Tax the Rich

Economics by Adam on 2006-04-15 12:05

National sales tax is a method of taxation which could replace income tax while maintaining an identical level of federal government revenue. Why switch?

It is ironic that “tax the rich” is a commonly proposed solution to government shortfalls. In fact, income tax (which provides the lion’s share of federal revenue) does not tax the rich; it taxes those who are becoming rich.

Consider: if Joe has $1,000,000 in the bank and has no job, he is not making any money, other than interest on his savings. His taxes are therefore very small - only capital gains on the interest, which would probably come out to around $15,000 a year.

On the other hand, if Sue has nothing in the bank, but is working a job which pays her $100,000 per year, she will pay (counting social security and other pseudo-taxes) around $40,000 in taxes.

Who is more rich? Joe, obviously. But our income tax system does not tax him more.

You might argue that we should tax people for having money, rather than earning it. This, however, would be devastating to the economy. It would be impossible for people to save for their retirement or otherwise put money aside, because it would be slowly eaten away by taxes each year. Everyone would be encouraged to spend their money immediately, rather than saving for the future.

The alternative is sales tax. By shifting the time of taxation from when money is earned to when it is spent, individuals are encouraged save and invest, benefiting both the economy and their own future.

Harry Browne makes some excellent arguments against a national sales tax in the US, and I am not necessarily advocating that this is the best possible move for the US right now. But in general, sales tax is a better way of collecting tax revenues than income tax.

The strongest argument in favor of sales tax instead of income tax is that it taxes the rich - those who spend their money on luxuries today - rather than those who are earning money and saving it.

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