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QotD: Taxes

Question: No income tax, 23% sales tax on all purchases. Love it or leave it?

My Answer: Sounds like an idea that should be explored but is also an idea that, undoubtedly, has some pretty serious holes. But, as a general rule, I'd pay 20% more for everything if I didn't have to worry about income taxes.

How much would the United States save simply by eliminating the IRS?

You are encouraged to answer the Question of the Day for yourself in the comments or on your blog.

12 Responses to "QotD: Taxes"

  1. The main issue I have with it is that it penalizes not having much money, since the poorer you are, the greater the % of your income you spend on goods (as opposed to investing, etc...).

  2. I agree with David, a flat tax is a really bad idea. Besides, I don't pay taxes on a bunch of things here in Florida: food. No tax on food, with the exeption of prepared foods (i.e., cooked for you). Although when I move to Virginia in less than a month, I don't know what the rates. are.

    Why would I want a 23% tax anyway? I didn't pay close to that amount this year either. My effective tax rate this year was 9%.

  3. While I could agree with a GST, until I saw your specific proposal I didn't realize a likely side-effect: economic chaos. 23%? I can already see it... sales drop off across the board, black market good jump, businesses fail, sotck market dives, the American dollar takes a big hit.

    You know what? This proposal completely changed my mind. Do I even think this will wipe out the deficit? Hell no. First things first - the federal government needs to stop wasting our tax money.

  4. A couple of things that may not have been considered.

    First, we are currently double taxed on our money. We pay income tax on the money we earn and then also pay a sales tax on what we buy. Some of the 23% tax rate would be recovered by not having that anymore.

    Second, many people now pay effectively no taxes. Self employed/small businesses deduct as much as they can to reduce their "income" to very low levels. This would recover that. It would also eliminate large corporations who play shell games with their money. The raw materials for a car or refrigerator cost a fixed amount of money and that would be taxed.

    Sales may not drop off as much as you expect considering that people would have a large pay raise from not having to pay income tax. For low income folks we could have some form of rebate. Any month in which you make less than $X.xx you submit a form to the gov and get a portion of your sales tax rebated. Also, since Gabe cited effective tax rates. The effective tax rate in this plan would be lower. Rent doesn't have a sales tax, neither does electricity, water, services, etc...

    Plus it eliminates fraud. If I cheat on my taxes today, I am the only one who knows - I need no coconspirators. With a sales tax, why would I risk losing my business and prosecution to help someone else out? A neutral third party is responsible for collecting.

    And, as Erik said, let's eliminate the IRS.

  5. 'Self employed/small businesses deduct as much as they can to reduce their "income" to very low levels. This would recover that.'

    That's an interesting if completely incorrect statement. 🙂

    Self employed/small businesses deduct as much as possible so that they pay the IRS precisely what they owe. If something is legally deductible, you're not cheating anyone by deducting it. Are you cheating the IRS by taking the standard deduction? By deducting your 401(k) or IRA contributions?

    I deduct about 25% of my gross income because I buy plane tickets and rent hotel rooms and cars while travelling for consulting gigs. Am I ripping you off by doing so? I still pay an absurd quantity of income tax, which is why I'm a big supporter of a flat personal income tax.

    I agree with the previous comment that a flat sales tax is a bad idea for numerous reasons, because curtailing spending to "screw the IRS" is actually possible (and would definitely happen), while very few people will intentionally earn less money to do the same.

  6. I can't remember where I read it, but the #1 tax cheat is the underreporting of income rather then the over use of deductions.

    Clearly there are as many ways to cheat a sales tax as there are to cheat on an income tax. This will only stop 'casual' cheaters. The people who cheat the government out of millions will still find a way around it.

    I would personally love a simple flat tax system, with no deductions. When I was 18, I could file my taxes in under 15 minutes, doing all the calculations by hand. It took me about 8 hours to do my taxes this year, and I had a computer doing all the math.

  7. I encourage all of you, especially David Smith & Gabe, to read about the Fair Tax plan. There is a provision in HR25, the bill referenced in the article linked by our host, that provides for a "Family Consumption Allowance," which offsets the taxes of the poor, so that is not a legitimate concern about HR25.

    The Fair Tax plan really is a fair tax plan, and is one that I have studied and have come to support without reservation. Our tax system is so convoluted, and it includes so much engineering that it is disgusting. Not to mention that without the 16th amendment an income tax is unconstitutional. A flat tax system - a CONSUMPTION tax - was perfectly constitutional, and it is how our government raised the necessary taxes for the first 130+ years of its existence.

    Also, Gabe, your effective tax rate was likely MUCH higher than 9%. Your effective federal income tax rate might have been only 9%, but you need to also add the Medicare payroll tax, and the Social Security payroll tax (double this if you're not self employed).

    This topic also begs the question of the purpose of government, because that's what taxes go to pay for. The nation's founders had a wonderful idea - federalism - that has all but been ignored in recent years. (Does anyone remember the 10th amendment anymore?!) The downturn started with the passage of the 16th and 17th amendments to the U.S. Constitution. Those amendments have proven to be a travesty more than most people understand. I can go on, but that gets way off topic.

  8. I meant to say that our current tax system has "so much social engineering that it is disgusting." Sorry for the repost.

  9. Start an Indian Tribe, then all your income tax and sales tax goes to 0, your car registration fees go to 0, and you are exempt from state environmental laws.

  10. I have to agree with the other "Bill W" about the under reporting of income. I have a coworker who has some rental properties. He has told me how he needs a new refrigerator at home, so he buys a superwhamodyne $2500 model which he deducts as a rental expense against one of his properties.

    Another friend is a mortgage broker. She regularly sees tax returns and other financial documents and commented recently commented about one client. "He has his own business and actually paid taxes last year!" Her experience is that is definitely the exception.

    Out of curiosity Bill, can you give some examples of how to cheat on sales tax?

  11. A: I don't know. I don't think any of us do know.

    So would this new sales tax plan mean that people couldn't avoid sales taxes by purchasing items online or through mail order catelogs?

    I am wondering what you guys think taxes should be levied for... like, what should the government be doing with all our money?

  12. i deduct a lot. i could no longer do so.

    ...but the IRS is super bloated, so that would be nice.

    ...but also, most of our tax dollars are wasted anyway, and this wouldn't change that fact.