Income Tax versus Consumption Taxes

gaffer91

Unsure whether to put this here, in the economy section or in the Theory section so mods can move to where they see fit.

Question I want to pose is, in general, do you prefer higher taxes on income or ones on consumption as a means for the government to collect money?

I'm open to correction here as I'm no economist but I was under the impression that not only do the likes of VAT drive up the cost of living but they are also unfair. I believe they are unfair because flat taxes on consumption tend to hit lower earners more because A. They spend more of their income as a whole on consumer goods compared to middle and higher income earners who can save or invest more and B. As with income tax, a fiver extra a week from someone on minimum wage matters a lot more to someone on €100000 a year. Am I mistaken or are these accurate assumptions?

Black Swan

gaffer91 wrote: »

Unsure whether to put this here, in the economy section or in the Theory section so mods can move to where they see fit.

Moved to Irish Economy.

DM_7

High earners probably prefer consumption tax

Low earners probably prefer Income tax on high earners.

Real answer is both are needed and both can be pretty fair.

Tax on fuel for example, people who don't use don't pay. People who use a lot, pay a lot.

People who want a Big New TV pay more tax than a person who wants a medium TV etc.

ardmacha

People have a choice to save and not pay consumption taxes.
There is no VAT on food, so many poorer people do not pay that much VAT and of course a lot of people in the Irish tax system do not pay income taxes, whereas they would in other jurisdictions.

Direct taxes can have a disincentive effect, indirect ones less so.

If there are income taxes at 60%, I might not work the extra hour.
If BMWs have a high rate of VRT, and income tax is not too high, I might work the extra hour to be able to afford one.

Delancey

Direct taxes such as Income Tax are considered ' progressive ' in that they are based on a persons income thus the higher earner pays more which is fairer though the disincentive value of direct taxes should be borne in mind.

Indirect taxes like VAT are considered ' regressive ' in that they do not take account of income and indeed the less-well off may find themselves paying a disproportinately greater portion of their income on these taxes.
The advantage is that if someone does not want to pay the tax then they can in many cases avoid the tax by not buying the taxed product , e.g. alcohol. Indirect taxes also tend to have less of a disincentive effect.

cold case

There is VAT on food. Just depends on what you buy. No VAT on basics like flour, milk, eggs. But just takes biscuits for example: no VAT on plain biscuits, lower rate of VAT on chocolate chip cookies, but there is 23% VAT on chocolate covered biscuits.

It is fascinating what the tax authorities consider luxury items. Shampoo, washing powder, toilet paper, toothpaste; all considered luxuries, at 23% VAT.

Just google VAT rate decisions.

Good loser

gaffer91 wrote: »

Unsure whether to put this here, in the economy section or in the Theory section so mods can move to where they see fit.

Question I want to pose is, in general, do you prefer higher taxes on income or ones on consumption as a means for the government to collect money?

I'm open to correction here as I'm no economist but I was under the impression that not only do the likes of VAT drive up the cost of living but they are also unfair. I believe they are unfair because flat taxes on consumption tend to hit lower earners more because A. They spend more of their income as a whole on consumer goods compared to middle and higher income earners who can save or invest more and B. As with income tax, a fiver extra a week from someone on minimum wage matters a lot more to someone on €100000 a year. Am I mistaken or are these accurate assumptions?

You ask 'do you prefer?' Then go on to say taxes on consumption are unfair. Should the question not have been which of these tax types do you prefer and why? Does the question need to be asked? Perhaps those on high incomes prefer consumption taxes and vice versa - that's if they are motivated by self interest.
In general equity tends to favour income taxes while growth/enterprise are favoured by consumption taxes.
A property tax would be on the consumption side so assume OP favours that.

gaffer91

Good loser wrote: »

You ask 'do you prefer?' Then go on to say taxes on consumption are unfair. Should the question not have been which of these tax types do you prefer and why? Does the question need to be asked?

It is my opinion that income taxes are a preferable way to raise money than consumption taxes (although there must obviously be a balance). I am trying to find out what other people think.

Good loser wrote: »

In general equity tends to favour income taxes while growth/enterprise are favoured by consumption taxes.
A property tax would be on the consumption side so assume OP favours that.

As I made clear in the OP, I do not prefer consumption taxes so why would you assume I favour that? Anyway it's not the likes of property taxes I'm taking about, more things like VAT and VRT.

Pete_Cavan

gaffer91 wrote: »

Anyway it's not the likes of property taxes I'm taking about, more things like VAT and VRT.

But why not talk about a property tax?

Henry George argued that a tax on land value is economically efficient, fair and equitable and could replace all other taxes. Georgism is based on the idea that things found in nature, most importantly land, belong to all of society and therefore those who own it should pay a tax to society for their continued use of the land. Our own Michael Davitt, of the Land League and the "Three Fs" fame, supported this idea.

I certainly believe that we should put more emphasis on a Land Value Tax rather than income tax or other consumption taxes. This would eradicate many of the problems that have caused the current mess, ie. speculative property deals, and encourage people to make efficient use of the land and to develop high value land, while punishing landowners who let their sites fall into dereliction.

Another form of tax which I would support increasing is inheritance tax, it would force people to create their own wealth rather than just be handed it from their parents.

gaffer91

Pete_Cavan wrote: »

But why not talk about a property tax?

No problem with it in principle but would rather this thread did not become another thread on the merits and demerits of the household charge.

Pete_Cavan wrote: »

Henry George argued that a tax on land value is economically efficient, fair and equitable and could replace all other taxes. Georgism is based on the idea that things found in nature, most importantly land, belong to all of society and therefore those who own it should pay a tax to society for their continued use of the land. Our own Michael Davitt, of the Land League and the "Three Fs" fame, supported this idea.

I certainly believe that we should put more emphasis on a Land Value Tax rather than income tax or other consumption taxes. This would eradicate many of the problems that have caused the current mess, ie. speculative property deals, and encourage people to make efficient use of the land and to develop high value land, while punishing landowners who let their sites fall into dereliction.

My main problem with taxing property is that the property a person lives in does not generate income. While I don't really have an issue with a minimal charge to cover some local services, taking money directly out of people's pockets on some crude basis that if they live in a home of a certain value they can afford it seems a bit unfair to me. There are a plethora of people who should be exempted from a property charge- pensioners, a couple who have have a low combined income but saved for years to buy their dream home, a well off couple with a nice home but several kids in college costing them a fortune and so on that I just don't think it is fair.

I don't really buy into his notion that all the land belongs to the people. While I am not against public ownership of lakes, roads etc (In fact I am absolutely in favour of such things), I think that once someone buys their home it is theirs. I don't even see why someone should be "punished" for letting their own property fall into disrepair- after all it is theirs!

Pete_Cavan wrote: »

Another form of tax which I would support increasing is inheritance tax, it would force people to create their own wealth rather than just be handed it from their parents.

I'd wouldn't have as much of a disagreement with this. There would be certain cases, like premature deaths, where it is important that next of kin are looked after but on the whole it is not a terrible idea.

Good loser

gaffer91 wrote: »

As I made clear in the OP, I do not prefer consumption taxes so why would you assume I favour that? Anyway it's not the likes of property taxes I'm taking about, more things like VAT and VRT.

Sorry you're correct. Got that wrong.

Suryavarman

Pete_Cavan wrote: »

But why not talk about a property tax?

Henry George argued that a tax on land value is economically efficient, fair and equitable and could replace all other taxes. Georgism is based on the idea that things found in nature, most importantly land, belong to all of society and therefore those who own it should pay a tax to society for their continued use of the land. Our own Michael Davitt, of the Land League and the "Three Fs" fame, supported this idea.

In the 19th century it would have been fair and equitable because it was rare for poor people to own property. Today it is a different story because almost everybody owns property. Although it would still be very economically efficient if the only tax was a property tax.

Fromthetrees

Ireland has the fifth highest share of indirect taxation as a proportion of its overall tax take in the EU 27 (and the highest in the EU 15).

Pete_Cavan

gaffer91 wrote: »

I don't really buy into his notion that all the land belongs to the people. While I am not against public ownership of lakes, roads etc (In fact I am absolutely in favour of such things), I think that once someone buys their home it is theirs. I don't even see why someone should be "punished" for letting their own property fall into disrepair- after all it is theirs!

It is not just that that all the land belongs to the people, rather that ownership of land is facilitated by laws which society accepts to abide by so it is not unreasonable to expect landowners to pay a tax to society for their continued ownership of the land. And I dont buy the "after all it is theirs" argument - land as a factor of production is fixed in supply so therefore must be used efficiently. Letting property fall into disrepair has an opportunity cost to the economy because that same property, in the right hands, could be used to run a productive business. Focusing (not just through sales, also through lettings) land in the hands of those who will use it productively would be good for the economy.

I am not saying that we should accept Georgism and introduce a land value tax while abolishing all others, I am just pointing out that the tax system doesnt have to be rely on income and transaction taxes. A land value tax would be very efficient with many economic benefits. I am just putting forward an alternative idea rather than the usual "I support increasing taxes on this because it does not effect me" we often get around here.