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How about replacing income tax with a consumption tax? The current tax system encourages speculative investment for capital gain and discourages investment for
by meric 15y ago
How about replacing income tax with a consumption tax?
The current tax system encourages speculative investment for capital gain and discourages investment for passive income due to lower tax rates on capital gain. Just look at the dismal amount of dividends paid out by companies in the US compared to Australia, where many companies pay out over 50% of their profits in dividends.
A person who earns a $10m a year but only spends $20,000 pays close to the same tax as a person who earns $10m and spends all $10m.
Both contributed lots to society to earn that $10m, but since the first person only spends $20,000 he only claims back a tiny amount from society resources due to him for his contribution. The second person claims back everything, equal in value to his contribution, resulting in no net gain to society. [correction: less net gain, because earning $10m would likely have provided several times that in benefits to society]
Replacing income taxes with only consumption taxes will further increase incentive for production, while discouraging unnecessary consumption. You'd get more people like the first person than the second person, and society will reap more of the rewards of more productive individuals, who use up less resources.
It'll be like society giving out pieces of paper that is put in a building called a bank in return for real goods and services, that are carefully allocated because no one wants to waste anything.
An example of a consumption tax is the VAT.
- rdouble 15y agoA person who earns a $10m a year but only spends $20,000 pays close to the same tax as a person who earns $10m and spends all $10m. Only if you ignore sales tax and other taxes incurred when spending money (hotels, fuel).
- deleted 15y ago[deleted]
- mseebach 15y agoFirst, there is already a sales tax, so the guy spending $10m would probably pay $500.000 (5%), or 25 times more than the other guy spend. Second, low income families spend all their money making ends meet, whereas high income families have a lot more latitude in adjusting their expenditure. Offsetting this with deductions will be a bureaucratic nightmare.
- meric 15y agoFirst, both of those guys earning $10m will have paid a $4m income tax. With the remaining $6m, it'll be difficult to claim existing consumption taxes paid will be anything close to $4m. Second, you can implement a progressive consumption tax scheme. You can mirror with existing income tax system - first $10,000 spent each year is tax free, next $20,000 at 15% and so on. It could be hard to implement at this moment but with the advance of technology it would certainly become possible. An alternative would be to charge higher taxes for luxury goods like yachts and fast cars and lower taxes for basic goods like food and transportation. The collected taxes can given back to the populace as social welfare. Most people would want to only limit welfare to low income individuals and families. I do not share the same opinion - there are many convoluted rules it is hard for people to see what the government is really incentivising you to do - in my country if you save more than $2,500 you lose your welfare payments until your bank account balance goes back below $2,500. Which I think is dumb.
- mseebach 15y agoHow will you track consumption (required for a non-flat consumption tax) without creating a bureaucratic nightmare? There is a strong incentive to appear to spend less than you do (in order to hit the progression later), so every single can of coke you get needs to get attached to your tax-ID.
- meric 15y agoDefinitely it will be difficult to implement at the moment. At the rate the government is passing legislation on tracking people and making companies provide their data to government whenever requested, though, I can definitely see one day (maybe 50 years) where all this will be possible. e.g. When cash is replaced by only bank accounts, then every transaction becomes traceable. As I said before though, you can as an alternative lower sales tax on basic goods and raise them on luxury ones.
- mseebach 15y agoYes, let's actively lobby the government to put infrastructure in place to monitor every single penny we spend. There's no way that could go wrong.
- spindritf 15y ago> The second person claims back everything, equal in value to his contribution, resulting in no net gain to society. While I don't disagree with your larger argument, producer captures only a fraction of the value they created. So earning $10M likely resulted in a huge net gain to society, regardless of their spending habits.
- meric 15y agoThanks. Corrected.
- Aloisius 15y agoConsumption taxes in practice are incredibly regressive. Someone who earns $20,000 must spend the majority of their money in order to live. Someone who earns $1.2 million will probably spend a small fraction of it.
- meric 15y agoYou can lower the tax on goods that lower income individuals are likely to spend on, while increasing tax on goods higher income individuals are likely to spend on, to make it more progressive.
- Aloisius 15y agoMost of the rich don't go around buying stupidly expensive things. They don't get rich by spending. They get rich by saving. There are billionaires that live in modest homes and don't particularly act or spend like their rich, but they enjoy all of societies benefits that created an environment that enabled them to become rich. They should pay for it so that future billionaires and millionaires can be made.
- benmmurphy 15y agoi'm not convinced. if someone earns $20,000 over their lifetime and consumes $20,000 over their lifetime I would say they are richer than someone who earn $1.2 million their lifetime and consumed $10,000 over their lifetime. it is total lifetime consumption that matters. so if people are not spending all their income than it can't increase regressivenes it can only help to increase consumption equality.