Abolishing income tax--would this work?

Great Debates
41

If your income is derived from U.S. sources, you still have to pay taxes if you are not a resident.

Bolding mine.

Here is where this breaks down. Whatever you spend the money on is taxed more than you pay now (unless you make more 200k). It doesn’t matter where you scrimp or save on the essentials. In fact, if you reduce the amount you spend on groceries and clothes, you end up paying more later.

These types of proposals must have one of three effects:
[ol]
[li]Everybody pays the same amount of tax, just a different way.[/li][li]Some pay more in tax and some pay less, shifting the load.[/li][li]Less tax is collected and either the national debt goes up, or spending goes down.[/li][/ol]
Which of these are you hoping for? In almost any conceivable consumption tax scheme, the rich will pay less than they do now, simply because they invest so much of their income. If you tax investments (as opposed to profit from incomes) then you put a disincentive on investments. It would be foolish to invest in anything that could not make a return above the tax rate. Plus, you can not deduct capitol loses, so you are taxed when you profit and when you lose.

So if the rich pay less, and you prevent the poor from getting screwed, who is left to pick up the burden?

BTW, the reason the IRS is so big and our tax law is so unwieldy is all the exceptions and deductions put in place in our system. We never get rid of them because we all want the ones we have. Any consumption tax that tries to protect the poor as you outlines will be just as unwieldy and need a similar bureaucracy. Any type of tax, (sales, income, property) can be simple and easy to regulate. You are just shifting the burden from the federal to the state level.

On preview. scabpicker makes a great point that this will have a huge negative effect on the consumer economy. You are basically proposing a reverse stimulus package as the only thing that seems not to be taxed are the bare necessities and putting you money in a savings account.

Jonathan

42

Why do people prefer taxing consumption as opposed to taxing income or wealth?

43

Because on the surface of things it seems like a good way to shift the burden off the poor (who in theory don’t buy a lot that wouldn’t be on the essentials list) and onto the rich (who do buy a lot of things that aren’t on the essential list), while leaving the middle class essentially the same (they split the difference). I also think that some people who normally wouldn’t consider a flat tax find this appealing as it would punish people for consumption, which a certain group of folks finds distasteful.

The problem is of course the unintended consequences a downturn in consumption would cause. It would be a ripple effect impacting not only all those industries and service companies directly effected but all the suppliers and such…and the government itself, due to an unstable revenue stream as people find ways around such a tax.

This kind of thing SOUNDS good when you first look at it, and I think coupled with other things it’s workable (VAT taxes are used in other countries pretty extensively…though I don’t know if anyone uses them exclusively). I don’t know if it would be better than what we currently have though. It MAY be less complex to begin with, but I bet the devil is in the details and such a system could become very complex indeed.

-XT

44

It seems that it falls into three classes:
[ol]
[li]They figure they will pay less this way[/li][li]They think this is more fair and gives them more control over how much they pay[/li][li]They hate the IRS and think this will require less bureaucracy[/li][/ol]

I suspect that some are mistaken about 1, and some state 2 when in reality they want it because of 1. The reality of any of these depend on how the system is set up. I personally don’t see any way to have both 2 and 3 be true, but my definition of fair may not be the same as others.

Jonathan

ETA: On what xtisme said while I was previewing: I still see no way to not reduce the burden on the rich since they spend much less relative to their income.

45

Not to mention, sales taxes now, at under 10% stil have quite a bit of tax evasion. Can you imagine the tax evasion @ 30% +?

Many of us can drive across the border, how would the USA tax our purchases in Canada or Mexico?

Then there’s this- every modern Industrialized nation has an Income Tax.
This would be a huge and risky experiment.

The Op’s cite (and please Originally Posted by DocGonzo @ DailyKos did not post anything of the sort here. Why not just use italics and “”“”?) , talks about a “privacy invasive IRS”- how much more invasive would a national sales tax be?

46

That’s the thing… In order to make it fair for the poor (exempting necessities) you end up making this seemingly simple idea, extraordinarily complex. Has anyone ever realisitically demonstrated a problem (moral, economic or otherwise) of taxing income or wealth?

47

With a few tweaks, he could be talking about the FairTax.

48

Anytime I see a tax proposal that supporters call “Fair Tax” , I can only conclude it would be the biggest assfucking of the middle class in the history of assfucking.

Like the “Patriot Act”, any time such reform cannot stand on its own without such a transparent puffery as calling it “Fair Tax”, that is when I grab my wallet and vote no.

49

I have exactly the same reaction whenever I hear Democrat’s tell me that all their shinny new programs will be revenue neutral. :wink: Or whenever Republican’s tell me that this or that foreign adventure will be over with quick and won’t cost all that much…

Come to think of it, if a politician’s lips are moving I’m going to be grabbing my wallet with both hands.

-XT

50

Yeah, if it reduces taxes on the rich without raising taxes on the poor, who pays? Bottom line, what is the point of this tax? What does it seek to accomplish? As I asked in post #41, what is the point of this change? Just saying to make things fair doesn’t cut it. Tell me what changes in tax burden, taxpayer behavior, or government function this massive undertaking is supposed to produce. Then we can talk about whether or not it will do what you want and whether or not it is a good idea.

Jonathan

51

Whenever anyone tells me about any proposed overhaul of the tax system, I always ask the same question: If we were to go to this new system, whose taxes would go up?

If everyone’s taxes stay the same, then the answer is “nobody”. OK, but if everyone’s going to be paying the same as now, why change? If someone’s taxes go down but nobody’s taxes go up, then there’s going to be less total money going into the government, in which case the follow-up question is, which government programs would be cut back? And that just leaves the possibility that someone’s taxes will go up, and then you have to know whose, and you’d better have a good argument for why those folks’ taxes should go up.

52

Well, another possibility could be (and I use the world ‘could’ cautiously here) to simplify the tax system, making it easier to do taxes. This could, in theory at least, also simplify things for the collection of taxes, making it possible to save some money by refining the process for the IRS.

So, in theory you could make a system that is tax neutral but that makes doing taxes easier (and so costs people slightly less in either buying tax software, getting a tax accountant or just in the work necessary to do taxes), saves businesses money (by simplifying taxes) and saves the government money. It’s theoretically possible. Hell, I’d be willing to have my taxes go up slightly for that matter if they would make the process simpler overall.

-XT

53

To be tax neutral, it could not be simple. How much you pay right now depends on how many kids you have, whether you have a mortgage, what kind of car you drive, what type of improvements you make to your home, and on and on. Even if you just wanted the average and total burdens of the four quintiles to stay the same you would need to make some serious adjustments to a simple sales tax. You would either need to fill the equivalent of a tax return each year to see how large a refund of your sales tax you get, or a large proactive bureaucracy would be needed to determine what is taxed and at what level to maintain neutrality.

Jonathan

54

I agree completely. It’s possible in theory…in practice not so much so. Especially across the board ensuring that everyone has the same tax before and after the change. The VAT system alone would complicate things as far as revenue for the government goes as well as what the tax burden would be at any given time on each individual citizen. If you needed to buy a car or a new bed then your tax burden would go up in a given year…or if you didn’t need to buy an but mainly essential (non-taxed) items in a given year then your tax burden would go down. Tweaking things from the governments perspective would also be complex. Where to set the flat tax rate? How much should the VAT be set at? What items should be included, what should be excluded? Should the VAT be set at a standard percentage for everything? By category? Individually? At random based on goat entrails or a dart board?

-XT

55

Here’s another teaser: What about tourism? I am assuming foreigners would pay the sales tax, but it would make vacations in the U.S. more expensive. If air flights are one of the things that are non-essential and taxes heavily, you would see U.S. citizens driving to Canada or Mexico to fly to Europe for vacation, especially in places likely Seattle that have a large town close to the border.

Jonathan

56

I see a dozen posts I’d like to reply to, so I’ll try to condense my replies into a single post.

The FairTax is meant to be revenue neutral. That does not mean that everyone will be paying the exact same amount of tax. It means the government will get roughly the same amount of revenue from it. Socialists and libertarians both should be wiling to consider the FairTax

So why bother? Is it just an evil conspiracy to shift the tax burden to the poor, struggling middle class, like some have suggested?

There are a lot of advantages, but some of my favorites are (in no particular order):

  1. Privacy. No longer will random strangers from the IRS be entitled to know the intimate details of your life. The average citizen will have little to do with government tax collectors (other than the retail store clerks taking their money on the government’s behalf).

  2. Compliance costs. a) The IRS budget can be cut. b) You probably save on court costs from tax-related legal conflicts stemming from a literally incomprehensible tax code. c) Every year hundreds of billions of US dollars worth of work is wasted because American citizens and corporations have to pay their taxes correctly and plan for lower taxes. d) Many business decisions are based on minimizing taxes instead of maximizing efficiency.

  3. Economic growth. I’ll quote Wikipedia on this one:* “Americans For Fair Taxation states the FairTax would boost the United States economy and offer a letter signed by eighty economists, including Nobel Laureate Vernon L. Smith, that have endorsed the plan.[11] The Beacon Hill Institute estimated that within five years real GDP would increase 10.7% over the current system, domestic investment by 86.3%, capital stock by 9.3%, employment by 9.9%, real wages by 10.2%, and consumption by 1.8%.[47] Arduin, Laffer & Moore Econometrics projected the economy as measured by GDP would be 2.4% higher in the first year and 11.3% higher by the 10th year than it would otherwise be.[45] Economists Laurence Kotlikoff and Sabine Jokisch reported the incentive to work and save would increase; by 2030, the economy’s capital stock would increase by 43.7% over the current system, output by 9.4%, and real wages by 11.5%.[9] Economist John Golob estimates a consumption tax, like the FairTax, would bring long-term interest rates down by 25–35%.[58] An analysis in 2008 by the Baker Institute For Public Policy indicated that the plan would generate significant overall macroeconomic improvement in both the short and long-term, but warned of transitional issues.”*

Basically, most economists agree that a consumption tax is better for the economy than a typical income tax. Even those who don’t support the FairTax tend to acknowledge this.

  1. Transparency. Politicians are constantly tweaking and adjusting the tax code. It is constantly growing. A group who stands to benefit from a tax tweak has a powerful incentive to use lobbyists and political pressure to get the tax code changed. Those who have to pay a* little bit* more taxes because of it can’t be bothered to fight every little change. With the FairTax, the country’s taxes are right out in the open. If a politician wants to raise taxes he has tell the voters that “yes, I raised your taxes”. Politicians can still hand out government money, but it must be done directly instead of indirectly.

5.Reliability. DrDeth calls a large sales tax “a huge and risky experiment”. It’s not. Sales taxes are well tested. They work. Well.

In the US, Florida and Texas operate their state budgets on a sales tax with no income tax. In the rest of the world countries usually have an income tax, true, but it is commonly supplemented by a VAT (consumption tax) of some sorts. (In my home country, Norway, we have a 25% VAT [20% inclusive].) The US almost unique among first world nations in not having a consumption tax, and it puts US businesses at a competitive disadvantage in international trade.

As for progressivity, the FairTax will not just help out “the rich”. I’ve already posted a link to research showing that most everyone benefits in the long run. Some rich people who put a lot more wealth into society than they currently consume may appear to do much better under the FairTax based on income. But it’s consumption, not income, that determines your standard of living. Does Bill Gates become a pauper in need of special tax breaks if the Microsoft stock price drops by a few points? Why this obsession with “numbers in a column”, as scabpicker put it? The money will be spent eventually, by the person who made it or an heir. And when it is, the government gets the FairTax.

(Of course, savings are not just “numbers in a column”. Want to build your dream home? Want to start a new business? Want to expand your current business? Having temporary cash flow problems? Better hope someone else have resources - money - to spare that you can borrow. The economy depends on spare capital.)

Note that prices will not increase by 30% (or whatever the rate) under a sales tax. Nor will people get to keep all the money currently collected as income and payroll taxes. With no monetary inflation there is no good reason why the current market-based price balance would be shifted like that. (The transition period could be rough though, and some government price controls could be a good idea to hasten it.)

Cite: Does VAT lead to inflation?
“The tax being revenue neutral, the aggregate demand is unchanged and so there would be no impact on the aggregate price level. There is unanimity among the economists all over the world that there seems to be nothing inherently inflationary about the use of VAT.”

(A VAT is a kind of consumption tax, and from the point of view of the consumer the effect is the same as a sales tax like the FairTax.)

I also need to emphasize the FairTax prebate (pre-rebate). A number of posts have lamented the complications arising from exempting “necessary” goods and services from a sales tax. The FairTax elegantly avoids the problem by defining spending at the poverty level as “necessary”, and giving everyone a prebate once a month to cover the taxes on that spending. No special exemptions, no lobbying, no complications.
That’s it for now.

57

No one really wants simple taxes. They want fair taxes. Fairness breeds complexity by its very nature.

The simplest tax system is a flat tax on gross income (i.e., no deductions) that is the same percentage for everyone, but that’s not very fair now is it?

58

Der Trihs, care to answe the question I posed upthread (i.e., why would rich people leave under the FairTax whereas they haven’t let now)?

59

And from further down in the same article:

So, it’s not so cut and dried. I inherently don’t trust predictions made by economists, for the same reason I don’t trust the weatherman: because they don’t have accurate enough initial data to predict very far out. The more precise these predictions get, the less you should trust the device or person spouting them is as accurate as it pretends to be. All models are inaccurate. Some are useful.

60

You and others in this thread seem to be convinced that taxation is necessarily a zero sum game that just involves taking money from you and giving it to someone else, which is not true. The proponents of the FairTax, (although they are mostly conservatives and with their 3rd grade understanding of economics almost always wrong about everything;)), do have a point in that one of the effects will be to give people an incentive to save, instead of to spend. One car argue whether in the current economic climate that is a good thing or not, but part of the goal of any taxation system should be to encourage socially positive activities. For example, levying a tax on fossil fuel consumption ( an activity with social costs in the form of pollution) and spending those proceeds on research into alternate power sources does more than transfer wealth, it is a net positive on society as a whole in excess of the simple amount transfered. Even the simple act of welfare through wealth transfer sort of falls into this category - Everyone, including the rich, are better off if the bottom 10% of society can make ends meet instead of being forced into banditry and insurrection.

There are many countries, e.g. in Western Europe, who have tax structures with a much larger VAT/Sales tax component, especially on things like fossil fuels. There’s nothing unreasonable about it and those countries are certainly as competitive as any.