Debate (non-partisan?) - Taxes

[Galahad]

Some in Washington are talking again about the prospect of replacing the income tax with some sort of consumption tax (sales tax, V.A.T., etc.). Most plans I've read about have provisions for exempting certain kind of purchases as well as a tax allowance to offset the impact to lower income folks. So the question is, would you think that would be a better method of raising revenue or a worse method? (Use complete sentences, don't look at your neighbor's paper, close your blue book and put your pencil down when you're finished).

 

[JimB.]

I don't really care HOW the taxes are collected, as long as the tax BURDEN does not increase.

As far as being better, if it simplifies the system, cuts down on administrative costs to us as taxpayers, & (see above sentence), then I think any number of systems warrant further investigation.

 

[shrubber]

Jeez, It's about time.
The Russians have a flat tax now. Can you believe it? The Russians! Here we are spending a fortune on redistributing wealth of our citizens and a former communist powerhouse is far ahead of us ideologicaly.

 

[faithinkarma]

Shrubber, a flat tax and a value added tax are not the same thing.

It's a complicated issue. Off the top of my head I would say a value added tax may be unfair to the lower wage earner. A person earning 30 thousand a year is likely spending every cent of that 30 k to live. And therefore would pay tax on his entire income. A person earning 300 thousand, paying tax on only what they purchased, would probably pay far less. I know they have said they will give allowances for lower income families. In my own experience, they are not very helpful.

Coming from a place that has a goods and service tax, I tend to cringe when anyone speaks of it. You have to think of what it is like paying tax on everything from a single donut to a new car to a haricut. It makes you think long and hard before making any major purchase, so it is possible the economy might slow down because of a value added tax.

And don't forget both federal and state taxes would have to be replaced. And where I come from, one was added atop the other. A purchase of $100 was taxed 7.5% federally, and then the 7% provincial tax was calculated on $107.50 not the original $100. So you were paying tax on the tax.

I am no expert by any means. Just offering my immediate reaction to the possibility.

 

[caitycaity]

i'm in favor of a flat tax (with income minimums on the lower end). i know that's not exactly what you are talking about, but i think our current tax system is pretty ridiculous.

 

[jrydberg]

I'd agree with fik in that a VAT or sales tax would probably shift the tax burden a bit more to the middle and lower income households.

On the other hand, I agree with caitycaity that our current tax system is pretty ridiculous in its complexity. Fix the income tax system, don't replace it. That's my 28% worth

 

[BedKnobbery2]

I'm not sure a consumptive tax would necessarily solve the problem, or be a better system. Many states have consumptive taxes (as in, sales taxes) AND income taxes, and they are still struggling.

The issue I would have with a flat tax has been brought up on other threads; 3K is a heckuva lot more to someone earning 30K than 30K is to someone earning 300K. For the former, it can be the difference between going into debt in order to have shelter, food, & clothing for ones family or managing to get by; for the latter, it would more than likely be the difference between X luxury and Y luxury.

If strictly enforced realistic lower income exemptions were imposed, and there was a complete closing of all tax loopholes, it's something I could possibly consider. But I have no faith that either thing would be done.

 

[caitycaity]

You have to think of what it is like paying tax on everything from a single donut to a new car to a haricut.

i already do. i guess the proposals would just increase these taxes?

 

[Galahad]

The consumption tax schemes I've read about include some sort of mechanism to give refunds below a certain income, etc. to compensate for the regressive nature of the tax. If one of the arguments in favor of a consumption tax is that it would be cheaper to administer and eliminate the need for "the I.R.S." then I think they are fooling themselves. As soon as you have rules that give rebates, exceptions, etc. then you have a bureaucracy. I do think that if you could deal with the low income issue, actually eliminate the income tax by statute (so that you could not reinstate it at will) then a consummation tax, all by itself, is more "fair". Has anybody seen numbers about its supposed effects on revenue?

 

[faithinkarma]

Maybe there are some good arguments for a consumption tax. I would be interested in hearing them.

I can only go on my own experience. We already had much higher income taxes than here, and an added extra 15% GST to every purchase. Usually every major purchase made by a lower income family is financed. So they are paying the original cost of a car, plus an additional 15%, plus the interest on that extra 15% they had to borrow. We were given a rebate at the end of the year. To get the maximun rebate you had to be at the poverty level, and that rebate was still capped at $300 for the year (it could be more by now )

Does anyone know what kind of percentage they are thinking of here? I read 23% somewhere, but that could have just been speculation. But if they plan on replacing both income tax and sales tax with one tax, it is going to have to be a fairly hefty amount.

 

[rcyannacci]

To quote Barbie, "Math is hard...Let's go shopping!."

But, seriously, I'm following this conversation closely, since I generally feel uninformed about the tax system. Thanks for the multiple viewpoints.

 

[jrydberg]

The biggest argument I'd have against a consumption tax is that taxes are rarely eliminated. The income tax was supposed to be a temporary measure. I'd be afraid of adding the consumption tax without ever really getting rid of the income tax.

 

[DoeWDW]

I'd prefer a flat income tax - tax all income above $25,000 at a certain percenatge rate, for example. Our current tax system is already set up to report income to the IRS - no new bureaucracy. Calculating the tax on that income would be so much easier if using a flat percentage across the board. I would have NO loopholes, period!

With that said, I do NOT believe in taxing inheritances - if I paid taxes on it while I earned it, why should my kids pay taxes when I pass it on??

Any kind of tax that involves keeping track of the taxes paid on each purchase and then getting a rebate if you're lower income sounds like it puts quite a bookkeeping burden on the low-income people who would use it. How is that fair??

 

[chrissyk]

I like the income tax rather than a flat tax. With the income tax structure, you can eventually get away from paying it and toward paying the lower gains rate if you are able to save and invest. Also, you can drop your income preciptiously (like if 1 parent stays home) and actually pay a lot less in taxes because of the graduated tax structure. I think that the income tax offers more flexibility to most families than a flat-tax would.

 

[shrubber]

Here is some info you might find helpful


Comparison with Sales Tax
The difference from conventional sales tax is that it is levied on every business as a fraction of the price of each sale they make, but they are in turn reimbursed VAT on their purchases, hence the tax is applied to the value of the goods that has been added.

Example
Without a VAT:
A widget manufacturer spends $1 on raw materials to make a widget.
The widget is sold wholesale to a widget retailer for $1.20.
The widget retailer then sells the widget to a widget consumer for $1.50.
Adding on a 10% VAT:
The manufacturer pays $1.10 for the raw materials.
The manufacturer charges the retailer $1.32 and pays the government $0.02, leaving the same profit of $0.20.
The retailer charges the consumer $1.65 and pays the government $0.03, leaving the same profit of $0.30
So the consumer has paid 10% extra. The businesses have not lost anything directly to the tax, but they do have the extra paperwork to do so that they correctly pass on to the government the difference between what they collect in VAT (an 11th of their income) and what they spend in VAT (an 11th of their expenditure).