Should we be taxed on what we earn or on what we spend? Can you explain why?

Question

Also, how does the US system treat this issue ?

Answer 1

The US does both. Income taxes tax what we earn, and sales taxes tax what we spend. Taxing income is better.

Taxing income allows us to tax people who make more money at higher rates. So someone who makes $150,000 each year pays 33% on the last dollar she earns while someone who makes $15,000 per year pays only 15% of the last dollar she earns (and is eligible to get some back!). Taxing only spending doesn't allow us to tax rich people more, and so their tax burden is put on poor people. That's not fair!

Taxing spending does have some advantages: First, it encourages people to save their money. Second, it is very easy to track, because sellers (like Target) have to have bought from someone, so there is a paper trail for all goods on the market. If there's a step where the tax wasn't paid, the government knows to go audit someone.

But if you tax spending you could end up taxing people before they have the ability to pay. If I am buying a house for $500,000, I'm going to borrow most of that money (say, $450,000). If I'm taxed on spending (at say, 20%), I'm going to owe $100,000 in taxes on my new home, so I'll have to borrow $550,000 to buy the house . . . that's more than the house is worth! Taxing income makes sure we only tax people when they have the money to pay the taxes.

Answer 2

What we earn. We are currently taxed, on a graduated scale, on our income. So the more you make, the more you are taxed. If you had a "consumption" tax, the poor would have a higher effective tax rate than the rich since they typically spend a higher percentage of their incomes on living expenses etc. Second, there would be a great debate over what items would be taxed and at what rate. High cost items such as cars, homes (purchased or rented) could be out of reach for many people. In order to replace the current tax revenue, the consumption tax would have to be close to 25% at the federal level alone. There is a lot of propaganda touting a consumption tax, but its just that. And how would you tax foreigners who earn income here but do not have residence here (corporate or individuals). Too many issues for a consumtpion tax to work fairly.

Answer 3

The US taxes earned income and unearned income (interest, dividends, pensions, rental, etc) then allows various deductions against that earned income to create the number "taxable income". As unfair as the current tax system may be in many cases, a tax on what we spend could be potentially difficult for low income individuals. Those individuals now basically pay little or no income tax, which is good because they certainly can't afford to pay that along with basic living expenses. But, the other side of "tax what you spend" can address the black market economy of drug dealers, ammunitions and firearms dealers, etc. who seem to have a lot of cash to throw around. Those people would be taxed on their illegal gains (finally!), but the tax system would somehow have to be adjusted so that the poor got some sort of tax credit to reduce their burden.

Kind of complicated, isn't it?

Answer 4

What we spend.

Taxing earnings promotes spending. Taxing spending promotes saving and increases the available investment pool.

The US system taxes earnings, by direct payroll deduction. This allows our government to reach directly into our pockets for as much as they want, and they have massively abused the privilege. Replacing the income tax with a national sales tax would be a good idea, but given the government's track record of dishonesty on tax and fiscal issues, I think we'd eventually wind up with a national sales tax AND the income tax.

Answer 5

Earn and spend. The US does both, but using different taxing authorities.
The federal government currently taxes income, not spending. In fact, in a business setting spending usually gives a deduction.
Most states also tax income AND spending by imposing a sales tax. Sales tax enables a state or local government to gain revenue from visitors and/or temporary residents who would not be subject to income tax rules.

I am in support of tax simplification, but not a flat tax (i.e. sales tax) at the federal level applied just to spending. It would be very difficult to evaluate supporting social security unless they intend to have payroll taxes stay intact. Of course, they could just end the program too and let individuals invest their own funds and assume their own responsibilities.

Creating a new federal level flat tax would cause issues, more of a mess than would it would be worth.

Answer 6

I'm definitly a proponent on taxing what you spend. It will encourage saving, which will strengthen our economy for the future. I believe that our system is now one of multiple taxation...we get taxed on what we earn, taxed on what we buy, taxed additionally at the gas pump, property tax, capital gains taxes, inheritance taxes...it never stops. I also think taxing on what we buy would help to fund illegal aliens...they don't register with the federal gov. and pay income taxes...but they buy a lot while they live here. Also taxing goods higher would also open up our tax base, as foreign tourists would also contribute to the good of our country. My thoughts go on and on...but some how politicians can't figure out how they can take advantage of that system for their political party and for themslves yet...and when they do...they will all finally begin to push for a national sales tax.

Answer 7

taxed on what u spend would be fairer as people spending more would pay more maybe

most countries go for a mix of the two, so as to make sure u get amounts off people that dont claim or arent honest - it also means if teh economy slows the governments money doesnt dry up as they have funds coming in from somewhere else

for instance in america u pay 6% sales on everything u buy and are taxed a little thru wages

here in uk we are tax 17.5% vat on everyhting we buy, massive duties on alcohol, cigarettes and petrol and we pay about 22% in total of our income thru tax and national insurance

Answer 8

Definately on spending.