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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: What could be the disadvantages of sales taxes? Maybe it hurts tourism and luxury product exports? Probably rich people are more prone to leave your country/area. In a recession, people would buy less, you would get less taxes, and the problems would get worse??

    No idea, just some random thoughts thrown out there. But are these 2 systems really excluding each other? Would a system with both income taxes and sales taxes be too complicated, or maybe more flexible because it gives you more knobs to turn and to fine tune the system??
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      Apr 25 2013: #1 perceived disadvantage of sales tax system is that people who spend most of their income ("the poor") would pay larger percentage than people who spend only a tiny fraction ("the rich"). With sales tax, rich people would shop elsewhere, with income tax, rich people will move elsewhere to make money. Pick your poison.

      In a recession, government tax revenue would drop either way: people buy less because they earn less because employers hire less and pay less wages because customers buy less of the products because... Also, investors invest less because they have no confidence in the future because the news in the media does not look good: unemployment's up, earnings are down, and businesses have hard time finding money to fund their businesses because investors invest less because...

      An easy way to stop recession is to suppress the negative news in the media, but we cannot do that because we have freedom of speech. It's a screwed up system that eats its own euphemism and complains that it does not taste good.

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