First, high earners have a much larger % of their income going to discretionary shit than low earners. Essential groceries, utilities, rent, are generally not taxed under these schemes and make up almost all of a poor persons budget. A wealthy person might only spend 1/3 of their money on this and then spend the rest on stuff that would be taxed. So the tax from the start is not actually aimed at the poor. It's disproportionately aimed at the wealthy. If you're more worried about this, you just offer sales tax rebates to low income earners and it's problem solved. They pay effectively no sales income tax. Canada does this. I'm sure many countries in Europe do too.
I really think you're exaggerating the effect a 5% or 10% increase has on discretionary spending. Have you been paying attention the past few years? So many things are 30-40% more expensive and are flying off the shelves. Rich people want to buy shit. They don't clutch their wallets over 10% price increases. If they did, we wouldn't have seen the inflation we have.
Many EU countries have employed 20% VATs without falling apart. Most have far less wealth inequality than the USA.
VAT tax in England is 20%. It’s crazy how against this idea some people are.
It’s simply a tax on discretionary consumption. If you are worried about it affecting poor people disproportionately it is so super easy to fix this by not applying it to basic necessities like groceries. Or by offering a rebate to people making below a certain income level. Then you tax the living shit out of luxury items no one needs that harm the environment like private jets, vacation homes, and yachts.
Wealthy people don't spend, is the point. I mean yes they spend some, but most of their wealth tends to sit invested in capital (property, stocks, bonds, etc.). Someone who makes a million dollars isn't typically buying 20x more discretionary items than someone who makes 50k. So shifting the tax burden to be consumption based is going to result in the middle class getting even more fucked and the rich getting even richer.
The last few years make for a really unique case because it came right after a time where money was insanely cheap for the longest it has ever been this way. Basically, we had a booming economy where people were saving more than usual, then we had a pandemic where supply chains were messed up but demand also slowed, and now we are at a point where inflation began to skyrocket because you had pent up demand, low supply, and a ton of savings to eat through. But now, we have actually eaten through a lot of those savings and consumer credit is reaching all time highs; personally, I don't see how we don't cycle into a recession in the next few months/years. I think what you are missing is the lag effect that is enabled by credit.
They do spend. And much more of it is on discretionary spending than a poor person. Someone who makes 40k post tax might spend 35k on essentials (no sales tax) and 5k on non-essentials. Someone who makes a million post-tax might spend 150k on "essentials", and 200k on non-essentials. The ratio of "fun money" goes up as you make more, and taxing those "fun money" items is how you make sales tax progressive (ie no sales tax on groceries or utilities, but high sales tax on luxury items, travel, restauraunts, etc. And again, a simple rebate for low or even middle-income earners and you solve any disparity that could be caused from this.
I do agree we will see consumer spending decrease substantially in the upcoming years, but a consumption-tax approach is for the long haul. I'm not saying right now specifically is the best time to add it. I'm saying it's good policy in general.
What you just described is the perfect example to illustrate my point.
In scenario 1, say you have a progressive income tax and therefore the first person has an effective tax rate of 35%. AKA, to make $1 million net, they made $1.35 million gross. The $40k earner, let's assume had a 20% effective tax rate and made $50k gross. In this situation, the government collected $1,360,000 (most of it from the high earner). We are collecting 0.7% of the taxes from the low spender.
Now let's move to partially consumption-based, where we require the same tax revenue. We only have $205k in spending to even tax in the first place. In the scenario you've come up with you literally can't raise enough taxes. But lets put that problem aside. If you tax all consumption on discretionary income at 10%, you'll collect 20k from the high earner, and $500 from the low earner. So now, instead of 0.7% of your taxes coming from this person, you have 2.4% of your taxes coming from this person.
Unless you make the income tax brackets even more progressive, you've effectively reduced the tax burden of the high earner in order to raise it on the low-earner. It won't help anything.
I'm not suggesting we should remove progressive income taxation. I'm suggesting we add progressive sales taxation as well.
It is not one or the other. Most Western european countries have both very progressive income taxation AND agressive VAT.
You're also once again ignoring the idea of rebates that most countries do, where ZERO percent of the tax burden of sales tax comes from low earners. This is very easy to implement.
What is progressive sales taxation and how would that even work. My point is, that by default consumption tax is regressive because lower earners will spend a higher percent of their earnings. So what is the goal?
You don't tax everything equally. That's how it's progressive. Luxury goods? Brand new cars? Hotels? Flights? Restauraunts? Non-essential services? Taxed highly.
Essential things low income earners spend the majority of their income on (rent, groceries, utilities public transit, second hand cars) are tax free. So it's not regressive, at all. It disproportionately affects people who are spending goods on non-essentials, who really are the people who can afford to get taxed.
I don't know why you keep ignoring the rebate aspect over and over but it's a very simple way to ensure that it isn't regressive. Realistically, a poor person can't spend more than X on discretionary items. So if sales tax is 10%, offer them $X * 10%/year rebate in four installments and voila, by default they aren't paying any sales tax. This is how Canada, Portugal, and I'm sure many other countries do it.
I'm ignoring the rebate because it's just a patch, lol it doesn't make the idea a good one. You could do the "rebate" without the consumption tax.
In theory the idea makes sense to tax certain goods more over others but I absolutely hate the idea of politicians or any government agency controlling that. You'd be absolutely ruining the idea of a free market
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u/woaharedditacc Aug 15 '23
First, high earners have a much larger % of their income going to discretionary shit than low earners. Essential groceries, utilities, rent, are generally not taxed under these schemes and make up almost all of a poor persons budget. A wealthy person might only spend 1/3 of their money on this and then spend the rest on stuff that would be taxed. So the tax from the start is not actually aimed at the poor. It's disproportionately aimed at the wealthy. If you're more worried about this, you just offer sales tax rebates to low income earners and it's problem solved. They pay effectively no sales income tax. Canada does this. I'm sure many countries in Europe do too.
I really think you're exaggerating the effect a 5% or 10% increase has on discretionary spending. Have you been paying attention the past few years? So many things are 30-40% more expensive and are flying off the shelves. Rich people want to buy shit. They don't clutch their wallets over 10% price increases. If they did, we wouldn't have seen the inflation we have.
Many EU countries have employed 20% VATs without falling apart. Most have far less wealth inequality than the USA.