Best basis for taxation

  1. 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. jcsd
  3. 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.

    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.
  4. 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
  5. Well, that is essentially the current system. So you basically think the current tax system is close to optimal?
    Last edited: Feb 17, 2008
  6. That's interesting, why 7%?
  7. 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.
  8. D H

    Staff: Mentor

    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.

  9. 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?
  10. 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.
  11. 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.
  12. D H

    Staff: Mentor

    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.
  13. 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".
  14. 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.
  15. The burden is on the buyer anyway, the price of the good purchased includes any taxes that the producers and sellers have to pay.
  16. 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.
  17. 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
  18. baywax

    baywax 2,002
    Gold Member

    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.
  19. iansmith

    iansmith 1,361
    Staff Emeritus
    Science Advisor
    Gold Member

    The GST was introduce by the conservatives of Mulroney in 1991 and they lost the following election because of it.
  20. baywax

    baywax 2,002
    Gold Member

    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.
  21. CRGreathouse

    CRGreathouse 3,497
    Science Advisor
    Homework Helper

    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?
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