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In 1913, Henry Ford wrote the following as the directors had been reaping the rewards of profits - "The wages we pay are too small in comparison with our profits. I think we should raise our minimum pay rate".

Wednesday, August 10, 2011

Consumption Tax?

I was told by someone that I would not win the election. "Maybe not," I said. But Maybe I will. Then they said they support a Consumption tax with a voucher for low income people because Illegals and Drug Dealers would have to pay it.  Which is suggesting they don't pay income taxes.

Either way, I started thinking about the Consumption Tax. I could not support such a system to replace the income tax - even with some kind of voucher or credit system to ease the extra burden on the poor. Here are the reasons :
  • Extra financial burden on the poor and middle class - or extra paperwork or extra 'tax payment card' or something. The tax burden would shift significantly higher onto those who can least afford it. Rich people save a higher percentage of their income than the other two, meaning they would pay proportionally less taxes.
  • A consumption tax discourages spending. The $100,000 home which is now really a $107,000 (not including interest, points, closing costs, etc) home in Mississippi, would become a $167,000 home under a consumption tax. You keep 26% (whatever your tax rate is) more of your money, but everything costs 60% extra (what the consumption tax would need to be in order to replace income tax revenues). A $1.00 candy bar ($1.07 in Mississippi) suddenly really costs $1.67 to buy. A $18,000 compact car suddenly adds $12,060 in taxes and becomes a $30,060 car.
  • While savings would be encouraged, which is a good thing, there is no special incentive to use a 401k or an IRA or any deferred savings for retirement. Perhaps a much higher interest rate on that money would be some incentive, but there would be no up-front costs savings for putting money where you couldn't use it until retirement.
Here is a comment I found on one of the websites about a consumption tax that I mostly agree with :

I don’t think you people really get it. You all keep running these numbers over and over again. The reason people are not spending money isn’t because of the state our economy is in. We got here because over the years the prices of goods and services have continued to go up and the pay for the working man has stayed about the same. So then it comes down to food or your house payment, and that is where the credit cards and loans come into play. But now we are so far in debt that we can’t get any more loans or credit cards, and even if we did we cant pay it back.

These big companies need to pay their workers more and stop keeping all the profits for themselves, then maybe the people would have the money to go buy goods and services and keep this ecomnomy going. The asnwer isn’t more taxes!  The answer is better pay for the working class people in this country. They are the back bone, they are what keep the gears of this nation going. If they don’t have money to spend. Then these companies don’t have the money or means to keep going so they lay off workers. Its their faults not ours. Either lower your prices, or pay us more thats the bottom line.

I wouldn’t mind having a new car or house or tv, but even before the crisis at hand its been either luxury or feed my kids. I can’t pay my bills now and I have nothing to show for what I do spend out a month except for my house. And the way its looking now I might not even have it much longer. And people like you want more taxes. How am I to pay these new taxes? And if I don’t they just come take my house anyways. Try thinking more about the regular guy instead of how to keep the money in the rich mans pockets. The poor are who makes the rich rich.
— Dean
and a selection of another, rather long and collegiate article :

The income tax rests necessarily on the ability-to-pay principle, namely the principle that if a goose has more feathers it is more ripe for the plucking. The ability-to-pay principle is precisely the creed of the highwayman, of taking where the taking is good, of extracting as much as the victims can bear. The ability-to-pay principle is the philosophical embodiment of the memorable answer of Willie Sutton when he was asked, perhaps by a psychological social worker, why he robbed banks. "Because," answered Willie, "that's where the money is."

The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.
That article goes on to repeat my argument / statement  that any tax on a business can not conceivably be "passed on" to a consumer.

Consider: all prices are determined by the interaction of supply, the stock of goods available to be sold, and by the demand schedule for that good. If the government levies a general 20 percent tax on all retail sales, it is true that retailers will now incur an additional 20 percent cost on all sales. But how can they raise prices to cover these costs? Prices, at all times, tend to be set at the maximum net revenue point for each seller. If the sellers can simply pass the 20 percent increase in costs onto the consumers, why did they have to wait until a sales tax to raise prices? Prices are already at highest net income levels for each firm. Any increase in cost, therefore, will have to be absorbed by the firm; it cannot be passed forward to the consumers. Put another way: the levy of a sales tax has not changed the stock already available to the consumers; that stock has already been produced. Demand curves have not changed, and there is no reason for them to do so. Since supply and demand have not changed, neither will price. Or, looking at the situation from the point of the demand and supply of money, which help determine general price levels, the supply of money has remained as given, and there is also no reason to assume a change in the demand for cash balances either. Hence, prices will remain the same.