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 25 2013: Arkady,
    What most people do not realize (and are never taught in public school because it is an example thereof) is the concept of 'legal plunder.' Every TEDster should google that and read about it until they understand. Most of what our governments (federal,state, local) to is a violation of liberty supported by legal plunder.

    That being said, I think the un"Fair Tax" has a big problem: lower income people spend almost all their money out of necessity, so they will bear a bigger portion of the tax load. Whereas, those who benefit the most from government would pay very little proportionally. I suggest instead a Transaction Tax. All economic transactions are taxed at the same flat rate. Get paid? X% comes out. Buy a stock? X% tax. One company attempts a mega-merger? X% tax. All income tax, deductions, corporate tax, import duties, everything else would vanish under one simple Transaction Tax.

    Of course this would never happen with corporations controlling the US, but it would be the most fair system. It would reduce speculative stock trades, which would reduce poor/short-term management focus on quarterly goals, as well as make day-traders, acquisition and merger attorneys, and real-estate flipping bums get real jobs. Truth hurts.

    Donations would not be taxed because it's not a transaction - money goes one way with nothing being received.

    Transaction Tax is the answer.
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      Apr 25 2013: This book http://mises.org/books/thelaw.pdf explains the concept of legal plunder and how it comes about quite well. Corruption is the reason. Not only corruption of the rich and the powerful, but corruption of the public (you and me) as well. Of course, nobody considers seizing property under threat of violence "plunder" when it is committed by the government. Instead, people associate such act with "liberty" by using the image of the iconic statue on everything associated with federal income tax much like they use images of sexy girls in beer commercials.

      I agree that transaction tax would damper stock day trading, real estate flipping, and encourage long-term investing based on financial fundamentals rather than speculation. It may slow down economic "bubbles" and crashes and make them less severe.

      However, do you support the idea of multiple taxation? E.g. my salary would be taxed once when I receive it, and twice when I spend it. The stock will be taxed twice too.

      Drawing analogy between economics and electricity, this may be an equivalent to adding resistance to every wire in a circuit. It will slow down the whole circuit, increase energy loss on heat dissipation, decrease battery life, decrease power output, etc. While resistance is necessary in certain parts of circuits, in other parts, it's best to avoid it. I'm not sure if applying a uniform transaction tax is a wise idea.
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        Apr 25 2013: If government stays out of it the bubbles are mild and self correcting. That argument does not hold water.
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          Apr 25 2013: I disagree. Given that economy is a system with positive feedback loops
          http://en.wikipedia.org/wiki/Positive_feedback_loop, when it's completely unregulated, there is nothing to stop economy from railing up and down like a Schmitt trigger. There must be a mechanism to create a negative feedback loop - when the system suppresses small disturbances rather than magnifying them.
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        Apr 25 2013: Bubbles occur mostly because of government intervention as with the housing bubble.

        The housing bubble was created by regulation. Regulations create unintended consequences like housing costs skyrocketing. Another example of this is in education and the trillion dollars of debt created by government meddling in higher education.

        The last thing we need is more government regulation to create more bubbles.

        The one regulation that does work is the free market. Which ends bubbles without consequence or any legacy.
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          Apr 26 2013: Can you explain how government intervention created the housing bubble? I thought, there is an opinion that the lack of regulation in mortgage industry and lack of requirements for mortgage loan qualifications created the frenzy. When stocks crashed, the money was poured in real estate - a natural "free market" reaction. The speculators started buying the houses like crazy, the banks started lending like crazy under a false assumption that the price growth will continue and the borrowers will be able to sell and pay off the loans very soon, with everyone making a profit. Then, with lack of the rules in financial industry regarding derivatives, there was this shady business of loan repackaging and reselling by banks. Then of course, things went sour when this exponential expansion burned out. Where is the hand of the government in this "plot"? Or am I missing something major in this general picture? Wouldn't a mechanism discouraging house flipping and other real estate speculations such as a tax on real estate transaction slow this down a little?

          I may agree that government regulation may create false incentives and lead to disproportional development of an industry which has no demand. Or create requirements that immensely increase expenses such as requirement for universal health insurance or requirement to comply with REACH environmental regulations (a different topic close to my heart). But I would approach government intervention on a case-by-case basis, without making blanket statements.
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        Apr 26 2013: As per the Matt Ridley talk the key is communication (much more important than IQ) which means don't stop listening.

        There is a lot of conjecture regarding the housing bubble most of it comes from politicians . This means you have to consider their motivation, which is to get elected and only getting elected which means you have to throw out most of what they say.

        Almost all (if not all) bubbles are caused by government meddling. The source for this is the Mises institute. This fact alone could save many a lot of grief. Like John Moonstroller if he would listen.

        The key culprit was Alan Greenspan (an Ayn Rand fan, did not practice what he preached) as he made a lot of money available for lending to occur. It doesn't matter what they cook up as long as it is not financed. Since it was that was the biggest problem.

        What they cooked up was the CRA, which said that everyone has the right to own a home. The key conspirators were Barney Franks and Chis Dodd who were head of the banking committee in the house and senate respectively. They told the banks they had to make the loans or the banking committee would cause their business plans grief. They also made it palatable by having Freddie and Fannie buy all the paper. Neither ran for reelection last year after many years in office. The bankers left on own would never have made these loans, do you see how non sequitur this is?

        The conjecture said that the repeal of Glass Steagal allowed the OTC derivatives, but they were not regulated ever so Glass Steagal had nothing to do with it.

        The sub primes were a tiny part of the market for decades the only reason they became an issue was because of Barney and Chris for reasons stated above.

        The repackaging thing is conjecture as well. The media who also has one agenda and only one which is to sell advertising so you have to throw out most of what they say. They went on about trillions of dollars in the derivatives which is great for scaring people but not to educate
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        Apr 26 2013: The investment banks hedge their bets they do not go all in on anything. All the chatter about Lehman Brothers having a gazillion dollars in exposure, so when all was said and done what was the final settlement? Something like 20 million because of the hedging of their bets. So the question is with the hundreds of trillions of dollars that the media was yammering about why don't they talk about it anymore? Do you see how non sequitur that is?

        Who cares if people flip houses so what?

        The energy companies that were financed by the government all went out of business once the funding ran out.

        The blanket statements that I make are not out of ignorance.

        I suppose this is hard to assimilate all at once, as I REALLY am asking you to take the red pill. I assure you I'm not talking this stuff for fun. Out of all the participants on TED there are just a few who really get this stuff. As Krisztian says it is really tiring to get anyone to listen.

        It is encouraging to see you and some others talking about how economical slavery is putting us all in the yoke.
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          Apr 26 2013: Well, I'm not familiar with most of the facts and names that you list. I'll check them out as I have time. But if everything is how you describe, that's what I called "creating artificial incentives". That's exactly how the government causes people to make weird decisions.

          E.g., I've heard of a couple with a sick child that would qualify for some government medical program if the family income were lower or the child had a single parent. So, these people had a choice - for the dad to quit work or to divorce to qualify for the program.

          Why is buying a house considered such a bliss in this country? You get into debt for 30 years, you have to get fire insurance, do all maintenance, pay utilities, pay property taxes. You cannot just take off and move to another state for a new job without the hassle of selling the property. The house may or may not appreciate or it may get destroyed by a hurricane, flood, or an earthquake (huge risk). You can't even die in peace - you have to worry about estate management, probate, etc.

          Tenants don't have to mow their lawns and if a heater breaks down or the roof leaks or toilet overflows, they just need to call the landlord. And if things are not fixed, they have the right to stop paying rent. And if the house is destroyed, just move to another place.

          Why do people go through the pain and suffering of home ownership? Ah! Mortgage interest deduction! And an artificial demand for homes which drives the prices up (FHA loans with no money down guaranteed by taxpayer's money, etc.) Now, magically, buying a house without being able to pay for it makes financial sense. Otherwise, it does not.

          Thanks. Now what you say makes sense.
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          Apr 26 2013: A friend of mine who works as a digital animator used to work on movies, but now works in gaming industry. I thought, working on movies is more "sexy". She said, no, and sent me this article that shows how government subsidies destroy whole industries because of politics.


          "LOTR" wasn't shot in New Zealand for beautiful scenery.
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          Apr 26 2013: I have to confess my own hypocrisy. I must admit that despite my views and what I say here, if I would qualify for a government refinance program to lower my mortgage, I would take it. After all, "I'm entitled" I pay taxes. I'm the 99%. This false charity makes everyone a hypocrite (I am included).

          How many of us have the integrity to reject a social security paycheck, even if we have money to support ourselves? I don't - I admit.
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        Apr 26 2013: Yes that is how it works, co opting people. Look at goverment workers making 6 figure salaries for skills that would normally qualify for a fraction of that salary. On average a federal employee makes twice the money of their private sector counter parts. If you are them even if you are very conscious of your integrity that is going to be hard to say no. Marco Rubio has already changed his stance on issues to be more "main stream", what was it that co opted him? The possibility to run for president.

        That is interesting about the VFX workers. I guess that explains why James Cameron moved to NZ? funny his movies portray big evil business it would appear as the psychs say he is projecting. It seems like the VFX workers are doing that to themselves? Can their services be replaced overseas?
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          Apr 26 2013: I'm not sure if VFX services can be replaced overseas, but I also got an impression that the problem VFX people have is self-inflicted. They seem to agree to take lower salaries with no benefits and all these oppressive work conditions in order to "win" over competitors. Instead, they need to get together and say "no" - work together instead of working against each other. That's a separate issue from government subsidies forcing people to make poor business decisions.
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        Apr 26 2013: That is an aspect of the free market. They are doing work they want to do as such there appears to be more supply than demand?

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