[Robo]

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?

[PB PM]

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.

[Robo]

Originally Posted by PB PM 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.

Saying that consumption taxes, by their nature, do not collect enough revenue seems "iffy" to me. Couldn't the tax rate simply be increased (or decreased, ha) to meet the needs of the state?

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?

[billybobsky]

It is horribly regressive.

[Luca]

Originally Posted by Roboman Saying that consumption taxes, by their nature, do not collect enough revenue seems "iffy" to me. Couldn't the tax rate simply be increased (or decreased, ha) to meet the needs of the state? 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?

I'm not an economist and I don't have all the necessary information at the ready so forgive me if I'm wrong.

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.

[Kickaha]

Originally Posted by billybobsky It is horribly regressive.

Doesn't have to be... and in fact, it can be more progressive than our current income tax, if done correctly.

Originally Posted by Luca I'm not an economist and I don't have all the necessary information at the ready so forgive me if I'm wrong. 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.

High, yes, but remember that there's a numbers game going on with exclusive vs. inclusive taxes.

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.

[cosus]

How can it be progressive w/o over burdening the entire system? Same way the flat tax can be progressive?

[ezkcdude]

Originally Posted by Kickaha D 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.

There's a loophole. It's called C.A.S.H.

[Kickaha]

Really? You avoid paying sales tax when paying a merchant with cash? I don't think so.

[Kickaha]

Originally Posted by cosus How can it be progressive w/o over burdening the entire system? Same way the flat tax can be progressive?

It's actually beautifully simple.

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.

[ezkcdude]

Originally Posted by Kickaha Really? You avoid paying sales tax when paying a merchant with cash? I don't think so.

1) Merchants can simply take the cash transactions and not send it on to the government.
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.

[turtle]

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!

[Kickaha]

Originally Posted by Luca 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.

You're missing that folks in that bracket aren't *PAYING* the taxes you assume they are. They just aren't. There are so many loopholes that it's pretty easy to avoid paying what you'd expect they would.

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.

[Kickaha]

Originally Posted by ezkcdude 1) Merchants can simply take the cash transactions and not send it on to the government.

Do you know what the *current* non-compliance rate is for sales tax? Under 10%, nationally, average around 7%. Know what the rate is for income tax? 18%.

Additionally, there are fewer merchants to enforce compliance on than individual income earners filling with the IRS. Lower overhead for enforcement.

2) Consumption tax will create black markets.

Yes, because our current state, county, city and municipal sales taxes have created such a problem with that already...

Consumption tax doesn't make sense. It wouldn't raise enough revenue, and it would cause a dramatic contraction of our economy.

Read the site. You're simply not correct on the former, and your latter conclusion is dubious.

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.

[ezkcdude]

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.

[Kickaha]

Originally Posted by ezkcdude 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.

Wrong. Read the site.

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.

Wrong. Read the site.

3) Rich people will buy luxury items off the black market and never pay the tax, anyway.

I disagree. First off, you're positing the creation of a massive black market, with no evidence that it would happen. Secondly, think it through - where do the sales come from? Sellers. They have a desire to show revenue for their investors. Discrepancies would show up pretty quickly.

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.

You're paying the same amount either way - what's the difference?

Just a few issues, there are many others.

Read the site. Your points are all addressed there. As I said, you're going to have to ditch your assumptions first.

[ezkcdude]

Originally Posted by Kickaha Do you know what the *current* non-compliance rate is for sales tax? Under 10%, nationally, average around 7%. Know what the rate is for income tax? 18%.

Think about what you're saying. Sales tax, which is usually around 6-8% already has a non-compliance that is substantial, and it is a much lower tax rate than income tax. Raise it to 30%, and we'll see non-compliance shoot through the moon. You also argued that no new infrastructure is needed. Of course there would be. How much more accounting would be necessary to separate federal taxes from local sales taxes?

Additionally, there are fewer merchants to enforce compliance on than individual income earners filling with the IRS. Lower overhead for enforcement.

Doubtful. Actually, I'd argue the opposite would be more likely to occur, having to keep track of merchants (for compliance) and consumers (for rebates).

Yes, because our current state, county, city and municipal sales taxes have created such a problem with that already...

Have you ever listened to a debate about increasing local sales tax by even 0.25%? I have.


The fact of the matter is this would be an "experiment" on a mass scale with little benefit, even in the best of cases.

[ezkcdude]

Kick that site is just a bunch of opinions and rosy forecasting. Sorry.

[Kickaha]

Originally Posted by ezkcdude Think about what you're saying. Sales tax, which is usually around 6-8% already has a non-compliance that is substantial, and it is a much lower tax rate than income tax. Raise it to 30%, and we'll see non-compliance shoot through the moon.

I disagree.

You also argued that no new infrastructure is needed. Of course there would be. How much more accounting would be necessary to separate federal taxes from local sales taxes?

You're kidding, right? Ever run retail and paid out those sales taxes? It's rather simple these days, with a register system built anytime after about 1995. Taxes are computed on an on-going basis, totals are emitted on demand, by date, and tax amounts are calculated automatically. Unless you're trying to game the system, it's quite simple now. Adding another tax to the programming is straightforward in most cases.

Doubtful. Actually, I'd argue the opposite would be more likely to occur, having to keep track of merchants (for compliance) and consumers (for rebates).

Again, your assumption about tracking consumers is simply wrong. Read the site. I don't want to have to do this all day, and I think you'll understand it better that way.

Have you ever listened to a debate about increasing local sales tax by even 0.25%? I have.

I've been *IN* those debates... and come from a family who has run retail for decades. I fully understand both sides of the coin here, no pun intended.

The fact of the matter is this would be an "experiment" on a mass scale with little benefit, even in the best of cases.

I wholeheartedly disagree on the assertion of 'little benefit'.

Kick that site is just a bunch of opinions and rosy forecasting. Sorry.

I am too - I thought you were interested in this topic. I'm disappointed that you feel a what, two minute cursory glance at the site is enough to dismiss it out of hand. *shrug* Not my problem. We can agree to disagree and end this discussion.

[ezkcdude]

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.

[Kickaha]

Originally Posted by ezkcdude 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.

Unless it's income tax. Which is what they are comparing against. Apples to apples.

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.

[ezkcdude]

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.

[Kickaha]

Originally Posted by ezkcdude 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.

*headdesk* Except that it's a replacement for the income tax, and in comparing how much people will have in-pocket in comparison to *that*, that's what matters. This isn't rocket science. That's why there large discussions on that site about inclusive vs. exclusive, why this has to be talked about in both terms, what they mean, what their ramifications are, etc. You can't just pick one and say all taxes have to be discussed that way, because we don't *now*.

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.

I doubt your purchase patterns are the same as the rich.

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.

[cosus]

Originally Posted by Kickaha It's actually beautifully simple. 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.

So... this tax is only progressive if you are under the poverty line, otherwise it's highly regressive? Seriously, like others have said, it's the percent of your income that you actually spend. The more you make, the less, as a percentage, you spend and the less that you pay as a percent in taxes. Regressive.

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.

[Kickaha]

Originally Posted by cosus So... this tax is only progressive if you are under the poverty line, otherwise it's highly regressive? Seriously, like others have said, it's the percent of your income that you actually spend. The more you make, the less, as a percentage, you spend and the less that you pay as a percent in taxes. Regressive. 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.

*headdesk*

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.

[ezkcdude]

Originally Posted by Kickaha *headdesk* Except that it's a replacement for the income tax, and in comparing how much people will have in-pocket in comparison to *that*, that's what matters. This isn't rocket science. That's why there large discussions on that site about inclusive vs. exclusive, why this has to be talked about in both terms, what they mean, what their ramifications are, etc. You can't just pick one and say all taxes have to be discussed that way, because we don't *now*.

It's interesting that H.R.25 uses the 23% number then, with only mention of "tax-inclusive" mentioned parenthetically. Obviously, because most people have no idea that that means. If the bill were honest, it would say 30% sales tax.

[cosus]

I really am too lazy for the requisite reading. Can I get a synopsis?

[cosus]

Originally Posted by ezkcdude It's interesting that H.R.25 uses the 23% number then, with only mention of "tax-inclusive" mentioned parenthetically. Obviously, because most people have no idea that that means. If the bill were honest, it would say 30% sales tax.

If we thought of the modern income tax inclusive, it would too seem a lot lower.

[PB PM]

Originally Posted by Roboman Saying that consumption taxes, by their nature, do not collect enough revenue seems "iffy" to me. Couldn't the tax rate simply be increased (or decreased, ha) to meet the needs of the state? 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?

They don't, I can assure you. Consumption taxes make very little revenue, because most items that people buy are in the $5-20 range, even at 12% consumption tax (what I pay in BC) that would be 6cents - $2.40. Sure it all adds up, but only on big ticket items, in the $100+ range, (ohh $12!), on a $1200 item then it starts to roll in, $144. It does raise a far amount of money, but its still not enough, especially during hard economic times (like now) where consumption falls into the whole. Revenue Canada still collects most of the Canadian Governments revenue.

[Robo]

Originally Posted by PB PM They don't, I can assure you. Consumption taxes make very little revenue, because most items that people buy are in the $5-20 range, even at 12% consumption tax (what I pay in BC) that would be 6cents - $2.40. Sure it all adds up, but only on big ticket items, in the $100+ range, (ohh $12!), on a $1200 item then it starts to roll in, $144. It does raise a far amount of money, but its still not enough, especially during hard economic times (like now) where consumption falls into the whole. Revenue Canada still collects most of the Canadian Governments revenue.

But you're still assuming the consumption tax has to be 12% (or less). It could be 20% or 23% or 30% - that seems like a lot, but perhaps not when viewed as a replacement for income tax.

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.