Fix the debt, Drop income tax...

[MilwaukeeMike]

It is more than apparent the United States cannot continue to run huge budget deficits and spend like drunken sailors in Washington. I have a solution that has been proposed throughout the Accounting circles for eons with little political dialogue. My plan is simple; eliminate income taxes on state and federal levels across the board, eliminate state and county sales taxes, and eliminate property taxes. I know this may sound absurd but think about it for a minute.

You institute a countrywide sales tax; something like 15% to 20% (whatever the IRS feels is right) on all items except essentials such as bread, milk, and basic clothing sold inside U.S. territory. This sales tax also would cover personal property sales. Of course capital gains taxes, low income credits, and the corporate tax structure would remain. In addition to other taxes such as estate and death tax. Obviously there are millions of minute details that would need to be worked out but in theory I believe this would have a multi pronged affect.

A. This would tax individuals only on what you buy that is not essential for sustaining life, and in essence promote national savings which has been on a huge decline increasing U.S.A wide credit debt.

B. Eliminate tax shelters and other tax avoidance methods that the wealthy use bringing in more revenue.

C. Is the most fair tax you can put in place, wealthy people spend more = they pay more; poor people spend less = they pay less.

I am obviously generalizing immensely; anyone that has studied tax, such as myself, understands the extreme complexities in the tax code and knows this would be no easy switch. And this would not limit or control spending in Washington, that must be solved on it’s own. But what do you think of this idea. Let me know

 

[Darth Rotor]

It is more than apparent the United States cannot continue to run huge budget deficits and spend like drunken sailors in Washington. I have a solution that has been proposed throughout the Accounting circles for eons with little political dialogue. My plan is simple; eliminate income taxes on state and federal levels across the board, eliminate state and county sales taxes, and eliminate property taxes. I know this may sound absurd but think about it for a minute.

You institute a countrywide sales tax; something like 15% to 20% (whatever the IRS feels is right) on all items except essentials such as bread, milk, and basic clothing sold inside U.S. territory. This sales tax also would cover personal property sales. Of course capital gains taxes, low income credits, and the corporate tax structure would remain. In addition to other taxes such as estate and death tax. Obviously there are millions of minute details that would need to be worked out but in theory I believe this would have a multi pronged affect.

A. This would tax individuals only on what you buy that is not essential for sustaining life, and in essence promote national savings which has been on a huge decline increasing U.S.A wide credit debt.

B. Eliminate tax shelters and other tax avoidance methods that the wealthy use bringing in more revenue.

C. Is the most fair tax you can put in place, wealthy people spend more = they pay more; poor people spend less = they pay less.

I am obviously generalizing immensely; anyone that has studied tax, such as myself, understands the extreme complexities in the tax code and knows this would be no easy switch. And this would not limit or control spending in Washington, that must be solved on it’s own. But what do you think of this idea. Let me know

Possible unintended outcome: greater "cash economy" growth in order to evade taxes.

By having a single tax, one makes tax evasion simpler, not harder.

IVA tax (aka VAT = Value Added Tax) tax in not uncommon in Europe, but so is a much higher gasoline tax.

Ross Perot for fifty, Alex.

My two centavos

DR

 

[MilwaukeeMike]

Possible unintended outcome: greater "cash economy" growth in order to evade taxes.

By having a single tax, one makes tax evasion simpler, not harder.

IVA tax (aka VAT = Value Added Tax) tax in not uncommon in Europe, but so is a much higher gasoline tax.

Ross Perot for fifty, Alex.

My two centavos

DR

How does it make it simpler to evade taxes. Right now the simplest way to evade taxes is to not file and hope the IRS doesn't find you. Or find elaborate ways by offsetting income with passive losses, fake depreciation charges, fake or over exaggerated business expenses, fake gift transactions to family members, death bed gifts, falsity in FMV estimation; the list goes on and on.

With a flat sales tax, business must simply follow the same procedure they already are doing for local and state sales taxes. I just don't see how there would be more tax evasion. And what do you mean by a "Greater cash economy," that doesn't even make sense. Please explain yourself more.

 

[Ziggurat]

You institute a countrywide sales tax; something like 15% to 20% (whatever the IRS feels is right) on all items except essentials such as bread, milk, and basic clothing sold inside U.S. territory.

Would this tax be applied to every sale? If so, it would introduce fantastic inefficiencies into the economy, by creating artificial incentives to prohibit redistribution of goods through resellers. If not, if you only want to tax end users (as current sales taxes do), it becomes very easy to cheat on.

How does it make it simpler to evade taxes. Right now the simplest way to evade taxes is to not file and hope the IRS doesn't find you.

Most people work for companies which file W2's. If the company files W2's, the IRS knows you exist, knows how much you got paid, will know if you don't file, and have already taken a big chunk of the taxes you owe without you doing anything.

Or find elaborate ways by offsetting income with passive losses, fake depreciation charges, fake or over exaggerated business expenses, fake gift transactions to family members, death bed gifts, falsity in FMV estimation; the list goes on and on.

Sure, but those methods tend to be elaborate (as you said), which makes them unattractive and dangerous to practice. Furthermore, you can be required to present documentation of such deductions.

In contrast, cheating an end-user sales tax is easy. All you need to do is mischaracterize the purchase as being to a non-end user, and no sales tax is paid. The government cannot expect companies to track who they sell everything to (again: trying to do so would produce massive inefficiencies which would offset any possible gains), nor can they require citizens to tally all their purchases to prove they paid sales tax on each (for the same reason) so there is no record. The only way to catch a cheat is to catch them in the act. And that's not good enough to prevent massive cheating.

With a flat sales tax, business must simply follow the same procedure they already are doing for local and state sales taxes. I just don't see how there would be more tax evasion.

Most people don't bother avoiding sales tax when the cost is low, but they damned sure will if it represents their entire (and substantial) tax burden.

 

[Darth Rotor]

How does it make it simpler to evade taxes. Right now the simplest way to evade taxes is to not file and hope the IRS doesn't find you. Or find elaborate ways by offsetting income with passive losses, fake depreciation charges, fake or over exaggerated business expenses, fake gift transactions to family members, death bed gifts, falsity in FMV estimation; the list goes on and on.

With a flat sales tax, business must simply follow the same procedure they already are doing for local and state sales taxes. I just don't see how there would be more tax evasion. And what do you mean by a "Greater cash economy," that doesn't even make sense. Please explain yourself more.

1989, marijuana was a one billion dollar cash crop in California by most sober estimates. (Part of the brief we got on the War on Drugs missions we got stuck doing. ) That is an example of "cash economy." What it amounts to is non-traceable money. If you can't trace it, it's hard to tax.

Off the books labor is another part of the "cash economy," but I don't have a number on the estimate of its current volume.

Another argument against is that the current income tax method allows for significant deductions that encourage home ownership, which your IVA model would not.

DR

 

[Ziggurat]

Let me know

You need a few other options on your poll. Such as "keep an income tax but rewrite it from the ground up to simplify", and of course, "On planet X, we don't need taxes".

 

[brodski]

Increasing sales taxes will make people more likely to save than spend, and so will probably also depress your economy as demand falls away.

 

[Crossbow]

Ummm, I do not think that one could raise enough money through a VAT to replace Income Taxes.

In Europe where they have a VAT, they also have Income Taxes.

Is there a European JREF Member that can speak to such a thing from personal experience?

 

[Ziggurat]

Ummm, I do not think that one could raise enough money through a VAT to replace Income Taxes.

A VAT is also different than a sales tax. It is not an end-user only tax (so avoidance is not so trivial), and the amount charged at any one step can be quite small, meaning there is not a strong incentive to cheat at those steps.

 

[brodski]

I pay VAT on all "non essential" goods, at 17.5%, I also pay income tax at 22% on (most of) my income, as well as other taxes.

To abolish income tax would require VAT rates well above 17.5%

 

[drkitten]

C. Is the most fair tax you can put in place, wealthy people spend more = they pay more; poor people spend less = they pay less.

This statement is simply out-of-the-box wrong; sales taxes are the classic (textbook) examples of a regressive tax that hits the poor harder than the rich. (One key reasons is that the rich buy a much larger percentage of untaxed "services." For example, if I can afford to have someone cut my lawn for me, I pay wages to him -- but if I have to cut it myself, I instead have to buy the lawnmower and gasoline.) And since savings are untaxed, the people who can afford to save pay less tax than those who can't.

Given this fundamental misunderstanding about the nature of the sales tax, I see no need to analyze the rest of the post in detail.

 

[Solitaire]

It is more than apparent the United States cannot continue to run huge budget deficits and spend like drunken sailors in Washington. I have a solution that has been proposed throughout the Accounting circles for eons with little political dialogue. My plan is simple; eliminate income taxes on state and federal levels across the board, eliminate state and county sales taxes, and eliminate property taxes. I know this may sound absurd but think about it for a minute.

You institute a countrywide sales tax; something like 15% to 20% (whatever the IRS feels is right) on all items except essentials such as bread, milk, and basic clothing sold inside U.S. territory. This sales tax also would cover personal property sales. Of course capital gains taxes, low income credits, and the corporate tax structure would remain. In addition to other taxes such as estate and death tax. Obviously there are millions of minute details that would need to be worked out but in theory I believe this would have a multi pronged affect.

This resembles The Fair Tax, that has perhaps a million people behind it now. Plus side it no IRS forms to file, minus side the Fair Tax turns government into a expense.

Aside: By this I mean big business such as Wall*Mart see the tax as an expense or a competitive disadvantage. In other words, by cutting the tax they can either raise profits or attract more customers through lower prices. Thus they will go to washington to lobby for smaller government. This creates conflicts between big businesses lobbying for big government and the lucrative contracts that enrich their bottom line. This creates disharmony in Capitol Hill as the two sides battle out the budget.

More Aside: The income tax is better because most people work for the bottom line, not the top line. From the worker's point of view, the employer pays most of the tax. From the employer's point of view, the worker pays the tax. Neither side takes responsibility for the tax and this creates harmony on Capitol Hill because neither side lobbies against the income tax. Of course if income taxes go up the worker will ask for more money resulting in inflation. Or if the employer cannot afford it, unemployment of the worker. Or perhaps a little of both in the form of a little stagflation.

 

[Crossbow]

I pay VAT on all "non essential" goods, at 17.5%, I also pay income tax at 22% on (most of) my income, as well as other taxes.

To abolish income tax would require VAT rates well above 17.5%

Thanks much for the information!

 

[Tricky]

So for poverty-level people who pay little or no income tax, their tax rate jumps as much as 300%? Yeah, that's fair.

It is real easy to see who the flat tax benefits by seeing who is supporting it. I can assure you, it ain't the poor.

Legalize and tax drugs and prostitution, tax churches, tax gas-guzzling cars if you like, but the flat tax is a recipe for disaster.

 

[casebro]

I've got a Better Idea (tm)

Lets abolish capital gains tax.

That ought to get some attention. But we'll replace it with property tax instead. Here's the way it would compare:

Now: buy $1,000 worth of stock. Do good picking, make 20% this year. Pay no tax at all. Not intil you sell or transfer, then pay 28% of 20%, or about 5%. Someday Later, much later. If you can't find any tax dodges in the ensuing years.

Property tax option: Make 20% on your $1,000, pay a 2% tax on $1200 RIGHT NOW. No time for tax dodges, creative accounting. 2% PERIOD. Send it in. Next year, 2% on $1400, next year 2% on 1600.... no alternative minimums, no depreciations, no phoney incorporation schemes.
Why should stock/bond/etc investment be taxed differently from my real estate investment?

Raise the rates a bit, and it would be more than fair to the low income folks- no investments, no tax.

Current stack market value in the U.S. is $16 TRILLION , capital gains paid in 203, 45 billion. Thats all of .3 percent.

 

[Ziggurat]

Raise the rates a bit, and it would be more than fair to the low income folks- no investments, no tax.

There's a problem with this too, though. For example, let's say I own a business, and I buy a fleet of cars to make deliveries. Those cars represent capital, or property, for me. I can pay the tax, because I'm getting a return on my investment in this capital that's larger than the tax rate.

But let's say my neighbor is poor. What if he buys a car? It's property, just like my fleet, so it would have to be taxed. But he needs it for the basics of life - like getting around, doing grocery shopping, having a life. Because he's poor, he may not be able to get a "return on investment" from buying a car. But he'll be taxed on it anyways. This tax, in effect, discourages the accumulation of wealth if you cannot use that wealth to create more wealth. That's not a bad incentive to give to businesses, but it actually could hurt poor people (who are often poor because they aren't good at turning wealth into more wealth) more than it hurts the wealthy.

This would also make long-term high-risk investment even riskier. For example, suppose you had some idea for a new technology which you expect to take about 5 years to develop, and which would require significant capital investment to perform the research. You go to a venture capitalist, raise the money, buy the equipment, and get working on your research idea. But you have to pay the taxes on all that equipment you own, despite not having any income yet. A minor 2% tax has actually increased your capital costs by a full 10%, essentially from the start. The venture capitalists who funded your project may be willing to swallow that cost, if the prospects are still good, but that also means they don't have as much money to invest in other things.

Lastly, of course, there's the problem of property flight. If you're rich, the last thing you want to do is retire in a country with property tax on all forms of property. You retire to a country with an income tax but little property tax. That flight is good for the country recieving the rich people, but bad for the country they're fleeing from.

On balance the idea of a pure property tax has some merit, but it's not unambiguously better.

 

[MilwaukeeMike]

In contrast, cheating an end-user sales tax is easy. All you need to do is mischaracterize the purchase as being to a non-end user, and no sales tax is paid. The government cannot expect companies to track who they sell everything to (again: trying to do so would produce massive inefficiencies which would offset any possible gains), nor can they require citizens to tally all their purchases to prove they paid sales tax on each (for the same reason) so there is no record. The only way to catch a cheat is to catch them in the act. And that's not good enough to prevent massive cheating.


Most people don't bother avoiding sales tax when the cost is low, but they damned sure will if it represents their entire (and substantial) tax burden.

Come on, you are telling me that Wal Mart doesn't track every single item they sell. Its called RFID tags and barcodes. They have been doing it for years. How do you think companies put just in time inventory programs in place. Most high volume retailers have been tracking their inventories for years.

The whole point of the sales tax system is to decrease the taxpayers responsibility to file, which reduces errors, government size, so on.

 

[MilwaukeeMike]

1989, marijuana was a one billion dollar cash crop in California by most sober estimates. (Part of the brief we got on the War on Drugs missions we got stuck doing. ) That is an example of "cash economy." What it amounts to is non-traceable money. If you can't trace it, it's hard to tax.

Off the books labor is another part of the "cash economy," but I don't have a number on the estimate of its current volume.

Another argument against is that the current income tax method allows for significant deductions that encourage home ownership, which your IVA model would not.

DR

The elimination of property taxes would induce me to buy a home.

 

[MilwaukeeMike]

Increasing sales taxes will make people more likely to save than spend, and so will probably also depress your economy as demand falls away.

In theory the increase amount of money the tax payer has from not paying income taxes, property taxes, or state and local sales tax should offset that.

 

[drkitten]

Come on, you are telling me that Wal Mart doesn't track every single item they sell. Its called RFID tags and barcodes.

Well, I'll tell you that.

All they care about is that the item sold -- they don't care to whom. They don't even care whether or not the item actually sold (as opposed to simply walking off the shelf), since they explicitly off-load the risk of "shrinkage" onto the suppliers by essentially leasing them shelf space.