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Would this revolutionize or destroy the US?
Democratic presidential candidate Mike Gravel wants to abolish the IRS and income taxes, and institute a "fair" tax on spending. Is this plan just crazy enough to work, or would it doom us all? Or is it utterly irrelevant?
I've been scratching my head all morning trying to weigh the pros and cons on this one, and honestly, I am stumped.
I've been scratching my head all morning trying to weigh the pros and cons on this one, and honestly, I am stumped.
Comments
Sure, you might say that if people have more money in the first place because of lack of income tax, then they can buy just as much as they used to because they have extra money to pay the sales tax. In some cases, this might be true. But let's look at the extreme cases to get the whole picture. On one hand you have someone who spends every penny they earn. This person will end up giving roughly the same amount to the government either way. They just pay their tax at the cash register instead of the IRS. On the other hand you have someone who only buys what they need, and saves the rest. This person ends up giving a lot less money to the government, regardless of what they make, because they spend very little.
What's the result when you average all the people on all parts of the spectrum? Lower tax revenues for the government. Even if you count out the fact that the government will save the beurocratic cost of running the IRS, it still won't be enough to account for the loss of tax money. This means that if you want to have a sales tax only, the tax rate has to be much much higher than if you have an income tax in order to get the same revenue.
Also, having only a sales tax really really hurts poor people and doesn't hurt rich people. I'm not a big fan of full on socialism, but I am a fan of a graduated tax. Bill Gates spends a very small portion of his total revenue. A poor person spends much more than 100% of their total revenue. Rich people will save a ton of money, and poor people will get less for their money.
In the end, even if you don't care about poor people, the only way to make this sort of tax work is to dramatically decrease government spending. As much as I would like to see that happen, it hasn't happened in about a century. Government spending is going nowhere but up. Let's just say I'll believe it when I see it, and not until then.
Added: I agree with Apreche, if you tax spending people will keep hold of money. If you tax income it doesn't matter how much you spend so you might as well not bother getting taxed just to stockpile money.
One thing I wonder about is the "prebate" thing. That sounds like we would have some government board or another deciding what the dollar value of "essentials" would be, adjusting it from time to time. This certainly could be troublesome.
I listened to an episode of the podcast "Econtalk" with a discussion of the flat tax, and saw that as even simpler. You exempt the first $X.XX for everybody, and pay Y% on the remainder. It fits on a post card, minimizes the government prodding us to spend our dough in certain ways, and saves them having to cut all those prebate checks in Gravel's proposal.
One concern I have with both proposals (other than the lack of political will to seriously look at either of them) is the transition. If we move sales tax from 5-8% (I think that covers most of the states) to something like 25%, people's spending habits will change markedly. This will cause some places to lose business, and some workers to lose their jobs. That's a normal part of progress, yes, but this would be a larger jolt than usual, I would think. How long until the transient effects of that jolt would last before we get back to a steady state, and how disruptive that would be to the economy, I wonder about.
So, having people hold money might not be a bad thing, economically.
As far as reducing spending, Omnutia, that is why I am still a registered Republican -- I believe in reducing the size of government and scaling back spending (but part ways considerably with conservatives on social libertarianism). Unfortunately, and quite ironically, the Republicans have all but abandoned this traditional part of their platform in the recent eight years (*cough, cough* get my drift?) while the Democrats have remarkably stepped up with some budget-balancing solutions that have worked.
Hank: I am going to subscribe to Econtalk tonight. Thanks for mentioning it.
So, having people hold money might not be a bad thing, economically.
As far as reducing spending, Omnutia, that is why I am still a registered Republican -- I believe in reducing the size of government and scaling back spending (but part ways considerably with conservatives on social libertarianism). Unfortunately, and quite ironically, the Republicans have all but abandoned this traditional part of their platform in the recent eight years (*cough, cough* get my drift?) while the Democrats have remarkably stepped up with some budget-balancing solutions that have worked.
Hank: I am going to subscribe to Econtalk tonight. Thanks for mentioning it.
If everyone is investing their money than they are not buying things. If they are not buying things the economy stops.
The economy could be stated simply as, "when money changes hands." If money is not changing hands then the economy dies.
Remember the crash of 1929? Most people remember the crash but they forget about the over-investing that preceded it. Investment firms were popping up all over the place. People were buying stocks in investment companies that were then buying stocks in other investment companies and so on.
A tax hurts whatever it taxes. All taxes are punitive by their very nature.
Yes, a national sales tax would hurt the buying power of the poor. It may also lead to more jobs.
How is that? Simple really. Let's say Scott has a boat load of money and he wants to buy a monument to himself. If he goes out to a monument store and buys one he has to pay sales tax on it. If he hires a craftsman to make it for him he gives someone employment and avoids the sales tax.
Will the monument craftsman have to pay sales tax on the raw materials? That all depends if he buys wholesale or retail.
This is just a quick post from the library kiosk and I can't use the spell checker or take more time to think this out.
Um, you realize you have to pay sales tax if you hire a craftsman. Sales tax means every time money changes hands, the government takes some. This leads us to the other problem of sales taxes. Unlike income taxes, sales taxes are inherently unenforceable. Just look at all the crap we buy online without paying sales tax. This is probably the main reason we have income tax. It is very difficult to avoid paying it without getting caught.
Quite enjoyable, though they could use Rym & Scott (or just Rym? I forget) to help with the sound quality.
Taxing only on sales is a horrible horrible horrible idea. One reason is what Scott said, when you tax income people feel motivated to work more and harder in order to earn more, but when you have a sales tax people tend to purchase less, and that of course leads to its own whole set of problems.
But the really really big problem is something you typically wouldn't realize. A sales tax system like this kills the poor. Why? Well obviously the more expensive the item the more tax associated to it in this system, which would mean that the rich would foot most of the bill right? Maybe, except that those really expensive items are typically luxuries, and when you tax luxuries you don't buy them, regardless of whether you have the money or not. So then all those craftsmen, and workers who help produce those items lose their jobs because no one is buying their goods.
But onto why it really hurts the poor. Who spends more of their income? The poor spend almost all their income, while the rich tend to invest their's rather then actually spend it. So now, with this system, you are penalizing the poor, because with a 20-25% sales tax they now have less money to purchase goods with, since $25 of every $100 they spend can now no longer be used on the food, and other essential goods that they need.
If anything he should be abdicating the opposite, with no sales tax, and only income tax type system.
What really pisses me off is the way some companies charge you sales tax on shipping and handling.
Oh, for the record I'm all for a flat income tax where everyone pays the same amount (percentage wise) on everything over $30K with no deductions at all other than personal deductions such as $5K per kid.
The $270B compliance cost is the accounting sector of the American economy. Abolish the tax code and lots of accountants lose their jobs.
The idea that used stuff is somehow tax free is very interesting because the "used stuff" stores I shop at charge sales tax.
He mentions it would move us from a spending to a saving economy. Well, if we all stop spending and start saving how will the sales tax work? If no one is buying then no taxes are collected. If no one is buying the economy stalls!
And I'm not advocating Reganomics, which is also a just horrible system as well. Trickle down doesn't work because you are giving the rich tax breaks in the hopes that they spend the money, which would eventually trickle down to the middle and lowest classes who do the work that produces the goods or services they would purchase with said money. Problem is when you give tax breaks like that to the rich, they don't spend them, they save them. This is because to the upper classes, cost isn't usually a factor in purchasing a good or service, thus having more money doesn't really matter in that thought process.
If you are attempting to stimulate an economy through purchasing who you should be giving money to is college age adults, because when they are in college, or when they have their first jobs, they don't consider savings at all (this is typical, not true in all cases, just mostly true on the whole.) So rather then save, they use all the money they earn to buy things, apartments, cars, furniture, clothes, electronics, etc.