I don't buy that. Yes, I know it seems logical, but in practice it's not so clear cut. With deductions, rich people end up paying very little for income tax. With sales tax (or VAT) the person spending more pays more, and it's more difficult to escape.
This issue is very unintuitive and numbers tend to hide reality. Let me put an example on how numbers can fool us.
In my country, Spain, there has been a recent discussion about what economic model we want. Left wing parties argue that in countries like Denmark (that's seen as a very good place to live) taxes are higher than ours.
But that's terribly misleading. The important number is how much money you're left with after paying taxes and what you can purchase with it. Our salaries are too low so, even if the tax percentage is lower, and prices are a little lower (not in Madrid or touristic areas) we still are poorer after taxes and we have worse public services.
> With deductions, rich people end up paying very little for income tax
You're utterly wrong. The wealthiest 0.001% paid 17.6% of their income in taxes in 2012[1]. That's not "very little" -- it's likely in the tens of millions per person. The top 1% paid even more than that.
Some corporations will avoid income tax altogether, as will some small-business owners, but individuals still pay substantial amounts of income tax. The "deductions" you mention aren't structured to eliminate most people's tax bills, and the loopholes don't work for everyone.
I said wealthy people prevent sensible, non-regressive taxes. You said that can't be right because rich people don't pay taxes. I showed you that they pay millions in taxes, on average.
Perhaps because in the end, you pay for stuff with dollars, not with percentages?
That whole game of playing with abstract fractional numbers is already massively progressive. I think people fail to appreciate how very bizarre this "accepted norm" actually is.
The goal of all taxing and spending must be related to political goals. They aren't goals in and of themselves. What is the political value of taxing a flat percent instead of a progressive percent (let alone taxing a flat dollar amount)?
The political value of progressive percentages is that it keeps the money supply stable without taking too much spending power away from the lower and middle income people where their spending power relates directly to things like seeing children cared for well with good education, time with parents, and other opportunities etc. There's a huge social value in maximizing the number of people who have spending power enough to live reasonably stable, healthy lives, as long as we avoid perverse incentives and allow healthy market mechanisms to keep the economy running smoothly.
So, what's the policy objective of going the other way (away from progressive percent tax rates)?
A fundamental sense of fairness -- for reasons given above.
I understand that the "social contract" may dictate otherwise in practice (even ignoring arrogant self-declarations of "social value", coming from a communist East European country, I've seen enough of those). After all, we're just a bunch of primates.
But to pretend there's nothing bizarre about this group-above-individual arrangement, that the opposite is somehow a completely invalid or incomprehensible viewpoint, is a serious lapse of the imagination.
>The wealthiest 0.001% paid 17.6% of their income in taxes in 2012[1]. That's not "very little" -- it's likely in the tens of millions per person. The top 1% paid even more than that.
So what? How much did they have left? How much utility do they have with what they have left?
The biggest argument against it is that it is incredibly regressive. Poor people generally spend higher percentages of their income on stuff where rich people save higher percentages of their incomes. So for example, Joe makes 51k/year but spends 50k/year. At the 23% tax rate that FairTax proposes, he pays $11.5k - a $2.5k "prebate". This works out to an effective tax rate of ~18% (with today's tax plan Joe's effective rate would likely be about 7.5% for income taxes and 7.5% for Social Security and Medicare. I.e. a lower tax burden.)
Compare that to a rich person. Susan makes 250k per year but only spends 150k/year and saves the other 100k. She pays 23% on the 150k = 34.5k minus the 2.5k prebate which makes for an effective tax rate of 12.8%. I.e. Susan makes more each year but pays a lower rate of taxes. These numbers get even more insane when you have 10 million in income but only spend 1 million a year. We basically are subsidizing investing and rich people are the biggest investors.
> We basically are subsidizing investing and rich people are the biggest investors.
What's wrong with subsidizing investing? Without investment in capital we'd all be subsistence farmers tending the fields for 12h a day.
If some rich guy wants to make $100 billion and spend 1% on himself and 99% on improving the world for future generations through investment, that's great, no?
I guess it comes down to whether you believe the government can invest those same dollars more productively than rich individuals.
It's not that subsidizing investing is bad. It's that we're subsidizing investing by shifting the burden to people who pay income tax.
If someone makes $100M by inventing an amazing product, and someone else makes $100M by earning interest on the fortune he earned from his mother, which of those behaviors do we want to encourage?
Earning money from investing is often a passive way of using money.
> If someone makes $100M by inventing an amazing product, and someone else makes $100M by earning interest on the fortune he earned from his mother, which of those behaviors do we want to encourage?
What's the difference between inventing the product himself and investing in a founder who otherwise would have had to get a regular job? Remember -- he could have spent the principal on yachts, cars, and jets instead; that's the behavior we want to disincentivize.
The fair tax proposal actually proposes removing Social Security and Medicare taxes as well so there would be no income tax of any kind. I stand by my numbers.
But Susan still paid 3.5x as much in actual dollars. I guess I just fundamentally disagree with taxing my labor (or investing acumen). I'd be fully on-board with a high consumption tax though.
I guess I look at it as Susan gets 5 times as much benefit from a stable society (they would both lose their incomes if society collapsed or the country were bombed, etc) and thus should pay _at least_ 5 times as much as Joe.
Because rich people spend a much smaller percentage of their income on taxable goods, so to be revenue-neutral the "fair" sales tax would have to be at least 30% (if you believe the FairTax fans) or over 50% (if you believe other economists).
One reason is that it's impossible to enforce. If sales tax were that high, it would give retailers a huge incentive to under-report sales on the billions (trillions?) of transactions in the US each year. The same way it's hard to catch drug dealers for tax evasion, it's hard to catch retailers who want to avoid charging/paying sales tax.
With the income tax, you have employers reporting and a far small surface area of cheaters to police. It's still a massive effort to police it, but not nearly as large as FairTax would be. FairTax is essentially a scheme to eliminate enforceable taxes, although I'm not sure its creators intended it that way.
You think it's harder to enforce tax collection on businesses than individuals? With a significantly lower number of business you can audit their books more often. Additionally you can more easily monitor their bank account activity to detect tax evasion. Sure, cash-only businesses could try and avoid taxes, but they have a lot more to lose than a single individual that under-reports their income.
Not sure how you think individuals are the easy ones to enforce.
Also, in this world the tax code is tiny in comparison and loopholes are removed (mostly?).
Well, at the rates usually proposed it's a massive tax increase on the poor (especially the working poor benefiting from the EITC) and middle class, and the rates usually proposed don't actually preserve revenue, so in reality it would be an even bigger tax increase on those groups. And it's an even bigger tax advantage to the capitalist class than the existing tax preference for capital income is.
Which is why "FairTax" support lines up with support for other proposals that hurt the poor and benefit the rich.
Not everyone earns money via income. You have to define what "income" is exactly, then it starts getting complicated......
Example: I route my investment earning via a company, that company can claim expenses such as paying my utility bills and buying my groceries, anything leftover they give me. They work it out so my net income is zero, oops.
Taxing consumption would rapidly explode into a vast array of categories and rates for different types of consumption, luxury taxes, etc.
Food, maybe no tax. But maybe there's some tax if it's ready-to-eat. Or based on sugar content.
Automobiles maybe taxed rather heavily, but the first $5000 is exempt so poor people can buy cheap cars, etc. It would become just as complicated as the current code.
Iceland (where I'm from originally, so I'm familiar with it) is already your worst nightmare when it comes to this. There's a 500 page PDF[1] exhaustively detailing every product category and what tolls & fixed fees you pay on certain products. Ketchup 0% toll, Mayo 0% but 19 ISK per kg etc. Turn to page 50 and you can see different tolls & fees for different types of cabbage.
It's an entirely byzantine system, but because it's happening when products are imported, or at the point of sale, it's vastly easier for consumers than an equivalent system that works through tax rebates.
Things on that list occasionally become a political issue. E.g. the tax on added sugar has gone back & forth a couple of times depending on who's in government.
Still, this adds zero complexity to your tax return, or to the average person's interaction with the government or private businesses.
Taxing consumption is already done in many parts of the world.
UK: most things are subject to 20% vat. Fresh food is 0% (normally), and there are a handful of things (children's clothes being the only one I know offhand) at 5%.
There's also heavy duties charged on fuel - over 2 pounds per US gallon (plus 20% vat). Alcohol - 28 pounds per litre of spirit.
Lots of these systems exist, and work, outside the US.
The goal is not making it easier, but maximizing income for the collecting entity. And guess what: there are different entities competing for maximum extraction.
The most infuriating situation is when a tax taxes already taxed money, so in fact you are paying taxes for paying taxes.
Most of the tax code addresses what is defined as income. The part that figures out what the rate is, is very simple. The deductions and loopholes in the tax code exist to incentivize many activities, and it would be politically difficult to change that
Most tax reform proposals (at least those aiming for flatter systems) advocate lowering rates in exchange for eliminating the deductions and loopholes. Bringing the statutory rate and the effective rate closer together.
Then people living off of investment income wouldn't be paying any tax. At the same time, if you mean, tax all gains at 1.5x the income tax rate, investors wouldn't be properly compensated for the risk they take + inflation.
If you are going that route, check into the FairTax idea. Basically, replace income tax (and others) with a simple federal sales tax system in the 30% range. Enforcement narrows to businesses and rates aren't determined by income. States get a portion of the tax in exchange for enforcement. Poverty level spending gets a tax rebate (prebate in that plan) to not tax a certain amount. Interesting ideas from my POV, but I'm not an economist.
