Income Tax vs Consumption, Pollution and Land Taxes

In and of itself this idea seems appealing, but trouble is, you'll then get accused of "selective" taxation.

edited 12th Dec '11 5:48:11 AM by HiddenFacedMatt

"The Daily Show has to be right 100% of the time; FOX News only has to be right once." - Jon Stewart

Can't people own apartments over there? I'm seeing a lot of equating "homeowner" with "houseowner".

Laws are made to be broken. You're next, thermodynamics.

Haven't read all the posts yet, but I'll add some thoughts:

1. I like the idea of a negative income tax. In fact, I think all welfare (except maybe health care for the chronically ill and elderly, and perhaps other specific things) should be replaced by one. That said, 500,000 is way too high, what the heck? A more reasonable target is something like 10 or 20 thousand, enough to survive on but not so much that you'd choose not to work. Of course this should decrease gradually the more you earn, something like 50 cents per dollar so working more is never disadvantageous.

2. I am not certain income tax should be eliminated entirely, but regardless a progressive tax would make no sense in a negative income tax system, regardless of your thoughts on progressive taxes generally.

3. Taxes cause what is called a deadweight loss in economic terms. I'm not sure how to explain this properly, but taxes essentially decrease the size of the pie for everyone. However, this deadweight loss depends on the elasticity of the good or service being taxed, so a perfectly inelastic good would cause no deadweight loss. One such perfectly inelastic good is the undeveloped price of land, so such a tax should form a large part of any theoretical tax reform. This may have a negative effect on home ownership, but I don't see a problem with that.

4. Similar to the above, there is a concept called a negative externality. This is where the price of a good or service, determined by supply and demand, is different from its actual benefit to society because it causes negative effects that are large for society but are not strongly felt by the buyer and seller. This is related to the tragedy of the commons and the prisoner's dilemma. Some such goods and services include the mentioned pollution (or rather goods and services that cause pollution) as well as recreational drugs and probably other things I'm too tired to think of. Taxes on such things are called Pigovian taxes. Because such taxes can avoid the effects of deadweight losses and even create gains these should be a strong part of the tax system. This could also be extended to luxury items like jewelry or fancy cars, although I don't consider media to be a luxury item but a form of artistic expression, which shouldn't be taxed any more than necessities are.

5. Somewhat related is the concept of a positive externality, where a good or service brings benefit to society beyond the benefit provided to the consumer. This is the rational for subsidies, but I oppose subsidies because they encourage corporate interference in government. Instead, where such positive externalities exist a voucher program, like those proposed for schools, would be a better choice.

6. I don't think a general consumption tax is a good idea, because of the deadweight loss I mentioned earlier. The deadweight loss is less for an income tax than a consumption tax because employment is less elastic than consumer goods. If land and pigovian taxes are not enough, then we should resort to an income tax, not a consumption tax.

7. A poster mentioned taxing consumers vs. taxing producers/sellers. Fact is, it makes no difference. Econ 101 will tell you that whether you tax the buyer or seller of a good or service the transaction ends up identical.

edited 13th Dec '11 12:43:13 AM by Drolyt

Yes, I have to admit that there is a dead weight loss in using consumption taxes, much greater than income taxes, usually because wages are not as elastic as prices of commodities. However, consumption taxes create less distortions in the economy. This is because consumption taxes lowers the incentives to consume but not the incentives to invest, produce and save, while income taxes increase the incentives to consume but decreases the incentives to invest, produce and save. While excessive savings beyond planned investment might be a bad thing, there is no empirical proof, no established negative correlation between wages and savings even during recessions, and since there is no statistical evidence I find the so-called 'paradox of thrift' effect might exist but has so little an effect in the economy as a whole. Using a consumption tax, investors will use real savings saved by other people instead of credit. Credit is very different from money in that it cannot move around or circulate: Once you buy a commodity using credit that credit cannot be used by the seller to buy something else until it is redeemed by real money. If you print money excessively, general price level is raised, creating inflation. When a horde of investors excessively uses credit to buy a commodity (let's say, steel) for his investment (let's say, cars), the general price level barely budges, but the price level of the commodity skyrockets. Loose credit is one of the elements which create boom-bust cycles, although I admit it is not the only element. One of the reasons Asia seems to be relatively unaffected by the late 2000s financial crisis is because of it's high savings rate. Whether or not this advantage compensates for deadweight loss is entirely up to interpretation, but I believe it does.

Otherwise, I agree with your other points.

Edit: I set the negative income tax at 500 000 because... I'm not sure, maybe I was having an episode of insanity or something...

edited 13th Dec '11 3:54:00 AM by greedyspectator

Go with "it was a nice round number that I pulled out of my ass".

Fight smart, not fair.

Those are good points about consumption vs income, I'll have to think about it some more. As for savings, I'm confused by some of what I've seen in this thread. Standard economic models have it that saving is a good thing, because savings = investment. This makes sense, since you can't invest spent money, you invest money you save, either that you saved yourself or you are borrowing from someone else who is saving. I had thought the economic consensus was that more investment = healthier, faster growing economy. The problem with the recent economic troubles was that instead of investing in Main Street, the money went into the bubble that was the housing market. When the bubble burst a ton of wealth, savings and investment, was destroyed. In my mind the reason the economy isn't recovering faster is because of the lack of savings, so investment in business just isn't happening. The other big issue is confidence, since lack of confidence in the economy leads to businesses being unwilling to take risks and invest in the future, which in turn leads to a slowly growing economy in a vicious cycle. I'm not sure how to fix that though.

edited 13th Dec '11 11:18:34 AM by Drolyt

I still haven't found a good point against progressive tax rate that isn't either viciously liberterian or ignoring all it's success.

edited 13th Dec '11 7:38:14 PM by Erock

If you don't like a single Frank Ocean song, you have no soul.

Rich people don't want to pay more? It seems to come down to some nebulous concept of fairness, or else some strange conception of trickle down economics that just doesn't work.

Edit: In case I was unclear, I agree that progressive taxes are in general a good thing.

edited 13th Dec '11 8:38:10 PM by Drolyt

0% Income tax rate + $20 000 negative income tax rate is basically progressive taxation, just much simpler and much harder to slip through. As a general rule, the simpler the taxation system is, the harder it is to game and manipulate. One of the advantages of using a flat tax and then supplementing it with a negative income tax is that it is much more difficult to manipulate, while still maintaining a progressive structure. The same simplicity is inside the idea of consumption taxes.

Having that said, redistributive policies in general creates a disincentive for work. This is quite evident in Europe. A negative income tax, coupled with an Earned Income Tax Credit (EITC) does not have this problem. So it is best to simply replace all welfare programs with these kinds of taxes. The net redistribution effect can be fine tuned to be similar or the same as redistributive policies, while having none of the drawbacks.

Edit: Interestingly, there might not be any correlation between tax rate and income inequality. Reagan and Bush tax cuts did not have a corresponding increase in individual income inequality (although there has been a slight marginal increase in household income inequality, which I am not sure why it happened), nor did Bush the first's tax increases on the rich decrease individual inequality. The proportion of taxes paid by the rich in the income tax pool also remained the more or less the same despite decreases or increases in taxes. It seems that income inequality has more to do with the composition of jobs in the economy and the mount of competition rather than taxes. Simple put, the reason individual income inequality is sky high in the US is because there is a high demand of high skilled workers but a low supply of it, while there is a low demand of low skilled workers but a high demand for it. The best remedy is therefore equal access to education and inviting foreign firms and companies to invest in the US in order to increase competition among firms to cut their profits and increase demand for low skilled workers. I think an organization called Institute for Policy innovation has published a detailed study about this.

edited 13th Dec '11 11:51:11 PM by greedyspectator