For my Libertarian friends

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 Epignosis wrote:

 Dean wrote:

I thought this was a hypothetical discussion on replacing all those taxes with a single consumption tax so my first paragraph was perhaps frivolous, but not so the others - if all those taxes are dispensed with and the equivalent sum transfered over to consumption tax then we need to know where that tax will be applied and collected and where it doesn't. 

This makes every seller a tax collector who pays all the tax he's collected to the tax office and claims back all the tax he's paid in the course of doing business. Of course consumption tax in the form of sales tax and VAT already exist, but not at the percentages that a single national sales tax would require to replace all other taxation.

I understand your requirement for this system is to have a smaller government and hence lower overall tax bill, but if the aim is to replace a multitude of different taxes with one single inclusive tax then we need to know where in the whole economy this tax is going to be applied. What I was attempting to get across is that consumption is just as complex as income and will become more complex when it is the only taxation method. 

You have already listed food as being tax exempt, if we add to that all the intermediate exemptions I've already discussed, then what of all the other necessities for life: pharmaceuticals (prescription and/or over-the-counter)? female sanitary products? do we tax children's clothing? some book or all books, text books, worship books? are haulage companies and travelling salesmen exempt from consumption tax on fuel? what of prepared food from a restaurant? do we tax pet food but not livestock foodstuffs?

Once you transfer the role of tax collector over to the retailer then all the complexity of the system becomes his responsibility, and he will make you pay for that by charging the extra cost of his administration and/or extra accountants needed onto the goods he sells so the price increase is more than simply the value of the tax itself. Of course the same thing can happen with any taxation - it depends on who collects the money and pays it to the revenue service - the ideal would be to have the tax collectors at the far end of the line where they cannot pass on the cost of collection to anyone else - but as income tax collection has demonstrated, once that cash sum is in their hands there is a pain-barrier to overcome in persuading them to give "their" money to the revenue service. 

At the end of the day it doesn't matter where the tax is collected or how big the government is - if it exists at all and requires z million dollars funding then that money will be collected in total - what you are discussing is how that is apportioned through the population. If someone pays less tax for whatever reason or circumstance then someone else will pay more as a direct consequence because the net yield has to remain at z millions.

If the rich pay more income tax by earning more or they pay more consumption tax by consuming more in principle it shouldn't make any difference, but the reality is that it will - TheLlama has already illustrated the deadweight loss associated with income-tax (when tax is removed wages will drop) - the same applies to consumption tax - once the price of goods increases through sales-tax then the demand will decrease and it will decrease more on expensive (luxury) items (where the fixed percentage tax just means paying more dollars per item - the buying public does not think in percentages it thinks in dollars and cents). Even if there is more disposable income as a result of income tax reducing to zero, there is a psychological effect of prices increasing as a result of sales tax to overcome regardless of how much money you have in the bank. If people don't like paying income tax, then they don't like paying any tax and will not be fooled by the ruse that consumption tax is fairer, because no tax is fair (in their estimation).

What you are doing is shuffling the effects of taxation around the population looking for the largest sector that will either complain the least or have the least influence on the overall economy.

Where consumption tax wins is that it is difficult for the ordinary citizen to avoid it and practically impossible to evade it. Where it loses is that it puts the burden of tax collection on the small businesses (ie retailers) who can least afford it and who are least skilled at managing it. To make tax collection simpler it should be moved up the supply chain, not down it - it is easier and more efficient to collect larges sums of cash from a small number of suppliers than it is to collect small sums from a large number. This could overcome the psychological tax pain-barrier effect - the price of final goods may increase by exactly the same percentage, but if it not regarded as a direct taxation then people will be less reluctant to pay it.

Yes, smaller government means less tax.

Now, just as complex and will become more complicated?  No way.  Dean, have you seen our federal tax code?  Apparently not.  
Then educate me, show me just how complicated your federal tax code is. As a non-American it's not "apparently", it's "evidently", but that does not negate the fact that I can have an opinion based on what I do understand of the taxation system I do have knowledge of, which is not that different from the USA system. (And judging by some of the replies and posts in this thread and other threads I do appear to have a better understanding and knowledge of tax in general than a some of the people who post here). 

 Epignosis wrote:

A consumption tax is 1) not an invasion of privacy, 2) eliminates deductions completely, and 3) is nearly impossible to avoid.  It means almost no paperwork (relative to what we have now) and thus fewer agents needed to manage government revenue, meaning a decrease in government costs. 
1) I don't get the privacy of earnings malarky, and I'm not going to fret over it. Pass.

2) Not sure what you mean by eliminating deductions, I sense it's not something to go to war over. Pass.

3) Tax avoidance is legal - tax evasion is the illegal one. But I already listed that as plus for consumption tax, so I'll pass on that one.

Consumption tax means zero paperwork for you, but a whole mountain for someone else. I don't quite see how it results in fewer agents, but if your answer is we already have consumption taxes then I'll pass on that too.

 Epignosis wrote:

You are trying to muddy things up.  These are mere details that can be worked out.  I'm not sitting here trying to figure every detail when my system probably won't come to pass anyway.  All I ask is how my general idea (which others have shared) is inferior to what we have now.  And if this idea is better, why don't we have it?

I'm not trying to muddy it up - it will do that all by itself. They are not mere details, these are the details that are the difference between success and failure - and if you don't figure those out at the beginning you'll complicate the system even further by trying to figure them out as you go along - that's partly why the whole tax system is complicated now, because it was done piecemeal fixing little problems here and there, giving little tax breaks and incentives here and there and vacialting between one political/ecomonic philosophy and another on a 4 year cycle for the past 100+ years.

 Epignosis wrote:

As for what else you are saying...we already have a consumption tax.  Companies already have to do this.  Eliminating income tax will do them a service. Ridding ourselves of the ultra-complicated income and corporation tax will save companies a fortune.

How does consumption tax eliminate corporation tax? How does a low consuming high earning service industry get taxed the same as high consuming maunfacturing industry earning the same amount? If there is no solution to that then manufacturing will decrease to zero in the USA.

 Epignosis wrote:

Yes, it matters how big our government is.  Did you not pay attention to anything I had to say about how our government functions? 

Sorry, must have dozed off during that bit, could you perhaps open a window or something...

...or maybe you could simply read - big government stealing 1trillion bucks or small government stealing 1billion bucks - it doesn't matter how big or small they are, how much they "steal" or how they "thieve" it - at the end of the fiscal year they are going to have their money. If it is a small government they will get their billion dollars through income tax or through consumption tax. If consumption tax doesn't net the same number of dollars as income tax did then they will raise the rate until it does. At the end of the day 113 million households will pay out 1 billion dollars in tax regardless of how it is paid.

 Epignosis wrote:

The feds spend more than they bring in.  We don't have a balanced budget.  That means your 6th paragraph is nonsense. 

I think your 21st word is nonsense.

Changing the tax system will not make the government any more efficient and it will not decrease or fix the budget deficit or the national debt. 

 Epignosis wrote:

Your seventh paragraph is the worst.  Demand hasn't decreased due to higher prices.  Our government has increased the cost of almost everything through minimum wage increases.  People still buy.  People will still buy.  We've proven that too.  Were a consumption tax in place in lieu of every other tax, then businesses can grow because ultimately (if the business chooses to operate in this way), the end user will be paying all the taxes.  But that's no different than how it already is...because...*

Your fifth and sixth words are the worst. 

I love that minimum wage one. Heard it once, liked the sound of it, chuckled at it ever since. It was specious then it's specious now. The number of people on minimum wage is hard to ascertain to any degree of accuracy since the lower level incomes also include part-time workers, itinerant workers, people on welfare, pensions, etc. What we can say is that the overall figure for the low-paid sector is something like 14 million households earning a total of 1.4% of all earnings for the USA. Most of those will not be on minimum wage and those that are will be working in the food service sector, not in manufacturing and supply. Even if we generously assume that all those people are on minimum wage and they all contribute to the manufacture of widgets then a 10% hike in their pay is going to affect the overall wage bill by 0.14%, which will affect the retail price of widgets by whatever percentage of the retail price their wage contributes to multiplied by the percentage increase in their wage. Let's be doubly generous and assume that it is 50%, so the increase in retail price is now (0.14x0.5=)  0.07% - or 7¢ on $100. TheLlama has already drawn a nice supply and demand graph for that - a 0.07% increase in price may result in a 0.07% decrease in demand if the two slopes were unity, but to be honest 0.07% gets lost in the noise of normal retail demand fluctuations so we can say the effect is negligible. Now, all those assumptions were generous ones - the minimum wage does not affect manufacturing in the USA or Europe anything like as "dramatically" as the 0.07% of this illustration, so for all intents and purposes changing minimum wage doesn't affect demand because it doesn't affect retail pricing anything like as much as people would like you to believe. However, the supply and demand curves are real and they do work, just not for infinitesimally small increments. It has already been shown that the real curves are really curves and not straight lines - what this means is that for small changes they can be treated as linear, but for large changes, which is what a sudden imposition of consumption tax would be, then the effect is disproportionately larger. For example if we pretend that the curve is a square law, then a less than 1% change will result in a less than 1% decrease in demand, a 2% change will result in a 4% decrease in demand and a 8% change results in a 64% drop in demand. Now I don't know what the curve is - it probably isn't a square law, it's probably far more complex than that, (as Brian said: "Draw me up a parabolic curve or go away, dammit!" ), but whatever it is it won't be linear and it won't be unity - increase sales tax from 8% to 18% and demand will decrease disproportionately more.

...someone said something about the rich buying yachts ... firstly "the rich" are not people earning between $100K and $250K - a luxury yacht starts at around $100K so you are looking at the real rich people who earn millions - yup they'll still buy yachts, but perhaps only one every 2 years instead of one every year. Instantly the fair system is netting 50% less tax because of a 10% increase in yacht prices. Same for the middle earners - they'll still buy flat screen TVs and Lexus's, just not quite as frequently so the demand is the same, but the frequency has dropped and so the total tax revenue has dropped.. 

 Epignosis wrote:

Your last paragraph fails because...*we already have consumption taxes here. 

You can keep saying we already have consumption taxes here until you are blue in the face, I'll still keep posting because you have a form of consumption tax that is limited scope and application - once it is expanded to a system that replaces all other taxes then it not the same tax as the state sales taxes you are refering to, it will become just as complex as income tax is now.
 Epignosis wrote:

We already have federal and state income tax, consumption tax, property tax, estate tax, and a host of other taxes.  Nothing you have said troubles my position, because we have all these things.  A simple consumption tax will be far simpler and far superior.

No one has shown why a consumption tax is a poor alternative to what we already have.  Any takers?

In principle income tax is simple - simpler even than consumption tax - what complicates income tax is not the collection, but the exemptions and exceptions and the varying rates and thresholds (and of course all the tax accountants and economists who earn their living unravelling the complications for you - it is in their interest that the system doesn't become simpler ). If you replace income tax with consumption tax all those complications will creep back into the system. 

I don't have to show why consumption tax is a poor alternative, nor do I have to show that it won't be a better alternative. I don't even need to show that it is regressive or will benefit the rich more than the poor. If it was a good system someone somewhere would have it by now. It's just an alternative, with all the hang-ups and limitations of any other taxation and it will be created, ratified, administered and governed by the same people who haven't managed to get any tax system right yet and will be paid for by people who don't like paying tax whatever the system is. 

Edited by Dean - September 29 2010 at 19:25