Fair tax; taxing consumption

[I'm Supposn]

The problem with a consumption tax is it will impact the poor and middle class far more than the rich and super rich. People earning $30,000 to $40,000 spend 90 percent on everyday consumption items.Food, entertainment, cars, gasoline, appliances, TVs computers, services, repairs, just to name a few.
ricksfolly

Rick’s Folly, (as you wrote), lower income earners, must of necessity spend in aggregate almost their entire incomes. To the extent that we shift income taxes to consumption taxes, many or all lower income earners will no longer file tax forms or pay income taxes.

Due to Social Security’s cost of living adjustments those beneficiaries will not experience any harm. Public assistance recipients will require some increase of their monthly checks amounts. Their nation’s economic benefits due to this transference of tax revenue sources should more than compensate for these additional government expenses.

Those completely dependent upon fixed incomes (other than social security or public assistance) and those who are now illegally evading income taxes will be harmed to an extent that consumption taxes replace income taxes.

All consumption taxes are simpler than income taxes. It is easier to determine gross sales revenue than to determine net income. A consumption tax, (particularly the VAT} is easier and less expensive for both the government and the taxpayers to administer and, less susceptible to tax evasion.
To the extent that the replaced income taxes will no longer be imbedded and concealed within prices of products, the consumption taxes increased expenses to purchasers are decreased to some extent.

If we become less dependent upon income taxes, it would be more feasible to reform whatever income tax systems remain. All of this is beneficial to our nation's economy.

When the tide comes in it lifts all boats. Both the wealthier and the poorer, those more or less deserving will all experience some benefits from the adoption of a federal consumption tax.

Respectfully, Supposn

 

[HeresToThePoint]

To whatever extent and rates we tax individuals’ incomes, we should continue to tax corporate incomes. Otherwise too many entrepreneurs will be further enabled to evade paying their fair share of income taxes.

I agree. By taxing income, we decrease the motive to being productive and decreases consumer purchasing power. On a philosophical note, an income tax is horrible because it taxes an individual's liberty. How am I free if I don't own myself and my productivity?

Consumption drives the demand that our businesses need to maintain our economy. Discouraging consumption through taxation will do more damage to our economy than any level of income tax-- because income is self-rewarding-- destroying profits and therefore jobs.

The problem with a consumption tax is it will impact the poor and middle class far more than the rich and super rich. People earning $30,000 to $40,000 spend 90 percent on everyday consumption items.

Food, entertainment, cars, gasoline, appliances, TVs computers, services, repairs, just to name a few.

ricksfolly

I would agree, in that it could damage the performance of our economy (temporarily) to shift away from consumption. This would be largely due to the fact that consumption is kind of like taking narcotics, it'll provide a short-term adjustment of reality with limited long term effect. Sure we could keep doing it, but at some point we develop a resistance and dependency so we require more and more to maintain that reality. Consumption, a form of investment, is generally on an good that ultimately becomes worthless over time. Items such as cars, DVDs, computer software, cell phones, and computers are classic examples of consumption that constantly lose value over time. Generally, it would be advisable not to allocate funds in this manner. That isn't to say we eliminate it, because consumption is generally enjoyable, but we should lightly discourage it with taxation (with the exception of food and shelter). This is probably why we're in the financial mess we're in now, our high spending on consumed goods is just like making a poor investment.

Inversely, by putting an individual's funds to work by loaning to businesses via market securities, not only increases that individual's total value, it also provides a means for others to be productive. If you want to promote economic growth, people need to start investing their money and not throwing it away. Additionally, by taxing capital gains we decrease the economic motivation to invest in the securities market. So skip that next generation of iPod or cell phone and invest in something (not U.S. Patriot Bonds though ).

The "rich people sitting around getting richer" chant that starts when we suggest eliminating the capital gains tax is a logical fallacy. The rich getting richer is a result, not a cause. The fact of the matter is: Smart people use money to create value in the securities market. Not so smart people (to be politically correct) waste money in the consumption market.

The difficult, but ultimately beneficial, thing to do when faced with a narcotic addiction is get into rehab and start to detox.
Respectfully, HTTP

 

[HeresToThePoint]

Oops! I rushed out and upon return, realized I didn't complete a thought.

Food, entertainment, cars, gasoline, appliances, TVs computers, services, repairs, just to name a few.

Said previously:
The "rich people sitting around getting richer" chant that starts when we suggest eliminating the capital gains tax is a logical fallacy. The rich getting richer is a result, not a cause. The fact of the matter is: Smart people use money to create value in the securities market. Not so smart people (to be politically correct) waste money in the consumption market.

Continued:
This means that becoming richer is not predicated on being rich, but rather making smart decisions that ultimately increases wealth. Using your example of, "Food, entertainment, cars, gasoline, appliances, TVs computers, services, repairs," I would suggest that we arrange it in terms of necessity.

Food, Cars, Gasoline, TVs, then Computers (I'm ignoring repairs and services, because it amplifies what is already listed)

Then we look at a given budget and see what we can afford. Maybe the individual needs to eat at home instead of eating out. Perhaps they don't purchase a computer and go to a local library or internet cafe. A TV can be substituted by a radio (for the basic need of current news). The financial strain of gasoline can be reduced by using public transportation. A car/appliance financial impact can be reduced by buying the good quality, low cost item needed to perform the minimum function. Instead, we see people collecting every generation of iPod, a new cell phone (and contract) every other year, eat fast food because its easy, and other wasteful consumer spending. All these savings can be moved into an account to make money on investments. In the opposite sense, if the individual spends more to get an extra feature above necessity, we amplify our losses by foregoing the investment opportunity. Because of the time-value of money, the financial decision is amplified positively or negatively on a diversified long-term investment. Before someone says, "But that's not fair!" An individual has to put the work in before you can get the fun out.

In summary, investment oriented economies are more likely to produce sustainable growth and consumption based economies perpetuate poor investment. The logical decision is to tax consumption because it will discourage poor financial decisions (a "sin tax" of sorts).

Less consuming today means more consuming later.
Respectfully, HTTP

 

[I'm Supposn]

The "rich people sitting around getting richer" chant that starts when we suggest eliminating the capital gains tax is a logical fallacy. The rich getting richer is a result, not a cause. The fact of the matter is: Smart people use money to create value in the securities market. Not so smart people (to be politically correct) waste money in the consumption market.
Respectfully, HTTP

HTTP, I just wrote two posts to the topic thread of “The capital gains tax discount is unjustified”. You can refer to this discussion thread for a contrary viewpoints.

Respectfully, Supposn

 

[I'm Supposn]

I agree. By taxing income, we decrease the motive to being productive and decreases consumer purchasing power. On a philosophical note, an income tax is horrible because it taxes an individual's liberty. How am I free if I don't own myself and my productivity?

Respectfully, HTTP

HTTP, I recognize the economic superiority of taxing consumption rather than income but I’m not particularly opposed to taxing income.

Taxing income does not in itself generally reduce the motivation to earn; taxing consumption does not in itself generally reduce the motivation to spend. The tax rate based upon any activity is certainly a motivation factor. Every proposed modification or addition of our laws should be considered upon its own merits.

Accounting for gross sales is much more explicit and accounting for net income is more subjective and difficult. What’s difficult generally also more expensive to do.

I do not believe that a consumption tax to replace all federal income tax revenues would be at a tax rate that’s acceptable to voters. If we retain any income taxes, we retain all of the government’s and income taxpayers’ administration expenses regardless of the revenue amounts.

There is no overhead expenses reduction due to reducing tax rates but there can be significant reduction if we simplify our income tax methods, if we reduce our dependence upon income tax revenues, it will be more feasible to reform the remaining income tax systems.

Additional administration expenses due to transferring any portion of income taxes to be replaced by sales tax revenue would be insignificant. The IRS is currently collecting (for the purposes of income taxation), all (or almost all) data necessary for the collection of a sales tax.

Respectfully, Supposn

 

[HeresToThePoint]

HTTP, I recognize the economic superiority of taxing consumption rather than income but I’m not particularly opposed to taxing income.

Taxing income does not in itself generally reduce the motivation to earn; taxing consumption does not in itself generally reduce the motivation to spend. The tax rate based upon any activity is certainly a motivation factor. Every proposed modification or addition of our laws should be considered upon its own merits.

So, we create tax law depending on what merit, without regard for consequences? I can't say that makes sense. Taxation does reduce motivation to earn and spend because it adjusts prices. An individual is generally more likely to purchase a given good for $100 than $109 after tax, this is seen through simple analysis of generic supply and demand curves. Consumer demand falls as price increases.

Accounting for gross sales is much more explicit and accounting for net income is more subjective and difficult. What’s difficult generally also more expensive to do.

I do not believe that a consumption tax to replace all federal income tax revenues would be at a tax rate that’s acceptable to voters. If we retain any income taxes, we retain all of the government’s and income taxpayers’ administration expenses regardless of the revenue amounts.

There is no overhead expenses reduction due to reducing tax rates but there can be significant reduction if we simplify our income tax methods, if we reduce our dependence upon income tax revenues, it will be more feasible to reform the remaining income tax systems.

I agree, mild taxation is bearable, as suggested by the Laffer Curve. But I propose that if liberty is a right and it is unconditionally wrong to limit liberty (as long as it does not interfere with other people's rights). If this premise is agreeable, then even a that 1% tax on a individual's productivity (income) is unconditionally wrong. Therefore the tax revenue collected is not ethically sound, and therefore shouldn't exist. But to this, I can agree to disagree.

Additional administration expenses due to transferring any portion of income taxes to be replaced by sales tax revenue would be insignificant. The IRS is currently collecting (for the purposes of income taxation), all (or almost all) data necessary for the collection of a sales tax.

Respectfully, Supposn

Agreed our revenue does not meet our expenses. I understand that our government's financial viability depends on the public as a source of income. The national debt severely violates the rights of the next generation, to me this is a bigger issue than a small income tax.

I appreciate the civil exchange of ideas. Cheers.
Respectfully, HTTP

 

[I'm Supposn]

So, we create tax law depending on what merit, without regard for consequences? I can't say that makes sense.
I appreciate the civil exchange of ideas. Cheers.
Respectfully, HTTP

HTTP, if the probable consequence of a proposed law is perceived to be undesirable, then wouldn’t the proposal lack merit?

Thanks, I too appreciate civil discussion.
Respectfully, Supposn

 

[I'm Supposn]

Taxation does reduce motivation to earn and spend because it adjusts prices. An individual is generally more likely to purchase a given good for $100 than $109 after tax, this is seen through simple analysis of generic supply and demand curves. Consumer demand falls as price increases.
Respectfully, HTTP

HTTP, the proposal is to replace some portion of income taxes with a general consumption tax.

Such a tax decreases the U.S. dollars’ purchasing power (within our domestic market). Because we’re replacing income tax with the consumption tax revenue, there are more pre tax U.S. dollars available to make purchases.

For the sake of argument, let us suppose that this proposal could in itself cause decreased domestic sales. What would people do with their money? Would the money be actually invested or fund transfers of wealth such as bank deposits or purchasing stocks and bonds? Eventually that money has to come out and be spent for products to be used or consumed by USA consumer or for actual investment.

Respectfully, Supposn

 

[HeresToThePoint]

HTTP, if the probable consequence of a proposed law is perceived to be undesirable, then wouldn’t the proposal lack merit?

Yes. That is the point I'm making w/ respect to the income tax vs. consumption tax as whole

HTTP, the proposal is to replace some portion of income taxes with a general consumption tax.

Such a tax decreases the U.S. dollars’ purchasing power (within our domestic market). Because we’re replacing income tax with the consumption tax revenue, there are more pre tax U.S. dollars available to make purchases.

For the sake of argument, let us suppose that this proposal could in itself cause decreased domestic sales. What would people do with their money? Would the money be actually invested or fund transfers of wealth such as bank deposits or purchasing stocks and bonds? Eventually that money has to come out and be spent for products to be used or consumed by USA consumer or for actual investment.

Respectfully, Supposn

The purchase of the bank deposits, stocks, and bonds create wealth because they are economically productive. Transfer of wealth being the initial purchase and interest payments or rate of return being the productivity value of capital. Generally, these market securities and deposits appreciate in value over time. Consumption on the other hand is not economically productive for the purchaser because it loses value over time. There certainly needs to be a balance between consumption and investment. But our current consumer and public debt suggests that consumption is already out of control. The appropriate tax response is to decrease incentive to consume and increase incentive to invest.

I think a simultaneous decrease in income taxes and increase in consumption tax would result in purchasing power remaining unchanged (domestically), if it was tax revenue neutral. Although there is more money out there, consumptive goods increase in price resulting in a wash. Unless, we set consumption tax high enough to encourage people to travel and spend their money outside the U.S, then domestic consumption would be significantly damaged. I think that we would say that the consumption tax would have to excessive if that begun to happen. The purchasing power of after-tax income with respect to market securities would increase investment because consumption as an alternative is less desirable.

Although, you know from our other discussions, I disapprove of this manipulation - for so long we have had policies that encourage consumption, now its become a problem. Once we stop racking up debt and show some financial responsibility as a nation, then we could consider taking a more neutral stance on how people spend there spend/invest their money.

I love _____ (insert your favorite) bubbles.
Respectfully, HTTP

 

[I'm Supposn]

I agree, mild taxation is bearable, as suggested by the Laffer Curve. But I propose that if liberty is a right and it is unconditionally wrong to limit liberty (as long as it does not interfere with other people's rights). If this premise is agreeable, then even a that 1% tax on a individual's productivity (income) is unconditionally wrong. Therefore the tax revenue collected is not ethically sound, and therefore shouldn't exist. But to this, I can agree to disagree.

Agreed our revenue does not meet our expenses. I understand that our government's financial viability depends on the public as a source of income. The national debt severely violates the rights of the next generation, to me this is a bigger issue than a small income tax.

Respectfully, HTTP

HTTP, There’s little point to our discussing your contention that taxing gross sales is a lesser risk to “liberty” than (the concept itself) of taxing net income.

I certainly agree that taxing net income is for practical reasons more invasive to our privacy. I also agree that for both the government and taxpayers, the administration of our income tax systems’ are too complex and expensive.

Unfortunately our nation’s highly dependent upon our major sources of revenue.

There are many proposals for “simplifying” our income tax systems, but unfortunately it’s difficult for the U.S. Congress to agree upon anything. Any consumption tax that MIGHT feasibly be passed by our congress would be preferable to our income taxes.

It would be imprudent for our nation to attempt replacing all federal income taxes with a consumption tax in a single step. I don’t think our congress would ever attempt to do so. I contend that if we transferred the tax revenue sources incrementally, we’d reach a step where further increase of the consumption tax rate would be publically and possibly economically unfeasible.

If we cannot replace all income tax revenue, the U.S. Congress could be enabled to better reform the remaining reduced rate income tax systems.

Respectfully, Supposn

 

[HeresToThePoint]

HTTP, There’s little point to our discussing your contention that taxing gross sales is a lesser risk to “liberty” than (the concept itself) of taxing net income.

I certainly agree that taxing net income is for practical reasons more invasive to our privacy. I also agree that for both the government and taxpayers, the administration of our income tax systems’ are too complex and expensive.

Unfortunately our nation’s highly dependent upon our major sources of revenue.

There are many proposals for “simplifying” our income tax systems, but unfortunately it’s difficult for the U.S. Congress to agree upon anything. Any consumption tax that MIGHT feasibly be passed by our congress would be preferable to our income taxes.

It would be imprudent for our nation to attempt replacing all federal income taxes with a consumption tax in a single step. I don’t think our congress would ever attempt to do so. I contend that if we transferred the tax revenue sources incrementally, we’d reach a step where further increase of the consumption tax rate would be publically and possibly economically unfeasible.

If we cannot replace all income tax revenue, the U.S. Congress could be enabled to better reform the remaining reduced rate income tax systems.

Respectfully, Supposn

I broke it up and responded to you in parts, only to realize that I was mostly in agreement. Except for the sales tax vs. income tax point, both tax an individual's liberty, just depending on when the tax is collected.

Although better than an income tax, I find advocating for a consumption tax difficult because I don't realistically see politicians reducing the income tax simultaneously. It would probably just get tacked on top or temporarily reduced. But if they do simultaneously adjust them, that's cool. I agree that any radical adjustment is ill advised, it would probably shock our economy into a recession.

The current income tax has existed beyond a single human lifetime, it would take even longer to fix the situation. Despite the obstacles, I still think its worth fighting for the ideal.
Respectfully, HTTP

 

[I'm Supposn]

HTTP,
. . transfers of wealth such as bank deposits, or the trading of stocks or bonds create can create monetary or paper profits but they do not produce goods or service products. That’s why investments which actually fund purchases of products that are dedicated to producing additional products are factored into the formula for calculating gross domestic product, (GDP), but transfers of wealth are excluded from the formula.

For example, if a corporation issued stock to obtain funds, that would not have been included within GDP calculations but when the corporation actually used the money to purchase goods or service products, that would have been included within the calculation as actual investments. Economists have a narrower definition of what is actually “investments”. Transfers of wealth are in themselves not considered as investments.

I agree with your analysis that “a simultaneous decrease in income taxes and increase in consumption tax would result in purchasing power remaining unchanged (domestically), if the shift of revenues are neutral.

The sales tax laws that I’m aware of grant the government the right to tax goods purchased outside and brought into the government’s jurisdiction. Generally governments do not attempt to enforce such a law against tourists but they certainly have done so with big ticket items such as cars or jewelry. They have also done so when commercial entities had a practice of evading such taxes to accommodate their customers.

Respectfully, Supposn

 

[I'm Supposn]

Supply side economics

This message was posted within a discussion thread regarding Arthur Laffer’s supply side economics:

There are many factors that may be germane concerning a specific tax’s affect upon an economy. Concerning any tax’s rate, I submit two factors for your consideration:

(1) To what extent would the tax rate generate insufficient revenue to justify the taxes administration expenses, (including enforcement)?
(2) To what extent would the additional revenue due to enacting a tax or increasing a tax’s rate fail to justify additional administration expenses or would undermine respect for our government and its laws?

With full consideration of these factors and the financial advantages of diverse revenue sources, I’m a proponent of multi revenue sources with lesser tax rates for each source.
/////////////////////////////////////////////

I mention this only in relation to my contention that we can simultaneously have both incomes taxed at a lesser rate and a consumption tax. Please post messages concerning supply side economics within the Arthur Laffer thread rather than here.

Respectfully, Supposn

 

[ricksfolly]

I agree that it’s economically more desirable to tax consumption rather than income.

Great if you make over $250,000 a year, but a ball buster for all others below, many with income so low. they don't have to pay taxes.

ricksfolly

 

[washunut]

Great if you make over $250,000 a year, but a ball buster for all others below, many with income so low. they don't have to pay taxes.

ricksfolly

We are going to eind up with both the income taxes we have today along with a consumption (VAT) tax. No choice, we have decided to keep increasing entitlements. There is only so much debt the world is willing to buy from the U.S.

 

[I'm Supposn]

Great if you make over $250,000 a year, but a ball buster for all others below, many with income so low. they don't have to pay taxes.

Rics Folly, o the extent that the transfer of tax sources are revenue neutral, the additional domestic prices due to the federal consumption tax is compensated by greater take-home pay. Consumption tax is a simpler tax with no tax loop holes.

Respectfully, Supposn

 

[obvious Child]

If our tax code were simpler and not longer than the Lord of the Rings trilogy, it would be a lot harder for them to avoid paying.

Uh, not really. If the tax code was simpler without explicit rules about transactions, corporate lawyers and accountants would engineer transactions to abide to the text of the law while completely ignoring the spirit. The vast majority of tax law deals with corporate transactions because people engineered transactions to pervert the law to avoid taxation. With a simple tax code, this is going to explode.

 

[obvious Child]

IMO you cannot tax a corporation, any increase will simply be reflected in their prices as they pass the costs down to their consumers.

Assuming the competition will do the same. Fast food for example, if McDonald's was willing to eat the cost and reduce profit margins by half a percent and make it back up on bulk, Burger King wouldn't be able to do pass on the costs.

As a libertarian I support it because it would eliminate the need for our harrasing Internal Revenue Service, for only black market sales (under the table) would constitute tax evasion.

Not really. Basically a consumption based tax would require inventory audits to ensure that companies were paying and collecting taxes on sales. Right now states have a problem with under the table sales. Without the IRS or something similar, we'd have truly massive cash only sales. Honestly, a consumption based tax to me, as an accountant, requires something far more invasive and harassing then the current form of the IRS. Furthermore, credit card companies would protest it as companies push more and more cash sales. I honestly don't see businesses standing up for this when they realize how many times they are going to get audited. Business right now get audited once a year. Quarterly payments of consumption tax would likely see many companies with two or three inventory audits in addition to regular audits annually. That's insane.

However, in order to afford/balance our current budget the sales tax rate would be obscenely high. The only way for such a rate to be as fair as its name suggest would be to cut far more government spending than the majority would allow.

Which would drive even more businesses to cash only no sales tax sales. And thus require more audits. Financial firms would have a field day hiding their actual sales.

 

[obvious Child]

Additional administration expenses due to transferring any portion of income taxes to be replaced by sales tax revenue would be insignificant. The IRS is currently collecting (for the purposes of income taxation), all (or almost all) data necessary for the collection of a sales tax.

Respectfully, Supposn

Uh at the moment yes. Because we are collecting data on individuals and cross referencing it to their businesses. With no income tax, there's no data collection for cross referencing. Many a business owner has gotten audited and convicted because their incomes reported did not match the incomes reported by their business. When you lack the business owner's income, how are we going to check without inventory audits?

 

[I'm Supposn]

Obvious Child, to repeat this discussions first message;
“I am dubious of both the political and economic feasibility of replacing our entire, (both individual and corporate) income tax revenues with a consumption tax”. I further doubt the U.S. Congress would imprudently attempt it in single step.

After one of the incremental steps, the sales tax will approach an unacceptable rate and the transfer of tax revenues will be halted.

Respectfully, Supposn

 

[I'm Supposn]

Uh, not really. If the tax code was simpler without explicit rules about transactions, corporate lawyers and accountants would engineer transactions to abide to the text of the law while completely ignoring the spirit. The vast majority of tax law deals with corporate transactions because people engineered transactions to pervert the law to avoid taxation. With a simple tax code, this is going to explode.

Obvious Child, many of the complexities within our income tax regulations are due to tax exceptions, (e.g. tax loop holes).
For example refer to the discussion thread “The capital gains tax discount is unjustified”.

Respectfully, Supposn

 

[obvious Child]

Obvious Child, many of the complexities within our income tax regulations are due to tax exceptions, (e.g. tax loop holes).
For example refer to the discussion thread “The capital gains tax discount is unjustified”.

Respectfully, Supposn

Yes and no. Much of the tax code deals with specific rules dictating what exactly you can do and what you can't do. With tax exceptions there are explict statements barring many actions while allowing others. However, a great amount of the tax code is directly due to action aganist abusive tax schemes. For example, S Corp recapture was designed to stop people from creating C corps purely to hold assets that are carried with them into a S corp conversion to bypass taxation.

 

[I'm Supposn]

Obvious Child, I’d rather segregate explicit discussions of more specialized (as opposed to general) tax regulations within their own discussion threads.
I sent you a personal message,
Respectfully, Supposn