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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: I support the idea of income tax only. Why? It is easy to calculate (percentage of income). In addition, I hate any exemptions. Why? This is an occasion to cheat. I say this: you are smarter, you make better income, but you must pay equal taxes (percentage) regardless of your smartness. Usually, simplest thinks (ideas) are more honest.
    Sale tax or consumption tax is not good in my sight. This is double taxation. Not honest.
    Income tax is totally different. You make income, so you contribute (%) to your City, State and Country. I see this honest. I would support the idea of three and only taxes: 5-5-10% (City – State – Country). Any other taxes I consider as the greed of the government. If the government needs more money so it should encourage people to make more money, not to steal money in the form of a tax.
    I think that we are done with this joke: consumption tax. I am guessing; some people are working on this and if the bill is ready, the consumption of politicians is consumption tax free. They will have tax free zones with no public access and fictional prices. You can learn this from post-communist countries history.

    Meantime, if I buy a rotisserie chicken (price is $5) I must pay $1 tax, means 20% ($0.50 sale tax and $0.50 special ‘chicken rotisserie’ tax). My $6 is after about 30% taxes, so real price is about $9 (I do not count property tax). $9 is much more than minimum/h earning. Well, some people must work over 1h for a rotisserie chicken (not organic). Who is calling this an honest tax? Yes, only politicians who live on taxes and benefit from taxes. Is this an American dream?

    Current spending is a proof that politicians and political parties were all the way wrong. They made a lot of mistakes we must pay for and we should NOT trust them anymore.
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      Apr 25 2013: I 'd say, income tax can mean double taxation as well. E.g. you pay social security and medicare tax and it's not deducted from gross income for federal income tax calculation. So, income tax is paid on the money you have never received. I agree that deductions open up possibilities to cheat.

      Having both income and sales tax means double taxation. Having just one is not so bad. There still may be multiple taxation when the same item is resold multiple times. But it depends on how sales tax is implemented. VAT, for example, seems to avoid this.

      Special tax-free trading zones would amount to deductions and exemptions from income tax. Regardless of the system, it's always possible to find a way to cheat. I agree that the more complex the system, the more possibilities there are.
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        Apr 25 2013: O.K. – you support sales tax, so you want to tax what I ‘eat’. You do not care of my income, so I must pay taxes even when NOT working. This is a joke (to me).

        I support ‘income tax only’: means, I do NOT care what you ‘eat’, but if you make income, you are obligated to contribute to the City, State and Country: same tax forever, no exemptions (but charity), and same tax for everybody (no tax accountant or a lawyer required). Isn’t it simple?

        Who has made our life so complicated? I know you know: politicians – social parasites.
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          Apr 25 2013: Check out http://www.fairtax.org. With "prebates", if you don't make income, the government would pay you so that you could eat.

          I don't push any agenda here. I'd like to know the pros and cons of each way. I, personally, would pay more taxes than now if U.S. replaces income tax with sales tax. I've listed why I like sales tax better and I am open to discussion without personal attacks.

          Yes, same tax for everybody. No lawyers, no exemptions, no deductions, no returns.

          I agree with "no exemptions" but not with "(but charity)". "But charity" means an exemption and this means lawyers, deductions, and returns that follow thus destroying the wonderful idea of "same tax for everybody". This means that charity must be excluded from government budget and delegated to individual contributions altogether.

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