Income tax vs other taxes

[Mackay]

Continuing to talk about this in the Obama/jobs thread seems like it would be derailing the argument that's going on in there.

What is the moral/ideological difference between income taxes and, to use the example in the other thread, a sales tax? I asked the question and got shown many ways the income tax system can be corrupted, but I'm wondering about the actual principle of it.

To clarify my own stance, I am currently in favour of any progressive taxation system (a sales tax which then redistributes enough to lower income brackets to make it progressive rather than regressive would work, for instance, but seems very, very difficult to implement). However, this is a topic into which I have not done very much research, and I don't understand the difference ideologically between a progressive income tax and a progressive sales tax. It seems to me that if you believe taxation is theft, you believe it about all tax, not just some types.

Tell me why I'm wrong!

[Tea Party Movement*]

Because poor people don't deserve money, otherwise they'd already be wealthy.

[groza528]

I would say that there are two major differences.

The first is the old "passivity" argument. Sales tax is an active tax in that you have a fair degree of control over it. You can't control the *rate* of course, but you can control how much money you spend on luxury items and therefore how much tax you pay on them. It's hard to sympathize when someone complains that they pay too much in sales tax because you're thinking "Well maybe you shouldn't have bought 34 pairs of designer shoes." Income tax is much harder to control; you have to cleverly manage donations, deductions, look for loopholes, or find a different (lower-paying!) job.

The "lower-paying" comment brings me to what I consider by far the more important distinction: sales tax has a positive regression, where income tax has a negative regression. By that I mean that people who try to improve their economic situation by buying less crap are rewarded by paying less in taxes on that crap. But people who try to improve their economic situation by getting a higher-paying job are punished with higher taxes. That's what makes it feel like theft; you can't escape it easily because you either get nailed with higher taxes or you get nailed with lower income. By trying to make things better you make other things worse, which is inherently difficult to accept.

[Scurra]

But that doesn't address Mackay's initial point. If you think of taxation as some sort of personal theft, then of course income tax will look regressive, and sales tax will look slightly less so, because there is some sort of apparent choice involved in the sales tax version. If you think of taxation (as I do) as your contribution to a healthy society then income tax can be seen as far more progressive by comparison. (Obviously I am disregarding the question of what happens to the tax once it is collected!)

As neither of these positions are especially politically compatible, this sort of argument usually ends up going round in circles and is often derailed by other ones e.g. the idea that entrepreneurship is adversely affected by high levels of taxation, which I think is demonstrably untrue but others disagree.
And I don't think that either side help their position by arguing edge cases - yes, buying 34 pairs of designer shoes would be expensive, but it also seems to me to be an unreasonable example. Likewise Pablo's 80-year-old lady being hit by a land tax. I don't dispute that edge cases will always exist - the trick is to keep them as edge cases (and deal with them) rather than extend the edge more and more!
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_{still Quiz Olympiad champion. Must get a life.
New definitions: COFFEE - someone who is coughed upon}

[Pablo]

Scurra, for the record, I don't consider those to be "edge" cases and I don't think they should be dealt with on a "one off" basis. My first (not my only) priority is not equity, or solvency, rather it's liberty. The possibility of even one 80 year old person losing her home because of inability to pay taxes violates my sense of the right of ownership. I think a system of taxation should in no way need a method of punishment for not paying. The government should never be in that position (have the power) to punish someone who hasn't been convicted of a crime by a jury of peers. The sales tax seems to accomplish that, i.e. raising revenue while preserving liberty. To me, that is by far the overriding consideration.
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All religions are the same - Guilt....just with different holidays.

[Mackay]

In what way does the sales tax preserve liberty, though?

There is a minimum amount that every individual will need to spend in order to live. Rich and poor will all pay this, but it's a MUCH larger percentage of the poor's income. They don't have the choice not to buy necessities (unless you are happy to accept "starving to death" as a valid alternative choice), so it's not as though they have any additional liberty as a result - in fact, quite the opposite. It's not as though they would be buying crap.

You didn't address whether redistribution or exemptions for lower income earners would be on the table, Pablo? Or does making the tax progressive then render it unfair, in your opinion?

Groza: the thing about a progressive income tax rate is that you're not being penalised any extra on the money you've already earned. Here in Aus, for instance, every person in the country pays $0 on their first $6,000 of income. Every person in the country pays 15% on the next $31,000, 30% on the next $43,000, and so on. If you earn $6,001, you don't suddenly have to pay 15% on all of it. So the argument I keep hearing about people not wanting to take higher-paying jobs because they'll move up a tax bracket... it really seems pretty stupid to me. They still take home more money, and if they're really willing not to take a higher-paying job on anti-tax ideology alone (rather than the mistaken impression that they'd take home less), well... like I said, it seems pretty stupid to me. But then, I don't buy into the idea that taxation = theft, so there's a pretty big ideological chasm which might be interfering with my ability to understand the mindset.

[Quailman]

A lot of taxing authorities already address the inequity resulting from having to buy necessities by not taxing food. I remember a time when restaurant food was not taxed, but I think those days are gone - if you can afford to eat out, pay the tax; otherwise buy untaxed ingredients and cook at home.

[Pablo]

Mackay, I, and most sales tax proponents, would exempt some amount, for example, the first $10,000 of all expenses, or maybe all food. It could easily be engineered to have minimal impact on those below or near a poverty line.

The way it preserves liberty is this:

It avoids the situation where the government has the power to seize your property without due process.
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All religions are the same - Guilt....just with different holidays.

[Mackay]

OK, that makes more sense now, and I can even get behind the idea, at least in my initial comprehension of it - the sales tax with food exemption you and Q mentioned seems like a good start. Would it be enough?

When you say "the government has the power to seize your property without due process", do you mean the act of income taxation itself, or the consequences of not paying/not paying enough?

If either of those sentences sound stupid, I apologise. It's strange to be posting to learn rather than argue, these days

[Zag]

Pablo and I have had a number of discussions on this, so my points won't be new to him, but they need saying in this discussion, I think. First off, let me state clearly that I don't object to a consumption tax in principle. I just think that the details are more pernicious than Pablo presents. The problem is that there are a number of loopholes that will leave fatcat corporate executives leading luxury lives but not paying any taxes.

The primary problem is that it is hard to define what is "consumption."

1. When GM buys raw steel from U.S. Steel to make into cars, is that a taxable transaction (since they are just going to turn that into a car that they will sell in what is clearly a taxable transaction)?

2. How about when GM buys coal to burn to melt the steel? They are clearly consuming the coal.

3. GM gives a couple of their cars to the CEO and his family, as a perk. (Or it sells them to him for $1 each -- is that a $1 transaction or a $50,000 transaction?)

4. GM lends a couple of their cars to the CEO and his family indefinitely.

5. GM buys a building in which to construct a factory.

6. GM buys a luxury house for its CEO's use. ... and pays for food, clothing, maids, butlers, etc.

I'm just getting started. Any purchase of intellectual property (i.e. music, software, electronic copies of books, etc.) can get fuzzied up. I'll bet you can't define a taxable transaction such that I can't slide my $1,000,000 sale of software from IBM to CitiBank under your definition without anyone paying taxes on it. (I work for IBM, and we did just sell a bunch of software to CitiBank. I don't know the exact number, but that was the neighborhood.)

[Pablo]

[Pablo]

[Zag]

I believe that you could be right, but certainly the most egregious loopholes would have to be addressed before you even start.

If the government never has the right to seize property for non-payment of taxes, then what do you plan to do when someone refuses to pay the consumption taxes that they owe? Is jailing a person the only option? Does anyone ever have the right to seize property as compensation for money owed? Why is the government left out, then?

I realize that your opinion is that the person shouldn't have owed this money in the first place, but that's beside the argument. Whatever way people become obligated to pay money to the government (and no matter what it is, you'll find someone who doesn't consider it to be fair), there needs to be some means of redress when they fail to do so.

[Gomez*]

Progressive income tax is the fairest kind of tax because the amount you pay increases in proportion to your wealth. It's the only tax which easiest on those least able to pay. To me, the arguments for progressive taxation are so obvious that it's a wonder that anyone but an ardent anarchist (opposing the very concept of central government, and, by extension, taxation) would ever advocate supplanting it with regressive taxes like sales tariffs.

[Quailman]

I agree that a progressive tax is fair, but what passes for a progressive income tax in the US is so bastardized that it is almost regressive. The more money you have, the more your ability to find a tax expert who can help you to pay a pittance.

[Pablo]

Collecting taxes is not the most important role of government nor the most important function of a civilization. It should not be the driver of all decision making. The quality of a civilization is not measured by its ability to extract revenue from its citizens. Societies don't fail due to lack of efficient tax collection. They fail because of abuse of power, usually power that has accumulated centrally. The survival of a society depends on the preservation of liberty at the individual level. That should be the first priority. If someone is guilty of failing to fulfill his tax liability, he should not be punished in any way without due process. If the government, or anyone else believes he has been "cheated" out of what they are owed, there must be an independent investigation and a conviction of a crime before anyone should forfeit property or money.
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All religions are the same - Guilt....just with different holidays.

[Thok]

I'm trying to decide how a sudden instantaneous 10% increase in both wages and prices would affect the economy. (10% is a bit of a low ball estimate for the actual effect and the wages and prices wouldn't be spread out evenly.)

[Pablo]

[MatthewV]

But what happens when a tax is added to General Mills (or other large companies)?
It doesn't make the company less profitable because they pass the expense to the consumers. So the price of food goes up and the poor end up with the tax burden.

I like the Australian stepped tax system.

[Mackay]

I just woke up, so sorry that this is more of a random collection of short responses than a coherent post:

Thok, from the little I understand of the current state of affairs in the US, it seems like it would cause businesses to use the wage hike as an excuse for further layoffs and hiring in the US would stagnate even further. I love the idea (you guys should seriously get paid more, it's obscene how rich I feel in my basically-unskilled job whenever I hear Yanks talking about their wages), but I think maybe number of employees is going to be more important in the short term. Maybe an immediate wage hike, followed by a phasing in of the sales tax after everyone's used to spending money again?

Hm, I just googled the Australian GST, and learned that it is not defined as a sales tax because it is refunded to everyone but the end consumers! I never knew. I've also learned that part of its original purpose was "to broaden the tax base, which was heavily biased toward the provision of services". That sounds like a good idea in principle, but I imagine the new people included in the tax base would have overwhelmingly consisted of seniors. Pablo, how do you feel about a hypothetical 80-year-old woman having to pay more sales tax here in Australia? Fair/unfair? The GST is still regressive (only some foods are exempt, plus a fair number of medical supplies, which makes it look like they agreed that seniors would be copping it), so is it just a matter of making it progressive with further exemptions?

MattV, I think the capitalist answer to your question is that people switch to other food companies. I have no idea if that's feasible or not, because the companies could just simultaneously hike prices. But, honestly, if one decided not to do so there would be an obvious benefit to them in revenues, which might cause other companies to drop prices again? I don't know, I'm not usually a "the market will sort it out" type, but in this case we're actually talking about businesses rather than the government, so I think it's OK. Our tax system seems fair to me, too - though I don't know whether or not it's much different to yours really, I just use Australian examples because I'm most familiar with them.

Drop some more knowledge on me, people - is there really any justification at all for taxing capital gains at a separate rate to other forms of income? The only thing I ever hear of it achieving is lowering the effective tax rates of the mega-rich, who pay themselves in company stock or somesuch so they can pay 15% instead of 35%. And it's not as though hiking the rate up penalises "job creators", considering the money is made by having/manipulating money rather than producing anything of societal benefit. Is my understanding of this wrong/incomplete/the liberal socialist gotcha commie media's lies, or is it really just that unfair?

[Zag]

[Thok*]

[Zag]

[Mackay]

[Pablo]

[Pablo]

[Mackay]

I actually think collecting taxes is one of the most important government functions. I pay my taxes, and in return I expect the unlimited use of government infrastructure and some basic protections/rights. I can access safe food, clean water, good roads, the ability to provide myself with basic living conditions if I am unemployed, basic medical care, an education that won't put me into crippling debt, fibre-optic broadband internet (soon), help if I am the victim of a crime/a fire/a natural disaster, guaranteed workplace rights, and so on.

I pay taxes, and what I expect for my money is to receive the benefits of living in a society that provides these things. I don't see it as a theft, more like... a cover charge to get into the nice club. Someone who owns a business probably pays more taxes than me, but they are also likely to get far more use from the infrastructure. Someone who is unemployed benefits to a degree some would call unfair, but those benefits (education, basic provisions, we'll throw in the broadband scheme too, for job hunting) will help them to not remain unemployed, and soon they will be paying taxes back into the society again.

The "importance" falls on the things which taxation provides rather than the taxation itself, but the one is essential to the other.

[Mackay]