Income taxes can be made progressive. Sales taxes are almost always regressive. Businesses need to do a lot more paperwork to document these taxes.
Why don’t leftist parties campaign to abolish sales taxes and replace the lost revenue with an increase in a progressive income tax?
Am I missing some critical functionality of sales taxes that income taxes cannot replicate?
Edit: Here’s an important feature of sales taxes that a few commentators helped me realize. It’s better if we think of a sales tax as a “revenue tax” instead. Let’s say we are in a country with multiple provinces. A business sells stuff in province A. However, the business and its owners are both located in province B. If sales tax didn’t exist, then all money earned by the business would go to province B’s government. Province A cannot enact tariffs and stuff like that. Thus, it puts up a “revenue tax” that is taxed to business for all revenue earned, i.e., a sales tax.
For those wondering, no, a corporate tax is not a revenue tax. It’s a tax on profit. Non profits for example, do not pay any corporate tax, but they do pay sales tax (which is basically, revenue tax).
People move. You capture revenue from travelers who might not earn income in the area.
Almost half of countries with a sales tax exempt foreigners from sales tax. Even more apply a 0% rate. The US seems to be the only notable exception. This is not a good answer.
To this, I was going to say “but the money they spend gets captured through taxing the income of the business owner”. However, I just realized one issue - the business owner might not be from the jurisdiction of the government either.
For example, if business owner residing in province A is selling stuff in province B, all income would go to province A and province B wouldn’t get anything. The only way for province B to earn money is by taxing all revenue earned by the business in the province, i.e., sales tax. Makes sense now.
Sales tax can be made, and is made, “progressive” by having different tax on different goods. By putting the tax on basic goods (ex food, used smaller cars etc) lower it becomes relatively cheaper to exist. But that yacht can be taxed to high heavens. Further can ownership be taxed, and be made progressive. Big car equals higher car ownership tax. Huge villa? Huuuge property tax. Stocks, funds and other savings easy to tax on value at a certain date.
But I agree, there is little talk about how taxes should be levied (income, consumption, ownership etc). Just amounts.
There used to be a “luxury tax” but it got dropped in 1993. Seems the yacht building industry pleaded poverty.
Even if sales taxes were the same percentage for every item, if you spend more, you’re paying more taxes. Theoretically, richer people would be spending/paying more.
Yes but not as a percentage of their income. A wealthy person with 100000x your income does not buy 100000x times as much stuff as you.
This is the problem with a flat tax. If we had a flat 20% tax on income for someone who makes 50k a year, that is 10k and leaves them with only 40k. For someone who makes 5M a year that is 1M but still leaves them with 4M.
Losing that 10k when you only had 50k to start with matters a lot. Losing that 1M isn’t a big deal when you still have 4M left!
As the other commenter mentioned, what’s important is the percentage of income/wealth that they represent, which is much much lower for richer people. Sales taxes are heaviest on the poor.
You are on point. The more you consume the more you pay in sales tax. Another benefit of consumption taxes is that they are harder to circumvent.
But taxes (in my opinion) is not just to fund communal services such as education, infrastructure and healthcare. They are also an instrument for redistribution of wealth. For that goal having different tax levels on the sale of different gods are necessary, to make sure that everyday items is less of a burden. In a similar vein sales tax can be used to alter consumption patterns. For example away from sodas, towards organic produce, smaller cars.
Sales tax is great! Income tax not so much.
That’s a great question in my opinion and the answer lies in the ways money moves around.
There are a lot of ways to get money that are not limited by income tax, depending on your specific country and tax structure.
Examples can be rent, inheritance, gifts and revenue/profits. I’m addition there is all the money that was earned elsewhere.
I’m short the sales tax is aimed at all consuming entities while the income tax is limited to, well, income. To give another example: Companies themselves consume but don’t give any income tax.
Now the follow up question might be why it’s designed that way. And that is something for the historians to answer. Make the sales tax too high though and people will country hop to shop, make income tax higher instead and you increase wealth gap even further (non income earnings are rewarded more)
Companies themselves consume but don’t give any income tax.
Won’t their owners be the ones paying income tax though? (Aaaaah, but what happens when the owners reside outside the jurisdiction of the government? So a sales tax is more like a revenue tax for businesses).
make income tax higher instead and you increase wealth gap even further (non income earnings are rewarded more)
Aren’t non income earners poor people though? Non income earners benefiting here would lead to a decrease in the wealth gap, no? As for the capitalists who earn very little income and instead increase their wealth through asset appreciation, you could huge progressive capital gains, no?
From a tax perspective:
Stock earnings are not income.
Neither is capital gain - and it would need to be tackled as you suggested with q capital gains tax. But that is quite easy to circumvent in basically all countries because it’s nearly impossible to check (as seen in the many scandals like cumex).
And then there is the whole banking apparatus: I can use stocks as security against cheap loans, use the loaned money for consumption and then lower my capital gains tax by calculating those loans against my gains. Remove that loophole and suddenly a pensioner can’t pay for their running costs anymore
All of that lead down a rabbit hole of “but can’t we just” for me. At least my conclusion: I didn’t come up with something that a) doesn’t break apart already on paper b) can be implemented without international collaboration and c) can’t be abused just as easy.
Personal note and speculation: often I read people taking about a system that is designed against group X. I disagree: the financial systems were not designed with any goal in kind at all outside the specific needs and questions for the specific legislatures. Meaning that “we need to fund a social security system” and “why don’t billionaires pay more tax” have the same root: we humans are terrible at overseeing time horizons of more than a few years. But we’re absolutely genius in taking something apart and finding loop holes the size of a raisin.
And then there is the whole banking apparatus: I can use stocks as security against cheap loans, use the loaned money for consumption and then lower my capital gains tax by calculating those loans against my gains. Remove that loophole and suddenly a pensioner can’t pay for their running costs anymore
I lost you here. How would taxing capital gains affect pensions? Surely a carveout can be made. There’s a difference between (in most countries) mandatory pension plans, index funds and $200k in stocks in the hands of one individual. It’s not as if these are indistinguishable.
Personal note and speculation: often I read people taking about a system that is designed against group X.
A system doesn’t need to be purpusefully designed against a group for it to cause carm against the group. And the system can be mended and modeled to lower the discrimination caused (or to create positive discrimination).
All of that lead down a rabbit hole of “but can’t we just” for me
You do have a point. But, the current system isn’t here from “time immemorial”. Things change, and they do so fast. Some change is inevitable. And the key to making sure “can we just” doesn’t happen is active participation in the discourse.
Oh I am with you regarin both the need for change as well as the potential - I only focus on the question of income vs sales tax structure and abolishing one of the two withouz deeper adjustments.
The pensioner example in more detail, I’m using wrong numbers to make it easier for me :)
I am a pensioner with 100k in my pension fund (which st least where I’m from is treated similar to any other stock fund). I get 1000 Euro out of that per month in capital gain. I would have a 300 Euro tax on that. which I use to pay off my student loan, a consumer loan from a past mistake and the rest of a loan for my flat. I live from my state pension which allows me to barely scrape by.
If I can get tax exempt for paying of my (imo ridiculous) student loan and the rest im fine. How if I have to pay the tax on top of that I’m suddenly 300 Euro down. The social system says “that’s a bad thing, people should have something from their money so we allow them to get tax credits for past debts - after all they did consume for that money and this helps the economy overall”.
Now rich asshole scipiti comes around and says: yo bank, I earn too much, give me 60mio credit, here’s the future capital gain and the stocks as security. Oh and tax man: I can’t pay any taxes because I have to serve this 60mio credit which I used for my second yacht.
What most states do is now make rules which give more details on what can be exempt under which circumstances. But rich me does a quick calculation and it’s way better to pay very smart people to figure out how can I still abuse the system. that’s why we can’t simply close loopholes: a) there might be side effects and that’s a scary thought for law makers. b) we still want certain people to benefit and it’s still worth it for them to benefit even though there is abuse. And sadly c) the incentive to close them is really low as the benefit is low on average for all voters but the pushback I get from the abusers is really big (imagine Elon musks money gets distributed evenly among every citizen of a state where one of his businesses resides vs the damage he can cause to any political individual).
I left the economic discussion btw completely as this is more speculation and political behavioral pattern observation in not exactly equal parts.
God, that seems horrible.
I don’t get taxes on index funds themselves - you don’t “own” anything - it’s basically a savings account that (in general) actually gives you something other than bajillions of a cent.
And there’s no sense in taxing you on what you already own (what you paid in). Especially on pension funds. Selling stock directly is a different matter, but that is done by the fund. They shouldn’t be passing this down onto you, nor should the government double-tax. Why don’t casinos charge capital gains when you cash out? Or stores charge you for gift cards?
Actually casinos so tax you on the US!
And it’s not tax on the owning part but tax on the regular payments you receive from your funds. Think of the thanks stock buybacks or more simple yearly profit shares (dividends).
What you describe ironically is something France tried a but as and Germany is discussing every couple of years: a tax not on income but in wealth. It’s as you described really tough to do right though from what I understand, again because it’s so easy to evade.
Overall an interesting but kind of depressing topic to be honest.
They’re very different, but sales tax does at least two things that income tax doesn’t:
It taxes consumption. If you consume a lot, you pay more sales tax than someone who consumes less.
It taxes the value of the markup on sales transactions. It takes a long time for money to reach the government through company taxes and income taxes. Sales taxes are instant on the transaction. A business buys a product and pays a sales tax to the supplier, and this is deductable. It also sell the same product with a markup, and collects a higher sales tax from he consumer. This difference is payable to the government. Focusing only on this product in this company, the government gets the tax from the markup almost as soon as it happens.
A negative side of sales tax is that it affects poor people more than the rich simply by being a higher percentage of their disposable income. It’s worth noting though that retail pricing is highly psychological. Whenever sales taxes change, the prices usually revert backto whatever price people are willing to pay regardless of how much of the price is taxes and how much is profit.
A business buys a product and pays a sales tax to the supplier, and this is deductable. It also sell the same product with a markup, and collects a higher sales tax from he consumer.
Usually in the US items purchased for resale are tax-exempt. A restaurant, for example, would have a resale certificate on file with their suppliers. Any food, beverage, and disposables they get would have no taxes since they are expected to sell those to a consumer. Cleaning supplies, however, are outside the bounds of their resale cert, so they would pay sales tax on those items.
Also, sales tax is not remitted to the government instantly in the US. I think it’s done quarterly, but I’m not exposed as much to that side of it.
USA is different from the majority of the world on this by having an actual old school sales tax. Other places have value added tax instead. The difference is basically purely administrative. In both cases it’s the final price at consumption that determines the actual government income.
By instant, I mean monthly or quarterly. It’s still much shorter than the annual company tax which itself is only a pre-payment of the owners income tax which would occur several years after the income transaction was made.
It taxes consumption. If you consume a lot, you pay more sales tax than someone who consumes less.
Why would you want to tax (in this case, discourage) consumption though? Isn’t it a good thing when exchange of goods and services for currency happens more in the economy? Let’s take the example of bread. I am better at programming than making bread. Therefore, it is good for everybody if I program more and if the baker bakes more. However, an introduction of sales tax has discouraged me from buying bread. I thus find it more economical to bake my own bread. This is bad from all angles - the baker’s income decreased, the government’s income tax revenue decreased, the baker ain’t going to get better software which I could have made and I’m not going to get better bread.
It takes a long time for money to reach the government through company taxes and income taxes.
Makes sense.
The functionality of being able to disou certain products is something that has been introduced later with differential taxes etc. The initial intention of sales tax is simply to have a transactional taxation.
Sales taxes are basically a flat tax applied based on consumption. Aside from some things being exempt from sales tax and other things being taxed extra, it basically just puts a disproportionate burden on the working class and makes it harder to make large purchases.
It certainly should be opposed by progressive politicians in the long run, in favor of a more progressive income tax system and more direct taxing of revenue. The problem with that, though, is that you’d kind of need to do both at once, or raise taxes on higher brackets first.
You’d also need more legitimately progressive politicians who aren’t beholden to the interests of big business and the ultra rich.
Sales taxes existed first, but income taxes were introduced when prohibition was introduced to make up for the lost tax money.
The same could be asked about, car registration, drivers license fees, court costs, building permits, property taxes, hunting, fishing and marriage licenses. The list goes on and on. If people got as upset about this now as they did back in the day, Boston harbor wouldn’t be close to big enough.
Am I missing some critical functionality of sales taxes that income taxes cannot replicate?
Sin tax. Governments might not want to outright ban something, but increasing the sales tax on it can discourage its use. The opposite is also true. Eliminating sales tax on necessities also eliminates the regressive nature of it since technically people could avoid the tax if they just bought what was required to live. Sales tax is a way to collect tax, but also a way to influence spending habits. Income taxes have this feature as well. Deductions and credits are ways the government encourages certain economic activity without mandating it. More ways to collect tax also means more ways to influence the economy.
Sin tax
That’s excise tax tho.
Income taxes have this feature as well. Deductions and credits are ways the government encourages certain economic activity without mandating it.
Yeah, I can see how sales taxes can be a lot better to do this job than income taxes haha.
Sales tax is different from customs or exise paid on specific items (alcohol, tobacco, etc.) sales is generally levied on the seller, customs and exsises by the importer or manufacturer, and that is generally where the sin tax goes in and allows the state to influence the market by making supply more risky rather than attempting to simply price people out of demand.
Of course the question is do sin taxes work as a way of influencing behaviour, my gut tells me know, because affordability isn’t something on an addict’s checklist, but I don’t care to do a lit review so don’t cite me. What they are good at though is giving the government its share of the whale-meat.
Scotland has been applying a minimum price per unit of alcohol for a little while and it seems to work at least a bit. It doesn’t stop addicts, but it does seem to stop some people who maybe are not addicts but do lack a bit of self control
Only allowing the luxury of alcohol induced recklessness to the rich does not seem like a good idea. Further, if we are talking about benefit to society, that it doesn’t work on the most corrosive type of damage suggests it is much more about the extraction of money than it is about trying to achieve a net good.
I can promise you that poor people are definitely still getting drunk in Scotland. Just a little less so.
that it doesn’t work on the most corrosive type of damage
The data is showing how many deaths it prevented; in my opinion, any case that results in death is quite severe enough to be worth addressing regardless of whether or not it is part of a pattern of addiction.
It’s totally fair if you think that the benefits aren’t worth the drawbacks, that’s a fair opinion to hold. I brought it up because it’s actual data relevant to the point you were making rather than to definitively say that everywhere should apply the policy.
My issue is in pretending that sin taxes are anything but profiteering on human weakness. If the goal is to stop people dying, then it is limp, ban the advertising, take it out of supermarkets, require ID and impose limits. If the goal is to deal with the social harms of alcohol then it is the opposite of effective, pushing addicts closer to poverty, and hitting the poorest the hardest. Minimum pricing has zero effect on anyone who can afford to shop half way up the shelves.
If the goal is to extract money from drinkers, specifically poor drinkers, then it is just fine. The reason why I focus on those dependant on alcohol is that those are the people underpinning the whole industry, and are the ones that end up paying the bulk of the tax, because they don’t have a choice in the matter.
revenue tax.
sales taxes are also somewhat profit taxes because the businesses get tax credits on input purchases. Sales taxes are a tax on imports.
