while considering their opinion "patriotic". The idea that select people can be considered "enemy combatants" based on their ethnic and religious background and denied the right to due process at government's whim to "save taxpayer's money" scares me more than terrorism. Protecting rights is one area where I would rather not "save taxpayer's money".
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          Apr 25 2013: Here is a great review from John Stewart of some weird opinions of how to "strengthen" and "protect" America.

          http://www.thedailyshow.com/watch/wed-april-24-2013/weak-constitution

          Reminds me of this story:

          Foxy Loxy: "Well, well. Where are you rushing on such a fine day?"

          Chicken Little, Henny Penny, Ducky Lucky, Goosey Loosey, Turkey Lurkey (together) "Help! Help!" It's not a fine day at all. The sky is falling, and we're running to tell the king!"

          Foxy Loxy: "How do you know the sky is falling?"

          Chicken Little: "I saw it with my own eyes, and heard it with my own ears, and part of it fell on my head!"

          Foxy Loxy: "I see. Well then, follow me, and I'll show you the way to the king."

          Narrator: So Foxy Loxy led Chicken Little, Henny Penny, Ducky Lucky, Goosey Loosey, and Turkey Lurkey across a field and through the woods. He led them straight to his den, and they never saw the king to tell him that the sky is falling.
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      Apr 25 2013: By the way, there is a controversy around mortgage interest deduction (all-American favorite). Mortgage interest on rental and commercial property is a business expense (like any other business loan interest) and should be deducted from business or rental income. Mortgage interest on personal residences seems to be a personal expense, much like any other personal credit interest (car loans, credit cards, etc.) If we deduct personal expenses from personal income, let's deduct everything else - food, utilities, credit card interest, etc. If we don't deduct personal expenses from income, let's not deduct personal residence mortgage income. The whole issue, again, smells with hypocrisy and riddled with logical inconsistencies.

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