4 ms·

Taxing spending tends to be regressive. Rich people end up paying less tax as a proportion of their income while the poor end up paying more. It is however les

Taxing spending tends to be regressive. Rich people end up paying less tax as a proportion of their income while the poor end up paying more. It is however less visible. Income tax is at least upfront about how much is taken whereas tax on spending is spread out and often invisible unless you're actively thinking about it. Sure you can make people happier about taxation by making it less visible but I'm not sure that's a good argument for it.

Simon_says 9y ago
I never really understood the argument that taxing spending taxes rich people a lower proportion of their income. Even allowing for investments and savings, rich and poor are all going to spend the money they have in their life (ignore or tax the estates). If there’s a 10% sales tax, then 9.0909...% of your wealth will go to it, no matter how much you make, invest, save.
- pedrocr 9y ago
  >rich and poor are all going to spend the money they have in their life (ignore or tax the estates). This is a spherical cow in a vaccum style argument. If you ignore estates and also ignore property and other investments that don't pay sales tax then yes, everyone pays the same sales tax. But the rich will disproportionally own investments and properties that will then be passed on to their heirs. Over any period and particarly over a few generations because of compounding this means taxing spending is indeed very regressive.
  - Simon_says 9y ago
    Sure, rich people will invest, and then get (hopefully more) money back and then spend it, subjecting it to same sales tax. And the tax on estates is higher than sales tax (over $5MM), so that’s hardly a dodge. I still really don’t understand the argument, and I still sort of suspect that it’s fallacious, though I’d enjoy being proven wrong. It seems to me that given a sales tax, a flat and identical percentage of every individual’s spending will go to the sales tax. If a person is “rich” but it doesn’t translate into spending or their estate, then what does that mean?
    - pedrocr 9y ago
      You're just restating the same mathematical impossibility. Compounding means that since you only pay sales tax at consumption rich people will pay much less as they will invest before the tax and have gains on all that pre-tax money. Estate tax is also definitely not higher than sales tax pretty much anywhere in the world. In the US in particular estate tax is only paid on very large estates which excludes almost everyone that matters for this calculation. For the purpose of this calculation estate tax is 0.
      - Simon_says 9y ago
        Yea, you caught me. I repeated the same argument because I think it works. And I don't see how your argument addresses it. In particular, this sentence: > Compounding means that since you only pay sales tax at consumption rich people will pay much less as they will invest before the tax and have gains on all that pre-tax money. doesn't really make much sense. Of course investments are pre-sales tax. The sales tax applies after the investments are liquidated to cash and the cash is used to purchase stuff. Let's say our hypothetical person is "rich", but it doesn't translate into extra consumption spending, then what's the point of being rich? It's not like he's getting anything out of it. You do have a point about estate taxes not affecting the majority of people, but estate taxes do affect estates with value greater than $5MM, and I'm working with the assumption that you and I are discussing "rich" people. The marginal estate tax in the U.S. ranges from 18% to 40%, which is higher than any sales tax.
        pedrocr 9y ago
        >doesn't really make much sense. Of course investments are pre-sales tax. The sales tax applies after the investments are liquidated to cash and the cash is used to purchase stuff. Say you have 100$ and you're rich. You invest that in the markets, compound for 40 years and end up with 4500$. You then get to pay sales tax on that after you've gotten your capital out multiple times over. If you're poor though you spend all the 100$ and pay tax right at the beginning, so you don't get to benefit from the compounding of your earnings because you have to use the money right away and thus have to pay the sales tax right away. Compounding is extremely important over even a single lifetime and rich people get to use it over generations. >Let's say our hypothetical person is "rich", but it doesn't translate into extra consumption spending, then what's the point of being rich? It's not like he's getting anything out of it. People put a very high value on aquiring wealth to pass on to their heirs. And even without that if what you buy is property there is no sales tax and you get to use that property throughout your life. If what you buy is investments you get to defer consumption till later and thus get much higher incomes through capital gains and thus pay all your sales taxes from investment gains of the pre-tax money you don't need to spend on day to day spending. >You do have a point about estate taxes not affecting the majority of people, but estate taxes do affect estates with value greater than $5MM, and I'm working with the assumption that you and I are discussing "rich" people. The marginal estate tax in the U.S. ranges from 18% to 40%, which is higher than any sales tax. The estimate from Wikipedia is that estate taxes apply to 0.2% of estates. That's what I mean by estate taxes being completely irrelevant for this discussion. The 0.2% of cases where your argument apply get to use all sorts of other tricks to avoid taxation, this is just about the difference between the people living paycheck to paycheck, the ones that get to put a little away and the affluent middle class. For all those 99,8% of the population estate taxes are irrelevant and sales taxes are extremely regressive.

Simon_says 9y ago

I never really understood the argument that taxing spending taxes rich people a lower proportion of their income. Even allowing for investments and savings, rich and poor are all going to spend the money they have in their life (ignore or tax the estates). If there’s a 10% sales tax, then 9.0909...% of your wealth will go to it, no matter how much you make, invest, save.

pedrocr 9y ago
>rich and poor are all going to spend the money they have in their life (ignore or tax the estates). This is a spherical cow in a vaccum style argument. If you ignore estates and also ignore property and other investments that don't pay sales tax then yes, everyone pays the same sales tax. But the rich will disproportionally own investments and properties that will then be passed on to their heirs. Over any period and particarly over a few generations because of compounding this means taxing spending is indeed very regressive.
- Simon_says 9y ago
  Sure, rich people will invest, and then get (hopefully more) money back and then spend it, subjecting it to same sales tax. And the tax on estates is higher than sales tax (over $5MM), so that’s hardly a dodge. I still really don’t understand the argument, and I still sort of suspect that it’s fallacious, though I’d enjoy being proven wrong. It seems to me that given a sales tax, a flat and identical percentage of every individual’s spending will go to the sales tax. If a person is “rich” but it doesn’t translate into spending or their estate, then what does that mean?
  - pedrocr 9y ago
    You're just restating the same mathematical impossibility. Compounding means that since you only pay sales tax at consumption rich people will pay much less as they will invest before the tax and have gains on all that pre-tax money. Estate tax is also definitely not higher than sales tax pretty much anywhere in the world. In the US in particular estate tax is only paid on very large estates which excludes almost everyone that matters for this calculation. For the purpose of this calculation estate tax is 0.
    - Simon_says 9y ago
      Yea, you caught me. I repeated the same argument because I think it works. And I don't see how your argument addresses it. In particular, this sentence: > Compounding means that since you only pay sales tax at consumption rich people will pay much less as they will invest before the tax and have gains on all that pre-tax money. doesn't really make much sense. Of course investments are pre-sales tax. The sales tax applies after the investments are liquidated to cash and the cash is used to purchase stuff. Let's say our hypothetical person is "rich", but it doesn't translate into extra consumption spending, then what's the point of being rich? It's not like he's getting anything out of it. You do have a point about estate taxes not affecting the majority of people, but estate taxes do affect estates with value greater than $5MM, and I'm working with the assumption that you and I are discussing "rich" people. The marginal estate tax in the U.S. ranges from 18% to 40%, which is higher than any sales tax.
      - pedrocr 9y ago
        >doesn't really make much sense. Of course investments are pre-sales tax. The sales tax applies after the investments are liquidated to cash and the cash is used to purchase stuff. Say you have 100$ and you're rich. You invest that in the markets, compound for 40 years and end up with 4500$. You then get to pay sales tax on that after you've gotten your capital out multiple times over. If you're poor though you spend all the 100$ and pay tax right at the beginning, so you don't get to benefit from the compounding of your earnings because you have to use the money right away and thus have to pay the sales tax right away. Compounding is extremely important over even a single lifetime and rich people get to use it over generations. >Let's say our hypothetical person is "rich", but it doesn't translate into extra consumption spending, then what's the point of being rich? It's not like he's getting anything out of it. People put a very high value on aquiring wealth to pass on to their heirs. And even without that if what you buy is property there is no sales tax and you get to use that property throughout your life. If what you buy is investments you get to defer consumption till later and thus get much higher incomes through capital gains and thus pay all your sales taxes from investment gains of the pre-tax money you don't need to spend on day to day spending. >You do have a point about estate taxes not affecting the majority of people, but estate taxes do affect estates with value greater than $5MM, and I'm working with the assumption that you and I are discussing "rich" people. The marginal estate tax in the U.S. ranges from 18% to 40%, which is higher than any sales tax. The estimate from Wikipedia is that estate taxes apply to 0.2% of estates. That's what I mean by estate taxes being completely irrelevant for this discussion. The 0.2% of cases where your argument apply get to use all sorts of other tricks to avoid taxation, this is just about the difference between the people living paycheck to paycheck, the ones that get to put a little away and the affluent middle class. For all those 99,8% of the population estate taxes are irrelevant and sales taxes are extremely regressive.