The Consumption Tax vs. The Income Tax.

I'm interested in seeing what people think when comparing the two. 

Consumption Tax:

    * Economists and tax experts generally favor consumption taxes.[8]

    * Consumption taxes are neutral with respect to investment.[1]

Depending on implementation (such as treatment of depreciation) and circumstances, income taxes either favor or disfavor investment. (On the whole, the US system is thought to disfavor investment.[1]) By not disfavoring investment, a consumption tax might increase the capital stock, productivity, and therefore increase the size of the economy.[1][2]

    * Consumption more closely tracks long run average income.[2]

An individual or family's income often varies dramatically from year to year. The sale of a home, a one time job bonus, and various other events can lead to temporary high income that will push a low or middle income person into a high tax bracket. On the other hand, a wealthy individual may be temporarily unemployed and will pay no taxes.

Or,

Income Tax:

Income tax basics

While U.S. tax law is very complex, the underlying idea is relatively easy to understand. Simplifying greatly, gross income is all income from all sources (§ 61) less any exclusions (§ 101 et seq.). An exclusion is something that Congress has effectively said a taxpayer need not include in his or her income for tax purposes, such as employer-paid health insurance (§ 106) or interest from tax-exempt bonds (§ 103).

For individuals, Adjusted Gross Income (AGI) is gross income less any above-the-line deductions (§ 62). Above-the-line deductions are listed in § 62 and include trade or business deductions, alimony (§ 215), and moving expenses (§ 217). Taxable income is AGI less (1) itemized deductions or the applicable standard deduction, whichever is greater, and (2) a deduction for any allowable personal exemptions for the taxpayer, the taxpayer's spouse (if filing jointly), and the taxpayer's dependents. (In certain cases involving higher income taxpayers, the allowed personal exemptions may be reduced or even eliminated.)

Non-itemizers take the standard deduction. Itemized deductions include any deduction not listed in § 62 such as charitable contributions (§ 170) and certain medical expenses (§ 213). Taxable income is then multiplied by the appropriate tax rate to arrive at the tax due. Tax credits such as the Earned Income Tax Credit (§ 32) or the Child Tax Credit (§ 24) lower the tax owed on a dollar-for-dollar basis. This means tax credits are more valuable than deductions because deductions are applied before the tax rate while credits are applied after. For instance, with a 35% tax rate, a deduction of $100 would save only $35 of taxes while a $100 credit would save $100 worth of taxes.



It seems like Libertarians don't really like either.  If you are a Libertarian, what would you suggest if not Consumption or Income Tax?

I find personal income taxes offensive on several levels.  In order to enforce an income tax, the government must intrude into the privacy of every citizen.  Citizens are required to sign declarations of income, and those who fail to do so must be harrassed into compliance.  Add the complexities of the current system, and the expectation that any citizens could comprehend the tax code becomes upsurd.

There is only one path our of the mess in my mind and that would be abolish it.

my .02

David Jahn

And then what?  Some opponents to the Consumption Tax say that it once again hurts the Middle Class.

There have been people taken to court for tax fraud and for failure to pay their taxes and who've been acquitted using a defense based upon, "The tax code is too difficult to understand."

In the end, you're right. This tax system was built upon socialism and the transfer of wealth from one group to another. The middle class can complain all that they want about the consumption tax, but there is no doubt that EVERYONE would be much better off with reductions in government spending and a modest consumption tax to support the local, state, and federal governments. The consumption tax is non-discriminatory and almost entirely unavoidable for illegal immigrants and those who would commit tax fraud.

I still think that property taxes ought to be replaced first.

Import, Export, Excise to name a few.  Direct tax is permitted as well.

David Jahn

I would rather see a consumption tax or other 'pay as you buy' tax. 

With the income tax, you pay as you earn, and there are so many loopholes, those who can afford tax lawyers can pay next to nothing.  With a consumption tax, you pay for only what you purchase (other than necessities like food), so everyone will pay proportionately.  Drug dealers (who pay no income tax) will have to pay taxes on the new Escalades, Hummers, and everything else they buy, so they will actually be contributing to society for once. 

I think the Fair Tax is a great idea for just this reason.  IMHO, of course   

Russh, thanks for the post and welcome to the club.

David Jahn

Exactly. The big issues with our economic crisis is the Fed's creation of the real estate bubble and the out of control spending. Even if a fair tax is not implemented, the critical thing is that we reign in government spending because the more debt that is accumulated, the bigger a hit the dollar takes.

Here's the big pickle the Fed has gotten itself into. If they raise interest rates too much, then the housing market gets killed and banks who happily lended out money will find themselves not getting it all back, which results in hyper-deflation, creating more unemployment. If they lower the rates, then we get the hyper-inflation and the dollar gets weaker. The key to getting out of this crisis is to first stop spending more than we take in. It's ridiculous that these politicans can't even manage their finances better than I could when I was 5 years old!