Cecil's flat tax responses

Cecil's Columns/Staff Reports
1

Cecil’s arguments against a flat income tax make sense, but by God I am tired of watching a fourth of my income get chopped off on payday!!! I’ve also heard people touting the benefits of a “commerce tax” - I suppose a fancy term for a national sales tax - and I must admit that it sounds too good to be true (which probably means that it is). The idea of getting my hands on my ENTIRE salary and only paying tax on the money I spend has me foaming at the mouth.

My question is: Has anyone heard any arguments against this idea?

“More hay Trigger?”
“No thanks Roy, I’m stuffed!”

stpete_macrtst

2

Most of Europe has what they call a “value added tax”, essentially a sales tax of roughly around 15%. Of course, that’s in addition to national income taxes that range from 40% (in the UK) to 60% or so (in Belgium.)

The clear argument against a flat tax is that the poor can’t afford it, and the rich find it trivial.

So the judge says, “You say you want a divorce. I tell you a divorce will cost you $20,000. You say you don’t have $20,000, but let me tell you that even if you were Bill Gates you couldn’t get it for any less. This is not a land with one law for the rich and one law for the poor.”

3

The other argument against the VAT is that it’s a hidden tax, since much of it is paid by manufacturers, wholesalers, etc. The cost of goods is jacked up to cover the tax, so make no mistake, it comes out of the consumer’s pocket, as you know if you’ve ever marveled at the exorbitant prices for many types of goods in Europe. Since people don’t realize they’re paying the VAT, though, there is less political pressure to keep the rates down.

As for not wanting to pay a quarter of your salary in taxes … well, who does? The fact remains that it costs a lot of money to operate a government, and no amount of monkeying with the tax code is going to change that.

4

Not only would it discriminate severely against the poor, the only way it COULD make as much money for the government would be to discriminate against the poor.

Consider: There’s no way in hell legislation could get passed that would do away with income tax and place a flat tax on absolutely anything sold. Anti-poverty groups and most everyone would insist that basic needs, like food and shelter, should be exempt. That would cut down considerably on the tax base. I spend approximately 35% of my monthly income on just food and housing. If I get to keep all that I earn, and nothing goes to tax, I could end up spending approximately another 50% of my monthly income on “consumer goods”, including gas etc. If the government was going to suck as much out of me through a sales tax as they do now through income tax, there would have to be approximately a 100% tax on everything, on top of the 7% GST and PST that I pay already. (OK, I’m in Canada, so tax rates are higher, but just to illustrate…) Not only that, but if 80% of my “consumer spending” each month goes to tax, I’m going to end up with less stuff than I do now. This will not make the manufacturers of the goods that I buy very happy at all, and they will quickly go out of business.

Sample numbers:
Let’s say I make $3000 per month.
35% to food & housing -> $1050
50% to consumer goods -> $1500

This leaves me 15% to save or invest, which is only $450. Currently I would be paying approximately $750 per month in income tax, give or take a bit.

Now, if that $750 had to come out of the $1500 I was prepared to spend on consumer goods, that would leave me with only $750 worth of goods (let’s ignore current sales tax, for simplicity). That’s a whopping 100% tax there.

Bear in mind that 50% of one’s income is a hell of a lot to spend on consumer goods. I probably wouldn’t actually do it - most people probably spend more like 30%. But that would mean there would have to be an even higher tax rate to make up for it. Besides, there would be no guarantee that people would continue to buy things if they were taxed that heavily. People hate to pay taxes. When the only way to avoid income tax is to not work (legally, I mean), everyone’s pretty much stuck. But if you can avoid taxes by not buying stuff, you’re going to turn into a minimalist and figure that you really don’t need several hundred CDs, a faster computer, a new car, every new toy that appears for your children, a new stereo, 10 similar but slightly different pairs of shoes, and so on. It would be the death of the consumer culture. Which I think would be a very good thing, incidentally, but it wouldn’t do much for government revenues.

End of rant, have a good Easter Weekend.

5

The thing that most people do not consider when they discuss income tax is that no matter how much you pay in taxes or how you pay it, you will get the same spending power.

The government needs X dollars to operate, we need X dollars to live.

If we paid no direct income taxes, and prices remained the same, then we would be paid less by our employers. Our demand as employees is driven by our expected standard of living. With no direct income tax, we would need less salary to keep the same standard of living. Competition between employees for jobs would quickly drive down the salary demands.

Of course, if the government needs X dollars and they do not get it from us, they will have to get it from corporations (import, VAT, sales tax, etc.) and the cost of goods would increase. We should expect that the cost of goods would increase proportionately and that the cost of our standard of living would increase. Therefore we would demand the same money we do now to maintain the same standard of living.

The problem with Government taxes on corporations and products is that they can vary the taxation to drive consumer demand (cigarette, liquor, gasoline, etc.) Lobbyists could affect the government’s decisions. We would have less of a free market and our economy would suffer. I don’t know if this is done in Europe, but they will think of it soon.

I pay a lot of taxes, but I also live better than most of the people in the world.

6

Longhorn’s points are well taken, but he misses one vital arena within this concept: inflation.

Income tax is, in my mind, largely illusory. Why? Well, let’s say that a new tax code is passed that one way or another increases substantially everyone’s take-home-pay by 20%… The operation of supply and demand in the marketplace (i.e. more dollars chasing the same amount of goods) would quickly result in inflation of… oh… I’d say about 20%. On the other hand, a major across-the-board tax increase would tend to drastically cut disposable income and buying power, and businesses would almost certainly have to drop prices (deflation) to maintain their market share, or competitors would use it as an opportunity to steal market share by offering lower prices… probably by, hmmm… say… 20%?

Think of it this way. If there’s a $1 million dollar house for sale and nobody in the market can afford it, there’s not much competition and the price is likely to drop. If 1 or 2 people want it and can afford it, it will likely sell for about $1 million. But if suddenly 25 people want and can afford it, it’s bidding war time and the house will likely sell for more than $1 million. That’s inflation in operation.

Bottom line, IMHO (though I must confess to being degreed in economics), any broad-based gains made through tax cuts will quickly even out to the same buying power you had before. The only way for a tax cut to actually improve your standard of living is if it’s limited to a smallish segment of the population, and that’s not the point now is it?

DE

7

Doc, you’re oversimplifying. Your inflationary argument holds true if the economy is at full capacity, but not if the economy is stagnant and substantial productive capacity is idle. Do you guys really want to get into economics seminar here?

8

You know the old saying about how if you layed all the economists in the world end-to-end they still wouldn’t reach agreement (or “a conclusion” in some versions)… So, probably not the best place for an economics discussion.

Actually, to be honest, Unca Cece is right AND I’m right – it really just depends on the time frame you wish to consider.

Nanny Nanny Boo Boo (or is that nana nana poo poo? I better go see how that thread is going…)

9

But, in general, is it a true statement that as disposable income increases, so do prices? If this is true, then I can see how the system would favor the rich, who could afford to pay more for goods and services. However, if it’s not true, I don’t understand the argument that a “commerce” tax system favors rich people. Higher standard of living = more dollars spent = more dollars contributed to tax base. I realize it’s an oversimplification, but it makes sense.

Cecil, I don’t understand your statement that a national sales tax would be hidden and paid for by industry (and therefore by consumers in the form of higher prices). My local sales tax is right out there for everyone to see, and the proprietor doesn’t pay it - I do! Are you referring to the cost of collecting it? Businesses already do that at the state level, don’t they?

10

In general, if the economy is at full capacity, prices would increase as disposable income increases, i.e. more money chasing the same amount of goods and services. The reason why prices HAVE NOT increased in the 1990’s as disposable income has increased is that output/efficiencies have also increased; there’s more money chasing EVEN MORE goods & services.

Great discussion; if only Congress would monitor the Straight Dope, would could really straighten out this country.

11

The assumption at the outset was that we were talking about a “value added tax,” which is paid when the mfr sells to the wholesaler, wholesaler to the distributor, etc. For the most part the consumer does not see this tax; it’s just built in to the price of the goods

12

Quote:
<<<However, if it’s not true, I don’t understand the argument that a “commerce” tax system favors rich people. Higher standard of living = more dollars spent = more dollars contributed to tax base. I realize it’s an oversimplification, but it makes sense.>>>

The reason is because, in general, the richer you are, even though you are obviously spending more dollars, you are saving or investing a larger percentage of your income. Money saved is money not spent and thus not taxed under a sales tax. The ultimate example of this are poor people, who of necessity must spend all their income and therefore would pay sales tax on all their income.

To illustrate:

Poor family: earns $20,000 and spends $20,000. 10% sales tax takes 10% of their income.

Middle class family: earns $50,000 and spends 45,000, saving $5000 each year in a CD or money-market account. 10% sales tax takes only 9% of their income.

Upper middle class family: earns $120,000 and spends $100,000, saving $20,000 a year in a mutual fund. 10 % sales tax is only 8.34% of their income.

Rich family: earns 1,000,000 and spends 750,000, putting $250,000 in stocks and other investments. 10% sales tax is only 7.5% of their income.

Even though each family spent more money than the previous one, it also saved more, and thus ended up with an even lower tax bill. I certainly don’t believe that the tax system should “soak the rich” but a sales tax would end up soaking the poor, which isn’t any fairer.

13

Sorry. My message above is a reply to "stpete_macrtst"s question about why a sales tax would be considered to favor the rich. I cut and pasted a quote from his/her posting, but for some reason, it didn’t come out.

14

John, I think it’s the “<” and “>” brackets that cause pasted text between them to disappear. I would guess it’s HTML, but it might also be bad hoodoo for all I know.

15

So how about instituting a national sales tax (or VAT) and “refunding” a set amount to each person (by adding $ to their paychecks)? This would retain progressivity, and allow us to scrap the complex system of income tax which undermines our privacy and necessitates an Orwellian organization like the IRS.

Alan

16

One thing nobody has mentioned. Income Taxes (in the US) are not a revenue source to fund needed government services and functions. The US Income Tax is used for social engineering. Redistribution of wealth. Class envy. Whatever you wish to call it, everyone wants to tax people richer than themselves, and tax themselves as little as possible. Who are these rich people? Anyone who makes more than you do.
The Middle Class, however you define them, will always pay the vast percentage of taxes in this country, because that’s where the money is. The poor don’t have it(DOH) and there aren’t enough rich folk.
So the real question is…How do we spend the money the government takes away from us? If Congress spent only to keep the government running and for the ocassional war or two, there would be no National Debt or Annual Deficit.
As it is now, the government is the ultimate combination of Robin Hood, Mary Poppins, and a giant teat. I’m not saying this is a Good Thing or a Bad Thing. What I am saying is, it IS a fact, and it never gets mentioned in any debate over tax reform.
The only way the government can cut real tax rates is to stop spending money. Your money, my money. So the way in which they confiscate that money is just for show. It dosen’t matter how they go about getting it. The people who have the money, middle class working people, will continue to pay the money. Progressive income tax, national sales tax, value added tax, you look like a weasle tax, It makes no difference at all.
If They spend it, You will pay.
Just my $.00002 (1955 inflation adjusted opinion)

17

mmahoney, rich people want to tax people who make less money than themselves.

As a matter of fact, they make the laws on just how much money those in poverty pay for taxes.

Mr. Gates is interesting in that He always wears casual looking clothes :slight_smile:

18

Really, mmahoney, such feckless hyperbole! It looks like fun, so let me try…

Yep, national defense is clearly a pointless exercise in social engineering all right. The $267 billion we coughed up last year for the good 'ol DoD all went directly to those left-wing “bleeding heart” pansies in uniform, who used it to host Sunday teas for the enlisted men.

Just look at Kosovo! All that guff about “ethnic cleansing” is just a front for our real goal of redistributing our national wealth to the Kosovars in the form of only-used-once military hardware.

What about the money wasted by regulatory agencies like USDA and the FDA? I say let everybody take their chances. There’s too many people competing for my job as it is.

And don’t get me started about old people and Social Security. Who needs 'em? I’m tired of having to visit gramps at the V.A. hospital.

I’m sick of The Great Beast of the Federal Government wasting all that money on social engineering. It sure ain’t helping me!

19

mmahoney has a point. Government keeps getting bigger, taking on more tasks, spending more money. To reduce the tax burden, downsize government. Examples: Do we really need a federal Department of Education? What does it do? What has it accomplished? Do we really need an FBI and a DEA and a Drug Czar? How much duplication of effort is there among these agencies?

20

[[One thing nobody has mentioned. Income Taxes (in the US) are not a revenue source to fund needed government services and functions. The US Income Tax is used for social engineering. Redistribution of wealth. Class envy.]]mmahoney
Probably nobody mentions it because it isn’t true, even remotely. Unless, of course, you consider Medicare, Social Security, Defense, and interest on the national debt to be “social engineering.”

[[ Whatever you wish to call it, everyone wants to tax people richer than themselves, and tax themselves as little as possible. ]]
Historically, the people with more money have been more successful at skewing the tax code.
[[The Middle Class, however you define them, will always pay the vast percentage of taxes in this country, because that’s where the money is. The poor don’t have it(DOH) and there aren’t enough rich folk.]]

That’s INCOME tax – not the only tax, of course.

[[If Congress spent only to keep the government running and for the ocassional war or two, there would be no National Debt or Annual Deficit.
As it is now, the government is the ultimate combination of Robin Hood, Mary Poppins, and a giant teat. I’m not saying this is a Good Thing or a Bad Thing. ]]
After using that over-the-top language, you expect me to believe that you aren’t saying it’s a “bad thing”?

[[To reduce the tax burden, downsize government. Examples: Do we really need a federal Department of Education? What does it do? What has it accomplished? Do we really need an FBI and a DEA and a Drug Czar? How much duplication of effort is there among these agencies? ]] Hazel
Do you realize how little you can trim from the fedral budget even paring away items like this dramatically?