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: Sales Taxes are historically viewed as regressive taxes because the poor will spend their total income on things they need and pay tax on all of it. While those who are better off are able to save or invest. The money saved or invested is not taxed currently so the wealthy are seen as getting a freebie.

    If you were able to eliminate Income taxes altogether, the Sales/Use tax seems to become the most fair. The rich would pay taxes not at a higher rate, but certainly a higher amount since they are consuming at a greater rate.

    Conversely, a flat tax on income would also seem fair as all those who earn will pay at the same rate. Those who make more, will pay more in total but at the same rate as those who are lower paid.

    Under the Sales/Use tax scenario, the savings and investments of the rich are more like an annuity for the government. One day, those funds will be spent. At that time, the taxes will be collected, not only on the original income earned but also any and all gains made as a result of the savings and investing.

    In a flat tax scenario, the income taxes are paid NOW, at the time of the earnings. The expectations of the citizenship should be that their elected officials are good stewards of those funds. Saving and investing for the future while conducting the business of running the government today.
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      Apr 25 2013: You fail to mention that the "poor" get as much as 30% of their income from government transfers that is not taxed, this would be welfare, section housing, food stamps, WIC, healthcare.

      The sales VAT/Sales tax would be the way to go, but only instead of not in addition to

      The other area that this would help, that has not been mentioned is the prediction factor which anyone investing is always looking at. Which in the last 6 yr craps are more predictable than this clown.
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      Apr 26 2013: Re: "Under the Sales/Use tax scenario, the savings and investments of the rich are more like an annuity for the government. One day, those funds will be spent. At that time, the taxes will be collected, not only on the original income earned but also any and all gains made as a result of the savings and investing."

      Hopefully... unless these "savings and investments" disappear in the next Enron or Madoff scheme. But this is a good point. Unless the employer matches 401k contributions (which can be up to 100% return right off the bat), I see little reason to lock up money for decades and wait till I pay off my mortgage, my kids grow up, and I will have much fewer deductions and exemptions than now.

      I agree. Either flat income of flat sales tax would work - not both and no exemptions, deductions, and room to wiggle.

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