Monday, May 07, 2007
Why I Love Sales Taxes
Side note: Some of you Public Finance guys out there might take issue with the statement above and say that governments can issue bonds to raise funds. While this might be true in the immediate term, eventually the governments will have to pay off the debt through some other means which comes back to taxation.
Side note 2: OK, I guess the government can also seize assets and sell them off to private individuals in order to raise money but that's not sustainable in the long term and detrimental to a well-functioning state.
Back to the story. With taxation being the only way to raise money, we're left with only two choices: taxing production or taxing consumption. As a firm believer in the free market, I abhor anything that inhibits the creation of value. Taxing production does exactly that. The tax reduces the incentive to produce. Taken to an extreme, there would be no incentive to make goods and provide services people want and shortages would abound (think Cuba -- more on this in the future). Income taxes are a form of production taxes since you pay according to how much wealth you earned.
On the other hand, sales taxes are consumption taxes. They collect funds on transactions that take away from the public good. Each time someone consumes an item, there is less of that item to go around. The more you consume, the more sales taxes you pay.
Many people think that sales taxes aren't fair because poor people can't afford to pay their proportional share of the tax burden. Sales taxes naturally adjust for this since wealthier people can consume more goods/services than the poor and as such would pay more in sales taxes. Wealthy individuals who don't consume goods/services aren't putting a strain on the system and as such shouldn't pay the same amount as those who consume more.
Agree? Disagree? Let me know!
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