Taxing The Rich
The Minor Thoughts Blog has a brief note on taxing the rich calledTaxing Paris Hilton.
Not necessarily Hilton specific, but the concept is sound. If you do away will all forms of taxation and replace them with a consumption tax, the rich will pay more tax simply because they spend more money.
Unfortunately, the Indian government ruined this relatively simple idea recently with the introduction of the service tax. They kept all forms of tax[including the short term capital gains tax of 10% and long term[12months] tax at 0%, yes ZERO] and just added a 10% service tax on all services [legal and medical services included]. Since the wealthy are likely to have more income from capital gains while everyone pays relatively the same for basic services, this is effectively a tax on poor people. WAY TO GO!
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May 24th, 2006 at 11:32 pm
Money Shaker,
All consumption taxes are also effective taxes on the poor AKA regressive taxes per economists.
I prefer a flat tax rather than consumption taxes. Albeit a low flat tax. Consumption taxes tend to have exceptions; i.e. tax everything except food, etc….
Consumption taxes never remain the only tax. Especially when governments need money for extraordinary expenses.
North Carolina has some of the highest income taxes in the country. A good chunk of the taxes were “temporary” taxes increased to compensate for tax revenue drops in 2000. Six years later, they are still temporary. Consumption taxes will be augmented by new taxes due to future economic necesity in the future.
I think India’s decision to tax services was very foolish – socialist minded, most likely. As you pointed out, even poor people buy professional services, though I’m sure they assumed rich buy the majority, hence why they did it.
What the service tax will end up doing is reduce economic mobility and financial independence within the general population. You need good health to save money – now it’s more expensive. Also, you need an accountant and an attorney to amass personal wealth, which will now be harder to do.
Great points raised,
regards,
makingourway
May 24th, 2006 at 11:48 pm
Making out way,
i agree with you in principle. However I think people who earn $40k spend $40k while people who make $400k probably spend atleast $300k. if there was a flat 16% on all consumables, the $40k people would end up paying $6.4k while the rich people[i think people who make $400k should be called rich!] end up paying $48k. that doesn’t sound too bad to me.
Also the $100k that the rich invest, helps stimulate the economy.[actually its $100k less $48k so its only $52k, but whatever].
A 12% flat tax would end up being $4.8k and $48k. Not a big difference either way.
May 24th, 2006 at 11:49 pm
unless the rich end up spending the full 400k, then they pay 64k, which is more than they’d pay under the flat tax. [which incidentally Hong Kong has].
May 25th, 2006 at 10:47 am
Hi. I’m the author of the Minor Thoughts blogpost. While consumption taxes can be regressive, the specific plan I was referring to was the Fair Tax. The Fair Tax features a monthly rebate of taxes paid on essential goods and services. Here’s the explanation from the Fair Tax web page:
All valid Social Security cardholders who are U.S. residents receive a monthly rebate equivalent to the FairTax paid on essential goods and services, also known as the poverty level expenditures. The rebate is paid in advance, in equal installments each month. The size of the rebate is determined by the Department of Health & Human Services’ poverty level guideline multiplied by the tax rate. This is a well-accepted, long-used poverty-level calculation that includes food, clothing, shelter, transportation, medical care, etc.
For more information (and some charts showing typical rebate levels), check out their FAQ.