Formerly Roboman, still
awesome Join Date: Jul 2004
Location: Portland, OR
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Now, I am in no way a tax expert, so bear with me here.
I've been reading up on consumption-based taxes, such as sales taxes or value added taxes, and in my (admittedly simple) view of things, there doesn't seem to be much of a downside to replacing income taxes with consumption taxes: A consumption tax would encourage saving, since only purchases would be taxed A consumption tax would be much simpler to administer, so taxpayers would spend less on the IRS - A simpler tax would also save millions of hours of lost productivity each year with time spent doing taxes - A simpler tax would be easier to comply with, reducing taxpayer error, which would make it more "fair" A consumption tax would make tax fraud a much more complicated affair than simply not doing ones taxes A consumption tax would be, by its nature, collected all year, so there would be no need for withholdings A consumption tax would be more visible, thus (ideally) increasing taxpayer interest in where the money goes Now, there are two obvious challenges (not problems! ) with a consumption tax. One is that an uncorrected consumption tax would be, by its nature, regressive; that is to say, those with less income tend to spend a higher percentage of that income than those with more income (everyone needs to eat, after all). This can be corrected, using a variety of rebates (or "prebates"). The other is that what's good for taxpayers isn't necessarily good for the government - while it's great for taxpayers that money in their savings accounts (what savings accounts?) would no longer be taxed, the government does kinda need those taxes. The challenge, then, would be to make the consumption tax revenue-neutral at the time of its inception, even when the lack of tax collected due to untaxed savings is taken into account (no pun intended). This, again, is by no means impossible, but it is admittedly an undertaking. But wouldn't it be worth it, though? Taxing on what people actually spend just seems intrinsically fairer than taxing on some sort of convoluted sliding scale of income. Everyone has heard stories of people who recieve a holiday bonus that puts them into a higher tax bracket, thus costing them money. That's not fair. Likewise, a fabulously wealthy person who's "unemployed" for a year can pay very little (no?) taxes at all, and that's probably not very fair either. But with a consumption tax, their tax rate wouldn't change unless their spending did (in either case). Plus, I am (as you all probably know) a fan of simplicity, and a simple sales tax (or less simple VAT, I'm not going to get into that here) is infinitely more elegant than the clusterfuck that is the IRS (and the current tax code). A purely aesthetic argument? Not when you consider how many dollars it takes to fund the IRS, and the costs of doing taxes: time, money, computer software that asks you silly questions... In short, I think that the simpler the tax, the easier it is to comply, and the greater the likelyhood of people actually doing so - especially since they wouldn't have much of a choice, if it's automatically added at the register. The arguments I've read against switching to a consumption-based tax often focus on short-term issues (like the loss of jobs at the IRS or tax software companies, or the possiblity that taxpayers will load up their credit cards with tax-free purchases prior to the switch and pay them off with tax-free income afterward) that, while real, are just that: short term. (My favorite is the "all those IRS employees will end up needing unemployment assistance" one - even if that were true, all of their incomes are 100% funded by taxpayers already, so...) Others arguments seem to grow from a lack of understanding of the tax; I've heard the proposed "prebate" system called "welfare for everyone," but it's not - it's really no different than most current sales tax systems, where food and medicine are not taxed (only they would be taxed, and then refunded with a rebate or "prebate"). By that logic, the current tax refund system is welfare, at least for those who receive rebates - but nobody receives a $200 refund because they are on welfare, they do so because they paid $200 more than they had to and were receiving a refund for the difference. The rebate/"prebate" system works exactly the same way, except in the case of the latter, it would work "in advance" (and once the system got started, would it even matter if it was a rebate or a "prebate?"). That said, I'm sure there's some better arguments against a consumption tax out there. So I'll ask. Why aren't we already using a consumption tax? and i guess i've known it all along / the truth is, you have to be soft to be strong |
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Sneaky Punk
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Consumption taxes, if you look at other countries, are always used in addition to federal (Government) taxes. In Canada for example, most areas actually have two consumption tax layers, Provincial (PST/HST normally between 7-13%) and Federal (GST 5%). The problem, (yes problem), with consumption taxes is that they do not collect enough revenue, thus income tax is still required. Now, that said, Canada is a far more publicly supported systems (Health Care for one thing) than the US, so it might work.
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Formerly Roboman, still
awesome Join Date: Jul 2004
Location: Portland, OR
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That's like saying income tax, categorically, does not collect enough revenue. It's the responsibility of those setting the rates to make sure that it does, no? and i guess i've known it all along / the truth is, you have to be soft to be strong |
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BANNED
I am worthless beyond hope. Join Date: May 2004
Location: Inner Swabia. If you have to ask twice, don't.
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It is horribly regressive.
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ಠ_ರೃ
Join Date: May 2004
Location: Minnesota
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But just doing some numbers in my head it seems as though you'd have to tax people at a VERY high rate on consumption in order to make up the lack of an income tax. Think of it this way (numbers are guesstimates): - Joe Blow makes $50,000 a year. His income is taxed at roughly 25%, so he pays the government about $12,500. - Joe Blow makes $50,000 a year. He only spends $25,000 on taxable goods and services (the rest is for rent/mortgage, food, investments, savings, and anything else that isn't taxed). It would require an exceptionally high 50% consumption tax rate for the government to make the same amount of money from him. If this figure is a more reasonable 20%, then the government only gets $5,000. Of course they can increase the amount of revenue by changing how things work, applying the consumption tax to more items or whatever, but the government is still basically starting with a smaller piece of the pie to work with. EDIT: Oh, and yeah, it's horribly regressive as billybobsky pointed out. People who make tons of money can't and don't need to spend most of what they make. Yes, they spend more than people who make comparatively little, but unless you're making several hundred grand a year, you're going to be spending a significant portion of what you earn. |
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Veteran Member
Join Date: May 2004
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Doesn't have to be... and in fact, it can be more progressive than our current income tax, if done correctly.
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I'd recommend anyone interested in this subject go peruse fairtax.org. This shit has been well thought out. Best part? NO DAMNED LOOPHOLES. You think rich folks pay taxes? Think again. They hire the lobbyists to get the loopholes in place, and the tax lawyers to take advantage of them. Jack up the rate all you want, they'll just keep laughing. You have to find a way of eliminating the loopholes, and this is the best way I've seen proposed yet. |
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How can it be progressive w/o over burdening the entire system? Same way the flat tax can be progressive?
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Join Date: Jan 2005
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Join Date: May 2004
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Really? You avoid paying sales tax when paying a merchant with cash? I don't think so.
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Join Date: May 2004
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What's the primary way that our income tax is progressive, giving the biggest benefit to the lowest segment? It's not the rate, it's the income point at which your tax is zero, without any deductions. Say that level is $14,000, based on your number of dependents on your W-2. The current system is designed to keep that amount free of any taxes, to ensure you have that amount, at a bare minimum, right? You can do the same with a tax rebate on sales tax. You file the W-2 (and that's *it* - no 1040 crap), and the amount of tax you would have paid is computed as (your base * the rate). That's the amount you get paid back, since you can't *not* pay it at point of sale. Now here's the nice part. This amount is known *as soon as you file that W-2*, which means you can be paid that amount *before* you pay it out of pocket. You can even ask for a monthly check to supplement your income on an ongoing basis. Now as for the rate - who do you think is going to pay more... someone who spends $25,000 a year, or someone who spends $250,000 a year? Do you *really* think that someone who is making seven figures is going to spend as little as someone making 1/20 that? It hits crass consumerism the hardest, it leaves those who save more or less intact. This is a nice thing. Seriously, it would be best if you went to http://www.fairtax.org/site/PageServ...ame=about_main and read about this directly - they do a much better job of explaining it. It will require you to leave your preconceptions at the door, however. It's a stunningly novel piece of rethinking the issues involved. Once explained, I have met few conservatives or liberals who have had a serious problem with it. |
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Join Date: Jan 2005
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2) Consumption tax will create black markets. Consumption tax doesn't make sense. It wouldn't raise enough revenue, and it would cause a dramatic contraction of our economy. |
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Lord of the Rant.
Formerly turtle2472 Join Date: Mar 2005
Location: Upstate South Carolina
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Yes, and there will always be nay-sayers to something better.
I would love for us to move over to the FairTax way for doing business. Screw the IRS! |
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Join Date: May 2004
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Sales, however, they can't really get past. If they want the new, the bling, the keep-up-with-the-Astors, then they can pay a nice chunk of that to the feds. Also, it utilizes the existing sales tax infrastructure we have in place already - merchants need to add a single tax item to their register programming, and write one additional check each pay cycle. |
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Join Date: May 2004
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Additionally, there are fewer merchants to enforce compliance on than individual income earners filling with the IRS. Lower overhead for enforcement. Quote:
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We can do this all day, or you can go do some reading... I think you'll be surprised, but it does require thinking it through end to end. You can't just hit a single bullet point and dismiss it based on the current system. This is a top to bottom rethinking of the federal revenue collection system, and it is fundamentally different. It requires some thought to really understand the implications. |
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Join Date: Jan 2005
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Problems with consumption tax:
1) To keep it progressive, we would still need a federal agency to keep track of income - so, the IRS will not go anywhere. Plus, we will need a new agency to monitor consumer spending. 2) In order for rebates/prebates to work, I will still have to give the government my income information, plus I will probably now have to keep all my receipts - even for cash transactions - so I can prove I spend the money and am eligible for rebates. God, this would be a nightmare. 3) Rich people will buy luxury items off the black market and never pay the tax, anyway. 4) Consumer spending makes up 70% of GDP, which equates to about 10 trillions dollars. The Federal budget is currently around 2.6 trillion dollars. Therefore, to maintain revenue, the consumption tax would have to be 30% on average. Of course, if you wanted it to be progressive, maybe it would range from 10% at the lower income brackets to 40, 50, 60% at the highest income levels. This would be absurd. Nobody wants that. Just a few issues, there are many others. |
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The fact of the matter is this would be an "experiment" on a mass scale with little benefit, even in the best of cases. |
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Join Date: Jan 2005
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Kick that site is just a bunch of opinions and rosy forecasting. Sorry.
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Join Date: May 2004
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Join Date: Jan 2005
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It's interesting to me that the "fairtax" site/movement isn't even transparent about the tax rate.
They proclaim it's 23%. Ok, doesn't sound bad at first. But that's tax-inclusive, a way no normal person would calculate taxes. Here's there own example: A good costs $77. The tax you would pay is actually 30%, which equals $23, bringing the total cost to $100. Now, the tax-inclusive rate is 23%, but it's completely misleading because nobody calculates tax rates that way. If I buy something that costs $100, under the "fairtax", I will be charged $30 in tax. For them to go around saying the rate is 23% is completely disingenuous and makes me distrust the entire thing. |
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Join Date: May 2004
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They even go to great lengths to explain this, ez. Like I said, this isn't a site to be skimmed. You have to read it, carefully, and let it digest. |
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Veteran Member
Join Date: Jan 2005
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When you go to the cash register, the tax is 30%. That's how people will calculate it in their heads, so that's what matters.
FactCheck.org agrees with me on this point. I actually went through their calculator. It turns out I would save a hell of a lot of money according to the flat tax. Does that make me want to support it? Hell no. It's obvious that people like me who can afford to invest (not taxed), save (not taxed) will benefit greatly. If I'm making out like a bandit, I can only imagine what rich folks would gain. It's ridiculous. |
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Join Date: May 2004
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If your entire judgement of a tax is based on how badly it soaks the rich, then I can't help you. I'm more interested in establishing a revenue collection system that is efficient, progressive, fulfills the monetary needs of the government, and doesn't have the opaqueness and loopholes we have now. |
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Reading the WSJ, a little over 1,000 people in the 90%+ income avoid taxes entirely. Then there's the idea that saving money is actually bad for the economy and really, only the wealthy save a significant amount of their income. Retired 8 years ahead of schedule. |
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Join Date: May 2004
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What can I say. Read the site. I'm bowing out, this obviously will take all day. Anyone who's interested, you've got the links. |
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Join Date: Jan 2005
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I really am too lazy for the requisite reading. Can I get a synopsis?
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If we thought of the modern income tax inclusive, it would too seem a lot lower.
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Sneaky Punk
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Formerly Roboman, still
awesome Join Date: Jul 2004
Location: Portland, OR
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Canada's consumption tax is in addition to their income tax, so it makes sense for it to be a lower rate - it doesn't have to raise as much money. I'm still seeing people "not understanding" consumption tax in this thread. The government would not have to continue to track your income, and you certainly wouldn't have to mail in all your receipts for everything you ever purchased at the end of the year. IOW, I'm still not seeing a convincing argument against it. But there has to be a reason we're not already using a consumption tax...right? I avoided mentioning FairTax by name in my original post, because it's not like that's the first consumption tax that's been proposed (although it is, perhaps, the one that's gained the most traction). All the minutia of a sales tax vs. a value added tax is beyond the scope of this thread - I'm just wondering what's intrinsically wrong with a consumption tax, instead of an income tax. and i guess i've known it all along / the truth is, you have to be soft to be strong |
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