[NickM]

Not sure why I got downvoted; while it's not super well-known, this is a real and potentially feasible idea that has been studied by economists and has had papers written about it. You can absolutely apply tax brackets to sales tax to avoid making it a regressive tax, it's just a little bit more administratively complex.

[gamblor956]

There are a number of reasons for your downvotes. For starters, income taxes don't disincentive work and are in fact lower now than they were during our greatest periods of economic growth.

And from the perspective of someone who actually works in tax: the "FairTax" simply pushes all the complexity to everyday transactions, instead of minimizing it to periodic transactions occurring 1-2 times a month (with reporting once a year). It would hugely disincentive paying for actual things, and artificially incentivize (untaxed) services over (heavily taxed) goods.

Moreover, the "FairTax" rate would be 30% or more on all purchases. Not only would the FairTax would obscenely regressive in effect, but a tax rate that large would push a substantial portion of the economy underground!

There's so much wrong with "FairTax" that it should be called "Ridiculous Tax."

[dragonwriter]

> income taxes don't disincentive work

While I agree with much of your post, current taxes on income (featuring reduced taxes on capital income, exclusion of most income from gifts/inheritances, and supplemental taxes on labor income [“payroll tax”]) absolutely disincentivize working for income if you have choices of how to get income. Now, lots of people don't have choices and are stuck with work, but that doesn't mean there is no disincentive effect.

(Of course, “treat income as income” makes this much fairer than the status quo, much less the laughably misnamed “FairTax”.)

[gamblor956]

All of those alternative sources of money require an individual to already be quite wealthy: capital income means capital assets; gifts/inheritances means wealthy family. At that point...it honestly doesn't matter how you get your money. Over my career I have provided tax consulting and compliance services to many HNW individuals, and income taxes were never once a disincentive to working. A person rich enough to choose how they earn their income works because they choose to.

(Note: payroll taxes such as FICA, etc., actually phase out pretty quickly after $100k in earnings, so they're regressive in nature. There is the high-wage supplemental tax, but this is offset by the cap on income subject to SSI tax, so workers earnings more than $140k actually pay less in payroll tax.)

That being said, I agree that capital gains should be treated as regular income (as it was historically, pre-Reagan) and that income received via gift/inheritance should not receive a FMV cost basis.

[unethical_ban]

That is probably different than the incorrect argument I've often heard, that "if I get paid more and move into a new tax bracket, I'll net less money" which shows up when someone doesn't understand the concept of taxation on marginal dollars.

I think the people who argue for higher taxes on wealthier brackets also argue for capital gains to be taxed at a similar/equal rate to income.

[NickM]

Right, exactly. And besides the examples you mentioned, the differing income tax brackets on married couples is also a big example of this. If only one spouse is working, and the second spouse is deciding whether to get a job, then having all of the second spouse's income taxed at a higher marginal rate from the get go can easily influence people's decisions.

[gamblor956]

Note: for married couples, the tax bracket thresholds are doubled, except for the highest (37%) bracket, which kicks in for couples making more than roughly $625k but for singles at roughly $520k.

The actual effect is that you need to actually have a huge wealth disparity between partners' earnings for the so-called marriage penalty to kick-in. Fox News notwithstanding, the overwhelming majority of married couples will not see a marriage penalty.

[NickM]

All true, and good points. However the marriage bonus for single earners is much greater than the bonus for double earners, so if you look at it from a certain angle there is sort of a penalty for dual earners vs sole breadwinner marriages.

[fallingknife]

Denmark and Sweden have VAT rates of 25%, so it's not nearly as unrealistic as you make it out to be.

[NickM]

I think you're making some incorrect political assumptions about my views. I have no idea what this "FairTax" thing is that you're referring to, but that sounds like something pretty different from what I'm talking about.

[gamblor956]

Your parent comment described one of the proposed ways for implementing the FairTax system, in which a national sales tax would replace the national income tax.

Even if you did not mean to suggest FairTax and you mean something very different, your proposal still ends up being significantly more complicated than an income tax, since now taxpayers must track all purchases made over the year rather than the relatively limited sources of income they have. Your proposal would increase the compliance burden on buyers, sellers, and the government.

[NickM]

No, my comment said calculate total purchases for the year as (reported income minus reported money added to savings) which specifically does not require tracking any purchases, only income and contributions to bank/investment/retirement accounts and such.

By not tracking purchases individually, and only inferring the total amount of money spent by subtracting savings from income, you can also apply brackets to purchases, and thus avoid the regressive nature of a "simple" flat sales tax.