# Best basis for taxation

1. Feb 17, 2008

### Staff: Mentor

With Hucabee in the presidential race suggesting that we should move from an income tax to a consumption tax I wondered what the best basis for taxation is and why. After all, any tax is punitive and tends to reduce the thing taxed. So under a consumption tax people will tend to consume less and save more. I'm not clear how that would impact the economy.

So what do you think, what is the best basis of taxation and why?
Labor (income tax)
Wealth (property tax)
Consumption (sales tax)

2. Feb 17, 2008

### John Creighto

I think property and sales tax are the best to a point. I don't think the sales tax should be higher then 7%. I'm not sure sure how high the property tax should be but the point is if you can't raise enough taxes though other means then you need an income tax. Ron Paul points out that in 1913 there was no income tax and that without the income tax the US government would have the same tax revenue it had 10 years ago.

http://www.motherjones.com/news/update/2007/12/huckabee-fair-tax-fallacies.html

Clearly the level of US spending is far to high to abolish the income tax and I really do not know what services would have to go to get rid of it and if the end result would be a net plus or minus. Personally I wouldn't eve think of going bellow a 15% tax as that still should give the government lot of revenue but it would not feel like a huge burden.

3. Feb 17, 2008

### DrClapeyron

How about all three you have listed and more? The best basis for taxation is exchange or transfer:

Exchange good for service: tax
Exchange good for good: tax
Transfer money from savings to checking: tax
Transfer yourself across national boundary: tax
You croak after 3 years of retirement: tax

4. Feb 17, 2008

### Staff: Mentor

Well, that is essentially the current system. So you basically think the current tax system is close to optimal?

Last edited: Feb 17, 2008
5. Feb 17, 2008

### Staff: Mentor

That's interesting, why 7%?

6. Feb 17, 2008

### John Creighto

The higher the level of taxation the more tax you have the methods you will need to collect it. Thus in the current system a mix of types of taxation is required. The relative level of that can be tweaked and there will be winners an loosers.

7. Feb 17, 2008

### D H

Staff Emeritus
I think we should keep this discussion to the "best" mechanism by which the federal government should collect revenues. Adding considerations of what the "correct" amount of the federal government should collect will only cloud the original topic.

Central to this discussion are concepts of fairness and perceived value. To start with, is it fair to make the wealthy pay more taxes than everyone else? I don't think anyone would advocate a truly flat tax. Since no one else will propose such an atrocity, I will for the sake of starting the discussion. I propose a $20,000 federal head tax. What's wrong with this? The rich don't drive any more than most other people, so why should they pay more taxes than other people. What is wrong with this is (1) Most people don't make that kind of money, and (2) the rich do benefit more from government spending than do the poor. While the rich may not drive much more than the middle class, the companies whose stocks they own do benefit from improved roadways. Making it easier for people to get to work makes it easier form companies to make a profit. The rich benefit from government services to people other than themselves. OK, so the rich should pay more taxes than the poor. Should it be proportionately more (which argues for a sales tax), or even steeper (which argues for an income tax)? I don't know what is right, as I have never seen a study that truly addresses this central question. 8. Feb 17, 2008 ### DrClapeyron Why not? Nothing serious in consequence has stemmed from the current tax system that has left people vulnerable to some kind of bodily injury. The bank has not been broke and the economy is strong, so why overhaul a system at the cost of who knows how much on the hunch it could benefit? 9. Feb 17, 2008 ### Dale ### Staff: Mentor That's a good point. As much as I like the idea of the simplicity of a retail sales tax, any such major overhaul is a risk. The current system, warts and sores and all, does function. 10. Feb 17, 2008 ### Dale ### Staff: Mentor Also, the rich directly benefit more because they have more assets that are protected by the police and military. As a Libertarian I disagree that John should pay for a benefit to Fred, regardless of the fact that John, as Fred's employer, gets some indirect benefit, but I think even so that there can be a direct justification for the rich to pay more than the poor. 11. Feb 17, 2008 ### D H Staff Emeritus I picked our roadways as a benefit of government expenditures we see every day. Military and police are another good example of where the rich benefit more than do other people. The key question is, how much more? It seems to me that any investigation into "what is fair" is going to be biased by the investigators own perceptions of fairness. I imagine that one could spin this anything between "the rich shouldn't pay any taxes because they are the ones who create all the jobs" to the "rich should pay all the taxes because it isn't fair to make someone who doesn't have the kinds of wealth pay while the rich are still wealthy". I think anyone who makes any income should pay something in taxes. It might be just a token payment at the bottom end, but they should still pay something. People who don't pay anything don't appreciate what they are getting for free. Even a token payment much smaller in value than the received benefit changes the perception drastically. At the other end, a fair assessment of how much the rich receive from government versus how much they pay is in order. I suspect the old rich, who largely live off inherited wealth, receive benefits that vastly outweigh tax payments. On the other hand, I suspect the new rich, who are still in the process of building wealth by working for it, make payments that vastly outweigh received benefits. 12. Feb 18, 2008 ### Dale ### Staff: Mentor That is one of my fundamental problems with using income as a measure of wealth in typical "tax the rich" approaches. The individuals with the highest income are small business owners, and they pay a huge burden of taxes. Yet, they are not generally what I would call "rich". 13. Feb 19, 2008 ### DrClapeyron Retail taxes would put the tax burden on the buyer and not the seller, the current system places the burden on everyone. Income tax and property tax are good alternates against a passive economy in which spending has gone down. The abundance of taxes and their variety may indicate the necessity to keep steady inflow for government spending in hot and cold times. 14. Feb 19, 2008 ### Dale ### Staff: Mentor The burden is on the buyer anyway, the price of the good purchased includes any taxes that the producers and sellers have to pay. 15. Feb 19, 2008 ### DrClapeyron A sales tax is just that, a tax on a sale. He who buys must pay the tax, the seller collects the tax and pays this to the government; your buyer has paid the tax. Even when the total weight is not entirely on the buyer, the seller carries less of the burden. The seller can always alter his inventory to offset a reduction in sales due to the tax, but the tax will always be there for the buyer. 16. Sep 10, 2008 ### Constructe Actually, I think the best taxation method is ones that are easy to enforce and don't have room for cheating. There are two, property taxes (it's hard to take or hide property, although you must make sure it is assessed fairly) and no tax (the government prints free money and the inflation in production of excess money is the tax on all). Unfortunately the second is not progressive and some may argue is regressive if inflation affects food staples etc. more than luxury items. Therefore it can be balanced with the first since it is progressive and as an added benefit prevents property squatting, land hoarding, and excessive property prices which moderate inflation. Unfortunately, the super rich don't like property taxes and some worry that the government can't be trusted not to print infinite amounts of money for assorted benefits. If you are in the US, essentially the US has already adopted the first taxation tactic of printing excess money. In this case it is called deficit spending. We will see how much free money they can make before the system breaks down. The only thing is that they don't acknowledge that this is a tax and the natural byproduct (inflation and dollar depreciation). The only way of masking this taxation is by creating a borrowing method from a independent bank called the Federal Reserve that gets to make free money off of the government (taxpayers) since the government must pay interest for printing money which they technically don't have to do. This makes bankers happy and proves the government isn't making money but borrowing it even though any economist will tell you this process creates money (fed produces money for deficit spending, lends to the gov, gov spends the money, Fed creates bonds and sells them to the banks, those who get$ from the fed spending deposit it in the bank which goes to buy more bonds). If we were rational beings we would admit the free creation of $and scrap the interest the gov pays which is actually the taxpayers footing the interest every year. This would make the bankers angry, especially the federal reserve which is a private banks who makes good money off this scheme. Another good tax is inheritance tax since the recipients have no real justification to assets usually aside from the fact their parents are rich. Welcome to the random birth lottery. The only downside to this is that their is many ways to avoid this tax (hiring your children, slipping them money, giving to people to give to children, insurance policies, buying expensive stuff and having it wind up with them in the future, etc.). That being said, although it is one of the most rational, it doesn't fit the easy to enforce and little room for cheating rule. This also, super rich people will lobby strongly against proving, the best doesn't really the one that is possible. So in the end, the government has found out the best tax is no tax, and embraced deficit spending, not flat out printing$. This works as long as you have enough inferior taxes to cover the interest payments and hide the fact you are depreciating your currency. Also required is the fact that your economy must grow fast enough to offset the inflation you are experiencing or you may find your population getting really mad at the government even though they should be irate at themselves for asking the government to spend beyond their means and the bankers who are getting rich because you use a debt system rather than calling it a inflationary tax and monitoring inflation like a hawk (what the fed is suppose to do). If you flat out print $you know you are overprinting when inflation shoots way up (meaning you are spending too much). So I guess this is an economics lesson as well as a taxation one. Last edited: Sep 10, 2008 17. Sep 15, 2008 ### baywax A GST (General Services Tax) was introduced by the Canadaian Liberals way back in 19something or so... it was 7 percent. This was on top of income tax. Then each of the provinces (like states to you guys) was able to impose whatever sales tax they wanted. Many went with 7 percent, one oil rich province has no sales tax. This meant that all year, before income tax, everyone, except in Alberta, was paying 14 percent tax on pretty well everything from food to a shoe shine. That's when we started paying off our national debt rapidly. And we saw some very interesting programs going into place, including the "hydrogen highway" between Southern California up to Whistler BC and the Pincher Creek wind farm which is going private as of recently. Somehow people absorbed the GST and PSTs along with around 24 through to 50 percent income tax. (based on income). And the debt got smaller. And Canada looked pretty good for quite a while with surpluses every year. Then the Tories (Conservatives) got in and started using the GST as political fodder by cutting it back 2 percent over 2 years. This is the slippery slope back into debt for the nation and for the social and technological advances we'd made during the years of higher taxes. So, I'd say taxation should match the wealth of the country along with the needs of its treasury and its people. 18. Sep 16, 2008 ### iansmith Staff Emeritus The GST was introduce by the conservatives of Mulroney in 1991 and they lost the following election because of it. 19. Sep 16, 2008 ### baywax Ah, thanks iansmith. I wonder how well a tax like that would go over in the US?! Shades of a tea party come to mind. 20. Oct 26, 2008 ### CRGreathouse I think that the income-'tax benefit' curve is concave down and increasing: a person making$2X benefits more than a person making $X but less than twice as much. But I don't think I'd be happy with a regressive income tax, so apparently I support some kind of implicit redistribution of wealth. (Of course a proportional system would be less redistributive than our current system, but by the assertion in my first sentence such a system would be redistributive.) So this raises a more basic question: On what ethical grounds should we base our taxation system? 21. Oct 26, 2008 ### D H Staff Emeritus I have suspicions that the "tax benefit" curve is U shaped, with a minimum somewhere in the upper middle class / moderately rich range. The upper middle class work hard for their money and pay taxes at the highest marginal rate. They don't have quite enough money to have accumulated vast quantities of wealth nor to pay some accountant to find a way to avoid taxes on a truly massive scale ala Leona Helmsley. The über-rich on the other hand have large amounts of accumulated wealth. The protection they receive from internal and external strife by the police and military protects that accumulated wealth. As wealth is highly nonlinear with respect to income, they, like the poor, receive benefits out of proportion with respect to their incomes (wealth is highly nonlinear with respect to income. That they can fruitfully hire people (including politicians) to help them avoid taxes exacerbates this discrepancy. The rich also benefit from taxes in another way. They have employees who benefit from government spending. The public roads that make it easier for people to get to work, the public education that makes for better jobs, the research that makes for better lives benefits not only the employees but also the employers. Poor people, and even middle class people, do not have employees. On the lesser of two evils principle. Taxation is inherently unfair and immoral. It is in a very real sense government-sanctioned theft. However, taxation is necessary to support our modern government, and a world without government would be extremely unfair, completely amoral, and utterly backwards. Taxation is a necessary evil. One problem with "fairness" is that what constitutes fairness is very much in the eye of the beholder. To some on the far right, paying anything but a flat rate is unfair. To some on the far left, earning 200 million per year is inherently evil and not taxing that at anything less than a 90% marginal rate is unfair. A bigger problem, to me, is that since taxation is inherently "unfair", any talk of "fairness" is an oxymoron. It is akin to a prostitute or porn star claiming to have regained her virginity. If taxation is inherently unfair, but is at the same absolutely essential, the best we can do is to spread the pain around evenly. Taking even 10% of the income of someone who makes$25,000 per year hurts that person a lot. That confiscated $2,500 means a lot more misery to someone who is just barely getting by. Taking 10% from someone who makes ten times that doesn't hurt near so much. Those who make$250,000/year are well beyond worrying about the basic essentials of life. That confiscated $25,000 means giving up a timeshare in Vail. Spreading the pain around evenly entails a progressive tax system. 22. Oct 26, 2008 ### rbj there are those poor enough (but with non-zero income) that any tax would be a hardship that would take food out of their mouth (or their dependents) or warmth from the furnace. i think a "zero bracket" for those living at or below the poverty line is fair and appropriate. about roadways and other infrastructure, there should be user fees (on gasoline or other fuel, tires, vehicle sales) to cover that. a decent tax on gasoline would also serve the purpose to discourage waste to protect the resource for future generations (as well as pay for roads and bridges). there is an "art" to taxation to hit up the different sectors of commerce and consumption, provide for the citizenry, and not incite rebellion (if any taxation becomes too burdensome). so we pay taxes based on our income, consumption (sales or VAT tax), property (that we pay in rent), "extravagant" consumption (extra tax on hotels/lodging, prepared or restaurant food, stuff that hits out-of-towners that don't vote locally), actions that "take" something out of the collective environment (say, a "carbon tax", etc.), and "sin" tax (alcohol, tobacco, gambling, whatever hootch that is legal) to be both tolerant of and discouraging of different sins that are deemed not-so-good for society. the trick is tweaking these different classes of taxation to get those who most are able to pay, those who are an extra drag on the collective economy to pay, those who are out-of-town and don't vote locally to pay, whatever other group that is less sympathetic to pay. this is also to sorta officially discourage (via taxation) behavior that society wants to discourage and to sorta subsidize behavior that society encourages. we all benefit from an orderly society with laws that protect us and our property (and our businesses or means of living, etc.) and the rich have a lot more to lose if society utterly breaks down than the poor. also, the rich have a higher percentage of "disposable income" than the poor. the laws could be far more simple and fair and consistent for everyone. if we could ditch the loopholes in the regular income tax, we could also do away with the A.M.T (alternate minimum tax, which is flat rate), we could also do away with any differentiation between sources of income. salaries should be the same class of income as dividends and capital gains, but present U.S. tax law eliminates taxation on dividend income and limits the rate on capital gain income (do you know many working-class people who make most of their income with capital gains or dividends?). it's an obvious tax-gift to the wealthy and is part of the class warfare of the rich upon the poor. i could sound a lot more like a Republican when it comes to corporate income tax. i think if the reforms that eliminate the Bush tax-givaways to the rich are adopted (like retaxing capital gains and dividends like all of the rest of one's income) and loopholes eliminated, then along with it corporate income tax should be completely flat rate and a low rate and apply only to cash income. i.e. any cash layout for manufacturing and development is a loss that can be deducted against cash income and only net realized cash income is counted for corporate income tax purposes. no taxation on the income anticipated by some widget that is sitting in inventory, and no need to depreciate the widget sitting in inventory when it doesn't sell for what you anticipated it to sell for. if the widget cost money to make, when that money had to be paid you deduct that cost from the corporate income. if the widget sat in inventory and never got sold, your corporation never saw any income for it, so no taxes were assessed. that is both simple and fair. also, whatever income that a corporation is able to brag to its stockholders about should be exactly the income that the taxman sees in his accounting. and whatever loss that the corporation cries to the taxman about (as a deduction) must also be reported to the stockholders. there should be one set of books for profit and loss. not different sets for different observers. 23. Oct 27, 2008 ### D H Staff Emeritus I agree that there should probably be some limit below which a person should not pay any taxes. I think this should be below the poverty line. The reason: People who don't pay anything don't feel they are a part of the system. I have worked for enough volunteer organizations to have learned that charging some token fee for services rendered makes the recipients value that service a whole lot more than if the service were provided for free. Even if that token fee but is a paltry fraction of the true cost, the act of paying something makes the recipients of the largess appreciate treat what they are receiving with respect. Give a poor person a cashmere sweater and they will wear while changing the oil in their car. On the other hand, they will only wear the ragged suit they bought from some second-hand store to church. The cashmere sweater has no value. The suit does. In the case of taxes, making even a very poor family pay some taxes may spur that family to force their children to continue going to school. They are paying for it, after all. Without that spur, the poor do not appreciate the value of an education. Have you read my other posts? The rich not only have more to lose than do the poor, they have more to lose that is disproportionate to their income. You could, but you don't. The basic problem with corporate income taxes is that corporations simply pass the taxes on to their customers. Since the poor and middle class spend a greater proportion of their income on goods, taxes on businesses are inherently regressive. 24. Oct 27, 2008 ### baywax Ethically, taxation provides a stable country or nation for all those citizens of that country. So, there is less crime because services are offered to everyone irregardless of their income. This means the more "well to do" citizens are slightly less inclined to be mobbed and robbed because "Joe the 7/11 clerk" has a nicely paved highway just like "Joe the Stockbroker". Taxation plays the ethical part of evening the playing field for all citizens... theoretically. When LA is hit with a tsunami... they will get the same influx of government funds (our taxes) as New Orleans.... er... bad example... but, you can see where I'm going with this. Taxation really does take the pressure off the rich in that everyone can enjoy pretty much the same benefits of a "rich country" because of taxation. In Canada we have some of the most luxurious spas that are actually "Community Recreation Centres" paid for by tax dollars. The price for a year's subscription is 1 dollar a day. This applies to the rich as well as the poor. But, if you look at the tax structure in this country, the people making over$50,000 are paying close to 50 percent tax on that income.... unless they are self employed where they can write off a large amount of their expenditures.

But my point is... in terms of ethicality... taxation provides a rule that placates the entire citizenship into thinking two things..... one: "we have the same conditions as the rich" and two: we are all relatively in the same boat when the tax man cometh!.

25. Oct 27, 2008

### CRGreathouse

I don't know. The nonrich benefit just as much as the rich from general government protection (police, military) in terms of retaining life, limb, & property.

And are you talking about the marginal benefit curve or the total benefit curve? I certainly think that a person making $100,000 benefits more from government services than someone making$50,000 (though less as a proportion of either income or taxes). In fact I feel that return to taxes is strictly increasing (ignoring the small discontinuities), even if only slightly... do you disagree?

I could see marginal benefit increasing from moderately rich to very rich, though I don't think the benefit-to-tax ratio ever matches that at the \$30,000 income level. (Most would say this is right and proper.)

Let me attempt to summarize your points, then you can correct me.

The ethical basis for taxation is:
1. The (Hobbesian) state of nature is "extremely unfair, completely amoral, and utterly backwards".
2. Taxation is an inherently unfair necessary evil.
3. Taxation used to counter #1 can be just; taxation beyond this point is unfair.
4. Taxes should be levied on a utilitarian basis: rich pay more because their marginal benefit from the money is lower.