Arguments Against Flat or ConsumptionTax?

Discussion in 'Economics' started by ktmexc20, Aug 2, 2006.

  1. I'm sitting here watching Sen. Grassley on CSPAN talking about the current tax reform+ measures before the Senate right now.

    I'm wondering, what are the reasonable arguments being made for reasons to not go in the direction of overhauling the tax code in favor of a flat or consumption based taxing system.
  2. GTS


  3. This might not be a reasonable agument, but the fact is that a flat tax would put thousands of accountants/lawyers out of work.

    From my understanding, IRS procedures are codified from a vast patchwork of "letter rulings". Most of those letter rulings are/were obtained by accountants/lawyers. So, the're the ones who got us to where we are.
  4. REASON ONE: A consumption based tax would probably not simplify the tax code in the long run, because then every industry would have its own lobbyists demanding exceptions to the rule. We have that situation now in the states; certain products get taxed when you buy them, but other products don't.

    The advocates for the poor would say "don't tax child products, or school supplies for the kids, diapers, basic food essentials." Advocates for the real estate industry would say "don't tax the sale of property." Lobbyists for Ford and GM would demand exceptions for American car buyers. The securities industry would demand exceptions for investors; the futures industry would demand exceptions for short-term traders.

    Considering how many different things one can buy, imagine all of the lobbyists stinking up D.C. Kind of like now, but probably even worse, since the tax rate would probably be higher than your standard 6% state sales tax
  5. REASON TWO: The tax rate would be almost certainly much higher than we're used to, and therefore there would be a greater temptation to create black markets.

    Rignt now, the cigarette tax in certain states is extremely high, and as a result you have, guess what, a black market for cigarettes. Can you imagine the law enforcement that would be needed to enforce a 20% or higher consumption tax and to stop all of the potential black markets?

    An average law-abiding citizen would be more tempted to cheat the system if it involved a lot of money. 20% on a $30,000 car would be 6K, plus of course state sales taxes and other fees.
  6. REASON THREE: Creative individuals would find exceptions to the rule that would lead to decreased revenue (OK if there is no deficit and no out of control spending, but that's all we've had since 2000). The resulting complications would reduce any possible positive effect of the so-called simplification.

    Would the consumption tax count towards used items? If so, that means that everytime some bought a used car from an individual who put an ad in the newspaper, the buyer (or would it be the seller? Someone!) would have to pay some tax. Right now, the seller probably is taking a loss selling the depreciating car anyway, so there would be no capital gains tax. Imagine the new consumption tax IRS going through the Daily Shopper and questioning individuals about paying their tax.

    What about bartering? Would that count toward the consumption tax? If not, then look out. Imagine an eBay for bartering as a way to not pay the huge consumption tax.

    What about trading stocks? Oh, that would be an exception, because you don't "consume" stocks and bonds (imagine the outcry if that exception was granted, and they'd be right). Oh, but you don't "consume" education either. Would THAT be taxed?

    What exactly is the definition of "consumption"? Is anything bought or sold part of that which is "consumed"? If so, imagine the complicated tax code and the new invasive enforcement to prevent abuse.

    I am no tax professional, but I know human nature well enough to know a lemon when I see it. And the "consumption" tax--at least the forms that I have seen proposed--looks like a lemon to me.
  7. gnome


    The only moral thing to do would be scrap the tax code and initiate either (a) a flat income tax. (It's against the law to discriminate against groups of people based upon a number of things, but it's not against the law to discriminate against people based upon income... and that's wrong.), or (b) a consumption tax, or (c) both.

    Much of "illegally avoided" taxes could captured in this manner.

    We could still have exemptions from either tax, but they need to apply to all people equally.

    However, I'm not holding my breath waiting for the US Gummint to do anything which is moral.
  8. REASON FOUR: I didn't even get to the anti-progressive nature of the tax, but I'm tired of writing, so someone else do it.
  9. nitro


    I wish I knew more to able to converse about it. From what I hear, it would be catastrophic for the poor, as the tax collected would not be anywhere near enough for [needed] social programs. But that is me restating what someone else said, not what I believe.

    FWIW, I believe this is the #1 political issue facing domestic politics.

  10. Arnie


    I think the true value of the flat tax is that it may finally motivate people to undertake some genuine tax reform winthin the current system. There is no way on God's green earth that a flat tax will fly BY ITSELF. Too many people have a vested interest in the current system, so why not just reform what we have?
    #10     Aug 2, 2006