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    Thursday, March 03, 2005

    Sales Tax

    MGO has a very interesting peace on the flat tax idea. He links to a great article from the Wall Street Journal.

    I have supported a flat tax (in principle, at least) for many years now. I am not an economist, but maybe that's what I like about it so much. Even though I'm not well versed in the arena, I could grasp a flat tax. Also, with my limited two years of economics classes in college, I understand the basics of supply-demand relationships, etc. It makes logical sense to me that overall people would be more likely to save money (as Greenspan testified before Congress) and have more disposable income to spend. Both of these things would help the economy.

    Specifics about a flat tax can be found at ncpa.org and they have another page highlighting the economic effects of a flat tax (from Barry Sheldon at UT Dallas and Roy Boyd at Ohio U.).

    American's have historically shied away from a flat tax. I think it must seem too communist for us. Nobody wants the poorer sections of society to be charged more, do they? Another option that may be more palatable to Americans is the national sales tax. Today Fed. Chair Alan Greenspan argued that a national sales tax or "consumption tax."

    He said:
    "As you know, many economists believe that a consumption tax would be best from the perspective of promoting economic growth — particularly if one were designing a tax system from scratch — because a consumption tax is likely to encourage saving and capital formation."

    Either way, trying to finish my taxes this year (interesting because my wife is not a citizen and we are trying to do her papers for permanent residency also) has definitely pushed me toward advocating some kind of reform. Judging by the positive growth in Europe after the institution of flat taxes, we should give it a look.


    MGO said...

    I see you caught that flat-tax post. To me, a tax like this - a tax on comsumption, rather than production, is much better for several reasons, but it might be hard to enforce.

    But realistically, I'd take anything that could just simplify the way we have to do taxes. As an engineer, I'm all about efficiency, and a complicated tax code means economic inefficiency. Money that could be spent on investments, entertainment, medicine, or education, ends up going to pay people for services or software (or we spend many hours of our time doing it ourselves) - just to know how much we have to pay!

    Not only that, the more complicated the tax code is, the more likely it is to have hidden loopholes for Congressional friends to take advantage of.

    I'm thinking a comsumption tax would have these advantages - what do you think?
    ---1. People are encouraged to save, rather than spend.
    ---2. Since they get to keep all the money they earn, people will work harder (in countries with lower taxes, people tend to produce more and earn more before taxes - data from the econ class my dad is taking right now)
    ---3. The rich may have more money, but they'll be encouraged to spend wisely - so there's a disincentive to waste money on corporate jets and submarines - stuff that makes us normal people jealous.

    The one trouble with a sales tax, though, is that people who earn less spend a greater proportion of their income on goods (but maybe, like sales tax in Texas, you can exclude some food and some basics of the American way of life.)

    But overall I like this idea a lot... Maybe just have to keep on talking about it and it won't seem so radical.

    MGO said...

    One more thing -- talk about efficiency - in some of those flat-tax countries, all you have to do to figure your taxes is fill out a postcard!

    We're working on our taxes, too. It's a pain.

    MGO said...

    Re your tax counting thought - I'm all for it. Lumping everything we buy (new) and figuring out how much we'd pay at a 24% rate. Interesting to see how it affects us differently, since we're both in school, but I've got a spousal income source right now.