Should we tax spending instead of income?

[Voyager]

@Red_Wiggler

Consumer spending is driven much more by perceived affordability (how much one makes, how much of it is discretionary, how confident one is in future income) than by sales tax ramifications. If the imposition of sales taxes replaces income tax withholding from one’s paycheck, the basic perception of the consumer won’t change.

People have very different attitudes to getting or spending big chunks of money versus little bits. That is why the payroll tax cut was done the way it was. Giving checks, like Bush did, tend to get saved, not spend. Getting dribbles of money, like Obama did, leads to more consumption. It was politically a problem since he didn’t get credit for it, but the economics is right.

People also work by percentages, not absolute numbers. An experiment was done telling people that if they drove ten miles they could get $10 off of a $20 object, and that they could get $10 off of a $110 object. People were far more likely to drive for the first saving, not the second one, though the absolute amount of savings is the same. People’s price sensitivity have been set. The extra money you pay if you raise the sales tax comes from a different bucket, as Thaler calls it, from the money you get from cutting the income tax. Plus they will find the new prices expensive, and reduce consumption if the demand was at all elastic. My sense of what a shirt should cost come from prices at Korvettes in 1970. I will buy a shirt at current prices, and I can afford to, but I still think it is expensive.

People do not behave like totally rational economic actors. Assume they do, and you are in for a lot of trouble.

[Learjeff]

@Trinopus

The usual answer, however, is a base level of tax-free spending. Your first 15,000 of spending is not taxed. After that, you could have a flat rate, or graduated rates.

(Heck, you could even have a negative rate for the lowest rates, which would provide the social safety net, in lieu of welfare or food stamps. )

FairTax

[emacknight]

@Damuri_Ajashi

Mitt Romney is unemployed.

I think he just got a new job doing something for the Republican Party.

@Damuri_Ajashi

And NONE of that was the cause of the current financial crisis.

None? It’s been 5 years, how haven’t you learned anything?

@Damuri_Ajashi

It wasn’t a main street driven collapse,

Your use of the word “driven” is your first failure, stop doing that. A massive financial collapse doesn’t get to have just one factor, there were many.

@Damuri_Ajashi

it was a wall street driven collapse.

Still doesn’t negate the role Main St played, particularly over consumption. People over consumed based on increases in home equity and increased stock gains.

@Damuri_Ajashi

We’ve had this discussion before

And yet you still haven’t learned anything.

@Damuri_Ajashi

and yes individuals are culpable for borrowing money to buy homes they cannot afford

Exactly, if only you were able to stop there, but I get the feeling you’re about to say something stupid.

@Damuri_Ajashi

but imprudent lending on this sort of scale is NEVER the fault of the borrowers

Never? Are you saying that there wasn’t one borrower that fudged some numbers to get a loan he/she shouldn’t have?

@Damuri_Ajashi

it is the fault of the lenders.

Oh, well that makes everything simple doesn’t it?

@Damuri_Ajashi

Lenders had an incentive to make imprudent loans because of market failures.

Ah, “market failures,” how convenient. And you’re saying that the American consumer had NOTHING to do with those market failures? Nothing at all? Entirely the fault of lenders?

@Damuri_Ajashi

Those market failures were the cause of the collapse.

When you can define “market failures” let me know. Next we can define the cause of the Katrina disaster was “too much water.”

@Damuri_Ajashi

As for the savings rate:Table Data - Personal Saving Rate | FRED | St. Louis Fed

I don’t see where our savings rate went negative or are you using some special definition of savings rate that gets you to that conclusion?

U.S. savings rate hits lowest level since 1933

Americans’ Negative Savings Rate

That last one is a pretty funny read considering what happened a year later.

@Damuri_Ajashi

I don’t think it matters because a negative savings rate isn’t what would have gotten us here.

Negative savings rate was a huge part of what got us here. It was one of the many variables that caused the problem to be so bad.

@Damuri_Ajashi

Mostly because its not true.

Well, now that we’ve clear that up, let’s hope you don’t keep repeating the same mistakes.

@Damuri_Ajashi

Secondly, are you proposing a consumption tax on purchasing homes?

I’m pretty sure I paid taxes on the purchase of my home. If we did have a higher tax on the purchase of new homes do you think that would increase home ownership, or decrease it?

When I bought the government gave me a $9000 tax CREDIT to encourage home buying.

Then the government reduced my taxable income to offset what I spent on mortgage interest.

Sure, we need people buying homes now, but only because we had too many people buying too many homes prior to 2007. It’s almost as if tax policies can have negative impacts.

@Damuri_Ajashi

Not nearly as much as we need consumption. We are suffering from an aggregate demand problem.

Because people spend more than they had prior to 2007. There is no right or wrong level of consumption. It was forced up (artificially high IMO) prior to 2007 and now we’re dealing with the results of de-leveraging. Had people been saving prior to 2007 consumption wouldn’t be such a key issue. Still want to think it had nothing to do with the recession?

@Damuri_Ajashi

You can’t fund the government with a luxury tax.

There are lots of ways to fund lots of governments.

@Damuri_Ajashi

Please cite for how our current government spending is significantly higher than it was under Bush taking into account the effects of the recession (higher food stamps and unemployment benefits, shit like that).

Dude, you have the largest military in the world. It has nothing to do with Bush, or Clinton, or Bush.

Also, please cite where I said, "current government spending is significantly higher than it was under Bush

@Damuri_Ajashi

And the OP isn’t talking about a hybrid tax system (I can get on board with that if properly structured), the conservatives want to REPLACE the income tax with the national sales tax. THATS what we are talking about here

No, that’s just what you’re bitching about because that’s what you do. Start with a hybrid system, get the budget balanced, then back off of income taxes as revenues come up. It’s unlikely you’ll get income taxes to zero. It’s also impossible to implement a system of that size by snapping your fingers.

@Damuri_Ajashi

Yes, but you have a hybrid system not a pure consumption tax system which is what the OP is advocating.

That’s what we have now, but I have no idea what it will be in 5-10 years. The GST isn’t that old, before that it was all income tax and deficit spending (sound familiar). After the GST was put in the government cut back on spending until the budget was balanced and then {gasp} started cutting taxes first income then scaling back the GST.

The Socialist Utopia of Canada managed to do what US conservatives wanted to do and liberals didn’t think could be done. You’ll also notice that Canada didn’t have a massive economic crisis.

@Damuri_Ajashi

BTW your unemployment rate is 1% lower than ours.

Yup, 7.3 vs 8.3. It’s hard to have a financial melt down when people have equity in their homes.

@Damuri_Ajashi

We tried for UHC and the conservative free market types shut us down.

Sucks to be you.

@Damuri_Ajashi

We wanted to move towards a balanced budget (we could get there in very short order if the economy recovered) but the conservative free market types who insisted that revenues would be increased over their dead bodies (to the point where they were holding extension of tax cuts for 98% of the country hostage until we also extended them for the top 2% of the country).

Wow, really sucks to be you.

@Damuri_Ajashi

Transition to a hybrid system is MUCH MUCH easier than replacing your income tax system with a consumption tax system.

Exactly.

@Damuri_Ajashi

What do you do about basis and recapture and and deferred income?

Deferred is easy by increasing the credits for seniors. Essentially upping the Social Security benefit to offset consumption taxes for lower income seniors. Higher income seniors can be taxed based on their consumption.

@Damuri_Ajashi

I’m starting to get the feeling that you have missed an important point of this argument.

Nope, but I think I’ve got more lines written than you so I’m about to win.

@Damuri_Ajashi

After they make all their money here, why would they have to continue to live here?

Always an important question to ask. I have no idea why anyone would want to live here after they’ve made their money.

But you’ll note that plenty of Canadian seniors retire to Florida, so it works both ways.

@Damuri_Ajashi

Why not just retire in Canada, hell at least you guys have UHC?

It’s cold. But when I figure out a good place to retire I’ll let you know. Hopefully Spain can get their shit together before I’m 55.

@Damuri_Ajashi

And how do they catch your purchase of a diamond ring or when you drive a car across the border?

How do they catch income tax dodgers?

Smuggling diamonds into the country is a rather serious crime.

@Damuri_Ajashi

I think there is a very good chance that we will see reform on capital gains rates and the carried interest exception.

Let’s hope I can cash out before that happens.

@Damuri_Ajashi

Reagan was able to do it in 1986.

Reagan sounds awesome, that guy passed all kinds of crazy legislation.

@Damuri_Ajashi

Are you under the impression that dividends are “earned income”?

Some are, some aren’t.

@Damuri_Ajashi

You do realize that dividends are also taxed at 15% right?

Some are, some aren’t. I’m beginning to think you don’t know what dividends are.

@Damuri_Ajashi

You know that Reagan’s last act in office was to eliminate the capital gains rate differential right?

You asked a stupid question, I gave you an answer. Obviously you weren’t aware of how capital gains were taxed, ignorance fought.

@Damuri_Ajashi

You do realize WHY there is a capital gains preference right?

Do you?

@Damuri_Ajashi

There are several arguments but the best ones are not really valid anymore now that our tax system is relatively flat.

Flat how? Compared to what?

@Damuri_Ajashi

Is that supposed to be an excuse?

You asked a stupid question, do you not like the answer?

I don’t have much else to add.

But I wanted to make sure.

That I had as many possible lines written.

[Voyager]

@emacknight

Still doesn’t negate the role Main St played, particularly over consumption. People over consumed based on increases in home equity and increased stock gains.

Just cherry picking here. Consuming based on borrowing using home equity loans is a problem. Consuming based on selling stock is not. In fact it locks in your gains, money which would have vanished otherwise. I know - during the bubble I bought a few cars and took a cruise using my gains, and there were no ill effects. I only wished I had bought more stuff.

Never? Are you saying that there wasn’t one borrower that fudged some numbers to get a loan he/she shouldn’t have?

Have you ever gotten a mortgage? They usually don’t take your numbers on faith - they check them against your pay stubs and credit records. The banks encouraging loans with no documentation was a big part of the problem, and one the banks are totally responsible for.

I’m pretty sure I paid taxes on the purchase of my home. If we did have a higher tax on the purchase of new homes do you think that would increase home ownership, or decrease it?

Maybe you do in Canada, but we don’t here. We pay property taxes, but nothing on a purchase.

Sure, we need people buying homes now, but only because we had too many people buying too many homes prior to 2007. It’s almost as if tax policies can have negative impacts.

People buying extra houses as investments don’t get tax breaks. So, one to a customer. And the problem was run up on prices due to increased demand. Which was a result of banks lending to people who couldn’t afford it, which was the result of banks being able to makes lots of money selling off risky mortgages.

Smuggling diamonds into the country is a rather serious crime.

So was smuggling booze from Canada during Prohibition. Yet they did it - and smuggling diamonds is a lot easier.

[amarone]

@Voyager

People buying extra houses as investments don’t get tax breaks. So, one to a customer.

Not quite.

[QUOTE=IRS]

Qualified Home

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes.

[/quote]

[Marley23]

@emacknight

I get the feeling you’re about to say something stupid.
[…]
No, that’s just what you’re bitching about because that’s what you do
[…]
You asked a stupid question
[…]
You asked a stupid question

Knock it off, emacknight. Make your arguments without saying people are bitching or dismissing question after question as “stupid,” which doesn’t support your argument and takes the thread in the wrong direction.

[Damuri_Ajashi]

@emacknight

I think he just got a new job doing something for the Republican Party.

He’s interviewing for a job, he isn’t getting paid right now and his employers would not be able to fill out his tax returns for him.

None? It’s been 5 years, how haven’t you learned anything?

Your use of the word “driven” is your first failure, stop doing that. A massive financial collapse doesn’t get to have just one factor, there were many.

Still doesn’t negate the role Main St played, particularly over consumption. People over consumed based on increases in home equity and increased stock gains.

And yet you still haven’t learned anything.

Exactly, if only you were able to stop there, but I get the feeling you’re about to say something stupid.

Never? Are you saying that there wasn’t one borrower that fudged some numbers to get a loan he/she shouldn’t have?

Like I said, we’ve had this conversation many times before and your side of the argument is proven wrong again and again and yet you keep bringing up the same arguments over and over again in a misguided attempt to exonerate the free market from the financial collapse. The only reason you get away with doing this is because the explanation is not a pithy soundbite and takes a reasonable amount of time and effort to lay out. Simply put it was a market failure that was possible because of a lack of government regulation of lending and financial markets.

Ah, “market failures,” how convenient. And you’re saying that the American consumer had NOTHING to do with those market failures? Nothing at all? Entirely the fault of lenders?

Not just the lender, the credit agencies, investors, and financial institutions were all at fault as well. Of all the participants that you could blame, the consumer carries the smallest share of the blame.

When you can define “market failures” let me know. Next we can define the cause of the Katrina disaster was “too much water.”

The market failure was fairly broad. It required a lot of consecutive and simoultaneous market failures to bring about the financial collapse.

The compensation practices promoted horrible lending practices. Lenders didn’t really care about the horrible lending preactices because they were able to flip the mortgages in the secondary market. The market had abdicated its obligations of due diligence by relying on the opinion of credit agencies with conflicts of interest. Banks were carrying lower and lower reserve margins while holding riskier and riskier investments. Banks were trading trillions of dollars inc redit derivatives with thinly capitalized or insolvent counterparties in an opaque over the counter market (with deliberate efforts nmade to reduce transparency and liquidity). The list goes on and on. If you want to count up all the times that a borrower hoodwinked a lender (without the aid and encouragement of a mortgage broker) that exercised due diligence in making a mortgage, it would be about as common as voter ID fraud. The lender is and always has been the gatekeeper to credit, noone forces them to lend.

[quote]

U.S. savings rate hits lowest level since 1933

Americans’ Negative Savings Rate

That last one is a pretty funny read considering what happened a year later.

I believe the Dept of Commerce “savings rate” includes government savings (or deficit) but I an open to correction.

Negative savings rate was a huge part of what got us here. It was one of the many variables that caused the problem to be so bad.

How did a 1% negative savings rate get us here? Other than playing to a general antipathy to debt, how did the low (or even negative) savings rate get us here?

I’m pretty sure I paid taxes on the purchase of my home. If we did have a higher tax on the purchase of new homes do you think that would increase home ownership, or decrease it?

Lower it. I don’t see your point. Are you saying that low home ownership and throwing up barriers to home ownership would be good for the economy?

It’s almost as if tax policies can have negative impacts.

You’re right, taxes serve no purpose, we should just get rid of them. :rolleyes:

But seriously, if youa re asrguing that we have suboptimal taxs policy, then i agree. But I think we might disagree on whyat would constitute optimal tax policy.

Because people spend more than they had prior to 2007. There is no right or wrong level of consumption. It was forced up (artificially high IMO) prior to 2007 and now we’re dealing with the results of de-leveraging. Had people been saving prior to 2007 consumption wouldn’t be such a key issue. Still want to think it had nothing to do with the recession?

And that demand was driven by wall street not main street.

There are lots of ways to fund lots of governments.

Yeah but explain to me how you do it with a luxury tax.

[quote]
Dude, you have the largest military in the world. It has nothing to do with Bush, or Clinton, or Bush.

Also, please cite where I said, "current government spending is significantly higher than it was under Bush.

[quote]

When you say “your current spending is too high” it implies that you think that past spending was OK. Did you meant to say that our spending has been too high since FDR?

No, that’s just what you’re bitching about because that’s what you do. Start with a hybrid system, get the budget balanced, then back off of income taxes as revenues come up. It’s unlikely you’ll get income taxes to zero. It’s also impossible to implement a system of that size by snapping your fingers.

Please reread the OP. The OP is talking about REPLACING the income tax with a consumption tax. The last thing that conservatives in this country want is a consumption tax stand next to an income tax. They call that double taxation in the red parts of teh country. Like I said i’d be open to a hybrid syswtem but tahts not what this thread is about, I guess we coudl derail it ot engage in a mutual, “I think you’re right” “no, no, no, I think YOU’RE right” conversation.

As near as i can tell, most people on this thread advocating a consumption tax are NOT contemplating an income tax AND a parallel consumption tax. its anathema to them.

That’s what we have now, but I have no idea what it will be in 5-10 years. The GST isn’t that old, before that it was all income tax and deficit spending (sound familiar).

After the GST was put in the government cut back on spending until the budget was balanced and then {gasp} started cutting taxes first income then scaling back the GST.

We had an income tax and a balanced budget until Bush cut taxes and created deficits again. I don’t think the deficits were critical to the financial collapse, it wasn’t driven by a lack of confidence in our debt, it was driven by a housing bubble that was driven by poor financial regulations and a failure of the free market.

Your GST is over 20 years old. Goods and services tax (Canada) - Wikipedia.

The Socialist Utopia of Canada managed to do what US conservatives wanted to do and liberals didn’t think could be done. You’ll also notice that Canada didn’t have a massive economic crisis.

There are a lot of reasons for this and your tax system has something to do with it but so does NAFTA, and a conservative right that isn’t batshit crazy.

Yup, 7.3 vs 8.3. It’s hard to have a financial melt down when people have equity in their homes.

Its hard to have a financial meltdown when your financial markets are properly regulated.

Sucks to be you.

Wow, really sucks to be you.

I would trade Canadian right wingnuts for American right wingnuts anytime. Your right wingnuts tend to be a utilitarian form of libertarian. Our right wingnuts tend to be latent mysogynists/racists who compete to see who can thump the bible harder and wave the flag higher.

Exactly.

We can have this conversation but the impediment to a transition to a hybrid system is not the liberals, its the conservatives.

Always an important question to ask. I have no idea why anyone would want to live here after they’ve made their money.

But you’ll note that plenty of Canadian seniors retire to Florida, so it works both ways.

You will notice that Florida doesn’t have a consumption tax. Oh yeah and it isn’t bitterly cold 6 months out of the year.

How do they catch income tax dodgers?

Smuggling diamonds into the country is a rather serious crime.

I live in a state that charges a sales/use tax on all purchases, even if you bought the item out of state. it is impossible to enforce and is only really applicable to purchases of things like cars and guns where you have to register the car of gun with a state agency.

Let’s hope I can cash out before that happens.

The change in capital gains may not affect current assets. IOW you may be able to apply the old rate for anythign you purchased before the change in rate. At the very least, I doubt any change will be a surprise.

Reagan sounds awesome, that guy passed all kinds of crazy legislation.

He had an accomodating Democratic congress.

He also ran historic deficits with his unfunded tax cuts.

Some are, some aren’t.

Some are, some aren’t. I’m beginning to think you don’t know what dividends are.

I’m beginning to think I don’t know what you are talking about. What ARE you talking about?

You asked a stupid question, I gave you an answer. Obviously you weren’t aware of how capital gains were taxed, ignorance fought.

WHAT are you talking about?

Do you?

Yes. Do you? because I’m beginning to get the impression taht you are getting all your ideas off some web page somewhere.

Flat how? Compared to what?

Compared to when we implemented the capital gains tax.

One of the main arguments for the capital gains tax was that you were taxing people at a marginal tax rate in one year for income that was earned over many years. Back when marginal rates were as high at 92%, moving income from one year to another wasn’t just a matter of “time value of money” it affected thet ax rate you were subject to. it wasn’t to offset inflation (otherwise we would have a preference for all investment income including interest. It wasn’t to promote investment over earngin (kind of an odd concept don’t you think?), it was to relieve the inequity of imposing a 92% tax rate on earnings that might have been earned over a lifetime.

This argument loses much of its appeal when tax rates are capped at 35% and get capped there at a relatively low income level.

You asked a stupid question, do you not like the answer?

I don’t have much else to add.

But I wanted to make sure.

That I had as many possible lines written.

:dubious:

@Voyager

People buying extra houses as investments don’t get tax breaks. So, one to a customer. And the problem was run up on prices due to increased demand. Which was a result of banks lending to people who couldn’t afford it, which was the result of banks being able to makes lots of money selling off risky mortgages.

Quibble: Yes we do. You can deduct mortgage on your second home as long as your combined mortgage balance doesn’t exceed 1 million.

You not only get interest deductions for mortgages on investment property, you also get depreciation deductions.

[Voyager]

@Damuri_Ajashi

Quibble: Yes we do. You can deduct mortgage on your second home as long as your combined mortgage balance doesn’t exceed 1 million.

You not only get interest deductions for mortgages on investment property, you also get depreciation deductions.

I stand corrected. I was thinking of investment property, not second houses. I assume the depreciation on these is used to reduce taxes on the gains from sales, which are not exempt like gains from sales of private residences. (Is a gain on the sale of a second home exempt also?)

[Red_Wiggler]

Depreciation on investment property is added back to the gain when the property is sold.

[randy054]

@Swords_to_Plowshares

Replacing income tax with a consumption tax would produce black markets for most everything valuable. Smuggling would become lucrative. It would become easier to sell stolen goods as black markets become bigger, which would most likely increase theft and break-ins.

Not only that, but for those that can afford overseas trips, they could buy big ticket items there in order to avoid the consumption taxes

[amarone]

@randy054

Not only that, but for those that can afford overseas trips, they could buy big ticket items there in order to avoid the consumption taxes

Although presumably tax would be due on return to the country, with fines and possibly jail time for anyone caught trying to avoid them. How effective such deterrents would be, I know not. Presumably there is some history/knowledge of this in Europe where duty is payable on entry to make up for the VAT not collected on a domestic purchase.

[Damuri_Ajashi]

@Voyager

I stand corrected. I was thinking of investment property, not second houses. I assume the depreciation on these is used to reduce taxes on the gains from sales, which are not exempt like gains from sales of private residences. (Is a gain on the sale of a second home exempt also?)

The depreciations is usually used to reduce rental income. There are limits to your ability to take these deductions from other income.

The first 250K or 500K of the gains from a “primary residence” are exempt.

@amarone

Although presumably tax would be due on return to the country, with fines and possibly jail time for anyone caught trying to avoid them. How effective such deterrents would be, I know not. Presumably there is some history/knowledge of this in Europe where duty is payable on entry to make up for the VAT not collected on a domestic purchase.

Plenty of US states have a sales/use tax that taxes purchases you make outside the state and they have almost zero enforcement unless you are talking about a gun or a car.

How would the US government ever find out about a diamond or a new laptop?

[amarone]

@Damuri_Ajashi

Plenty of US states have a sales/use tax that taxes purchases you make outside the state and they have almost zero enforcement unless you are talking about a gun or a car.

How would the US government ever find out about a diamond or a new laptop?

Entering a country is very different from entering a state, though. You have to fill in a form stating what you have bought (and that you do not plan to overthrow the government during your stay), and you pass through customs trying not to look guilty (so I’m told - never avoided paying duty myself, of course). People can and will lie, but there will be more compliance than with the whole state sales/use tax thing where there are no attempts at enforcement.

I tried to find some numbers for VAT evasion in the EU, but failed. Lots of articles about attempting to combat it, but I didn’t find any numbers.

[Damuri_Ajashi]

@amarone

Entering a country is very different from entering a state, though. You have to fill in a form stating what you have bought (and that you do not plan to overthrow the government during your stay), and you pass through customs trying not to look guilty (so I’m told - never avoided paying duty myself, of course). People can and will lie, but there will be more compliance than with the whole state sales/use tax thing where there are no attempts at enforcement.

I tried to find some numbers for VAT evasion in the EU, but failed. Lots of articles about attempting to combat it, but I didn’t find any numbers.

Granted but it would require a LOT more enforcement than we have right now to prevent people from bringing in laptops and diamond rings.