Tuesday, November 08, 2005

Tax Tuesday!

Last week we looked at a modified flat tax. This week let’s look at a regressive tax system.

The idea is this: Eliminate payroll and income tax. Instead raises sales taxes. The effect is taxing only what one consumes. It is regressive in the sense that there is a limit to what a human being can consume. Someone making $2.7 million a year can’t possibly consume at that rate year after year. Someone making $20,000 a year, however, ends up spending almost all their income on consumption, especially if they have a family. The result is that lower income earners are effectively taxed on every dollar they earn. Higher earners are taxed on only a part of their income. The highest income earners (think Bill Gates) are taxed on a tiny fraction of their income.

The shortcomings of this system are pretty clear: the government is run on the backs of the proletariat(sp?). As much of my readership is liberal, I want to take a second to outline the positives of the system.
1. Administratively ease: no more filing individual tax returns every year. Taxes are collected from the individual when they go shopping. The government recovers the tax from the merchants. Fewer audits, smaller IRS.
2. Encourages savings: If you don’t spend it, it isn’t taxed. This is a strong incentive to reduce consumption and save for old age.
3. Encourage economic growth: By encouraging saving, we increase capital investment. More small business’s, faster technological development.
4. Fairness: There is a strange fairness about the system in that it taxes what you take out of the system by taxing what you consume.

I may have left off some benefits, so if you see something positive about the sales tax system that I haven’t mentioned, let me know. Otherwise, I think this is an interesting approach worthy of some discussion, even if it turns out to be flawed in the final analysis.


Blogger Xeno said...

Taxing ones consumption doesn't seem to make since. The benefits/services that are gained from the government are have nothing to do with a persons consumption.

Plus wouldn't this hamper the American economy? The economy is based on consumer spending is it not?

2:11 PM  
Blogger Fishfrog said...

The economy is fueled by a combination of capital investment and consumption. If the sales tax plan is to work, we have to assume that capital fuels the economy to a greater extent than consumption (which I don't think is the case) and/or that consumption will not suffer too great a decrease. The latter assumption is possibly true, as much of society cannot limit their consumption because they need to consume to the full extent of their income just to pay for rent and groceries. It is also possible that increased investment will increase the number of low and medium wage job, thus increasing the number of people who can consume their entire income.
Now I'm no economist, but I'm sure in practice it would not work like this. My gut feeling is that the federal government would lose massive amounts of revenue under the sales tax plan.

4:26 PM  

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