[Echognome]

Winstonm, on Mar 7 2007, 07:41 PM, said:

Emotionally, I favor a consumption tax or a national sales tax rather than an income tax, but am aware this has no chance of succeeding; the U.S. economy is based on consumption and debt creation, so to actual reward saving and penalize spending would be the last thing the Fed would want to happen.

Of course, inflation is another hidden tax that sends money to the rich while exposing the poor - or in bridge terms, a Taxes Transfer.

Minor points I know, but the treasury department is in charge of taxes (with the IRS being enforcement and many policies actually determined by Congress). The Federal Reserve is in charge of money supply and interest rates. You may have heard the terms fiscal and monetary policy which are related to the two departments above.

Inflation is a hidden tax in that the government is a net debtor to its people. Thus as inflation rises, the real value of debt the government owes is lowered. When used as a policy it is called seignorage. It is said it is useful in economies with large black markets as although some can avoid government taxation, no one can avoid inflation!

[helene_t]

In Germany, the Christian Democrats had a minister-of-finance-to-be on their election list. A professor of economics with no political experience, he favored a flat-tax structure and scrabbing of all subsidies.

The disapointing elections results of the Christian Democrats were (rightly or not) attributed to the unpopularity of said professor. The main concern was from house owners. Hardly surprising, his ideas were soon forgotten and he left politics after the elections.

We see the same in many other countries. For some historical reason, most Western countries subsidize owned houses, often through tax deductions of mortgage interests.

Sweden and UK finallymanaged to get rid of that treasurry drain. Eventually it will happen all over EU.

Whether other aspects of the tax system will move towards simplicity is difficult to say. Todd has a good point but I'm an optimist. I think reason will prevail at the end.

Winstonm said:

Emotionally, I favor a consumption tax or a national sales tax rather than an income tax, but am aware this has no chance of succeeding; the U.S. economy is based on consumption and debt creation, so to actual reward saving and penalize spending would be the last thing the Fed would want to happen.

Consumtion tax does not favor saving. You save because you intend to spent the money in the future so you will end up paying your taxes anyway. VAT versus income taxes is largely an implementation issue. (Edit: if savings are subject to taxation, whether by mean of a fortune tax or by means of taxation of the interests earned, then you're right. )

Unfortunately, VAT is often used as an instrument to penalize people for spending money of imoral things (like candy, fashion and electronics) while awarding people for spending money of moral things (like housing and books). Whether food is considered moral or imoral varies by country. In Denmark, everything except for training, housing and newpapers is imoral, while in the Netherlands, books and food is only partially imoral.

I think politicians should stop using the tax system for their arbitrry crucades. First, because it's social engineering, AKA Stalinism. Second, because it makes it impossible to discuss tax reforms. TAX might be a better (or worse) implementation of the same tax as compared to source tax, but politicians always focus on the crusade aspects of alternative implementations.

[Al_U_Card]

The only real problem with any taxation system is......avoidance and exemption.

IF all pay fairly and according to the requirement where is the problem? Only the avoiders and the cheats gain from excessively complex or unenforceable methods. Black markets and under the table dealings reduce the tax base and transfer the burden to those that "honestly" submit.

[helene_t]

Al_U_Card, on Mar 8 2007, 05:09 PM, said:

The only real problem with any taxation system is......avoidance and exemption.

I disagree. The administrative overhead, the effects on income distribution, as well as the stimulation of behavior favored by the tax scheme, are important as well.

[cherdano]

helene_t, on Mar 8 2007, 05:31 AM, said:

In Germany, the Christian Democrats had a minister-of-finance-to-be on their election list. A professor of economics with no political experience, he favored a flat-tax structure and scrabbing of all subsidies.

The disappointing elections results of the Christian Democrats were (rightly or not) attributed to the unpopularity of said professor. The main concern was from house owners. Hardly surprising, his ideas were soon forgotten and he left politics after the elections.

I think a little more general, Germans actually cared more about fairness than simplicity - and what they (we?) perceive as fairness is of course biased by existing practice. If a teacher needs to have a separate office in his home (because he doesn't get an office in school), then in effect he has a lower salary, because he has to spend some of his income towards his home office.
Well, if you accept that, there is a similar reason for every other deduction or subsidy...

(Of course, the reasons the Christian Democrats failed are more complex than that. There are even a few more related to Kirchhoff (said professor): unfortunately, he hadn't written part 2 of his book yet, which would have explained how his tax cuts would have been financed; he not only favored killing all subsidies, but also a very flat tax structure, which just won't sell in Germany; finally, he just acted badly as a politician, and while the Christian Democrats chose him as future minister-of-finance, they (or at least some of them) also made it clear they don't agree with his tax plans, which made it hard for them to make it clear what they actually did want...)

[Al_U_Card]

helene_t, on Mar 8 2007, 10:20 AM, said:

Al_U_Card, on Mar 8 2007, 05:09 PM, said:

The only real problem with any taxation system is......avoidance and exemption.

I disagree. The administrative overhead, the effects on income distribution, as well as the stimulation of behavior favored by the tax scheme, are important as well.

Disagreement stimulates discussion so its all good. Remember I have been speaking "ideally" because we all know that humanity always chooses to complicate things...usually because they are adding "specifics" for their own personal benefit.

In my system there would be minimal overhead (just enough inspectors to check a small fraction of the taxees)

Income distribution? For those that wish to languish at the bottom, they receive the minimum....

The only behavior (successful) that I have seen stimulated by the application of taxes IS avoidance.

Ready for round 2?

[helene_t]

cherdano, on Mar 8 2007, 05:46 PM, said:

If a teacher needs to have a separate office in his home (because he doesn't get an office in school), then in effect he has a lower salary, because he has to spend some of his income towards his home office.
Well, if you accept that, there is a similar reason for every other deduction or subsidy...

You example is ok but I don't believe that all subsidies can be justified in that way. The subsidies on housing (which is one of the biggest treasury drains in many countries including Germany) is clearly beneficial for richer households who spent a larger proportion of their income on housing and also are more likely to own their houses.

As I see it, the problem is that those who recieve a subsidy feel it directly, while all those who don't receive it but only pay for it just get an overall tax bill, so it's not so obvious to them how much they pay for all those subsidies.

My monthly salary specification only says that so-and-so-many Euros where withheld for taxes. Suppose it said specifically how the taxes I payed were build up: so many Euros for keeping the milk prices artificially high, so many Euros for subsidizing owned houses etc. etc. Maybe the taxpayers/voters would be less easy to fool.

[mike777]

I love the mindset of phrases such as:

1) financing of tax cuts
2) drain on treasury, treasury drain
3) good luck on that whole fairness issue,
4) Just tax the top 5% or 1% a whole lot more and the rest zero for income taxes.

[Al_U_Card]

I kind of like flat myself as it sounds so innocuous.

[mike777]

1) Make death taxes 100% rate.
2) No foundations to pass on money tax free. Full 100% rate at death. See Gates Buffett.. Ford, and Rockafeller, etc.
3) Make life insurance 100% tax rate in full.
4) All gifts taxed at 100% rate.
5) Raise sin taxes and taxes on gambling winnings.

I make no claims that this will solve all tax avoidance schemes but it is a good start.

[mike777]

I should add another huge treasury drain is allowing the trading in pension plans and other retirement accounts on a tax free or tax deferred basis. Talk about unfair, if you are poor and do not have one of these accounts too bad...another break for those better off.

[Winstonm]

Echognome, on Mar 8 2007, 01:23 AM, said:

Winstonm, on Mar 7 2007, 07:41 PM, said:

Emotionally, I favor a consumption tax or a national sales tax rather than an income tax, but am aware this has no chance of succeeding; the U.S. economy is based on consumption and debt creation, so to actual reward saving and penalize spending would be the last thing the Fed would want to happen.

Of course, inflation is another hidden tax that sends money to the rich while exposing the poor - or in bridge terms, a Taxes Transfer. 

Minor points I know, but the treasury department is in charge of taxes (with the IRS being enforcement and many policies actually determined by Congress). The Federal Reserve is in charge of money supply and interest rates. You may have heard the terms fiscal and monetary policy which are related to the two departments above.

Inflation is a hidden tax in that the government is a net debtor to its people. Thus as inflation rises, the real value of debt the government owes is lowered. When used as a policy it is called seignorage. It is said it is useful in economies with large black markets as although some can avoid government taxation, no one can avoid inflation!

Thanks, and you are right, of course - I meant to use "the fed" as an expression of the federal government as a whole and not the Federal Reserve Board, as such.

I know you are a macroeconomist and I am not - I've never had a single class in economics, so I am ignorant except for self-education. Perhaps you can help with more inflation information.

Let's keep it to the U.S., please, to help me grasp it. I can understand that if the population is expanding at 5% then money supply will generally need to expand at the same rate and products and services also. But when money supply outpaces the need, doesn't that dilute the value? Isn't inflation more of a monetary problem than the Keynesian ideas of actual demand creating a bottleneck? Doesn't excess money create artificial demand and urgency to consume when the money value is lessening over time?

I don't remeber when the change occured, but I read recently that the old siliver quarter could buy one gallon of gasoline when gasoline was $0.25 per gallon, but the oddity is the silver in the quarter is now worth $2.67 so the old quarter could still buy a gallon of gasoline - the currency is what has changed value.

I know I am gettin more and more cynical in my old age, but I view the job of the Federal Reserve as creating a fictional estimation of inflation so as to keep COLA expenses manageable while assuring there is enough cheap debt creation to continue to fuel consumption - without consumption, what does the U.S. economy have? 70% of GDP is consumer spending, real savings are now negative, and debt per person is at all time highs - isn't this a Ponzi scheme simply waiting to come undone?

[mike777]

I agree Winston, if consumption in the USA drops to zero, we are in trouble.
If consumer spending falls to zero we are in trouble.
We can only hope that increasing the tax rates and getting rid of all these tax breaks on the rich can help us.

[Winstonm]

Quote

QUOTE (Winstonm)
Emotionally, I favor a consumption tax or a national sales tax rather than an income tax, but am aware this has no chance of succeeding; the U.S. economy is based on consumption and debt creation, so to actual reward saving and penalize spending would be the last thing the Fed would want to happen.


Consumtion tax does not favor saving. You save because you intend to spent the money in the future so you will end up paying your taxes anyway. VAT versus income taxes is largely an implementation issue. (Edit: if savings are subject to taxation, whether by mean of a fortune tax or by means of taxation of the interests earned, then you're right. )

You lost me, Helene. Of course, sending something flying over the head of an intellectual midget is no great feat, so don't be smug.

How can a consumption tax not favor present savings? As long as I am not spending the money now it will build interest and I won't be taxed on either the money or the interest earned. A consumption tax, or national sales tax, would replace all other taxes, and revenue for government is only generated when money is spent. This seems a more equitable tax, as well, as everyone buys staples and therefore is taxed on those consumptions, but not everyone can afford flat screen T.V.s, nights at the opera, and season tickets to the Knicks games; also, a 3-year old Ford doesn't cost as much as a new Lexus, so the better offs end up paying a greater share of the burden.

[Winstonm]

mike777, on Mar 8 2007, 08:02 PM, said:

I agree Winston, if consumption in the USA drops to zero, we are in trouble.
If consumer spending falls to zero we are in trouble.
We can only hope that increasing the tax rates and getting rid of all these tax breaks on the rich can help  us.

Mike, you are well-educated - Chicago, I believe? Perhaps you can help me grasp how an economy, seemingly based on debt creation, can hope to continue to exist?

Has any experiment with a fiat currency ever in history been a success? To my simple mind, debt is an obligation to pay - it must at some point be satisfied. But when money is simply tied to the value of other currency, all you can get in exchange for the debt owed is another I.O.U., and more debt to the borrower. Isn't the inevitable result of such monetary policy hyper-inflation?

[mike777]

1) I agree an economy based on debt creation cannot exit for long if at all.
2) I forget what is a fiat currency?

[Winstonm]

mike777, on Mar 8 2007, 08:42 PM, said:

1) I agree an economy based on debt creation cannot exit for long if at all.
2) I forget what is a fiat currency?

From Wikpedia: In economics, fiat currency or fiat money is money that enjoys legal tender status derived from a declaratory fiat or an authoritative order of the government.

In other words, paper currency the state declares is of value but is not backed by a commodity.

[mike777]

Ok I agree an economy cannot be based on debt and/or on a fiat currency.

[hrothgar]

mike777, on Mar 9 2007, 05:29 AM, said:

Ok I agree an economy cannot be based on debt and/or on a fiat currency.

So you're in favour of what?

The gold standard?

[mike777]

I do not think the USA economy is based on debt or a fiat currency. As I stated I doubt any economy could be.

I think we have real assets and real productivity, making real things that people want.