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Author Topic: Consumption Tax
Oculus
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Who here is in favor of a consumption tax. If you are not, why not. If you are, why and what form would it take? One of the advantages to a consumption tax is that we would be able to tax black market items such as drugs. When the people who sell the drugs go to buy things they will be paying for. I just want to hear others thought on this. My appologies if this has been covered a long time ago. I did a search for it on the forum and could not find many references to to it.
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Dave at Work
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It might help if you described what you think a consumption tax is. I can't honestly describe what a consumption tax is so it is rather hard for me to get into a debate on the merits of a consumption tax. Based on a plain english interpretation wouldn't a sales tax be a kind of consumption tax?
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Oculus
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That would be how I define it. Instead of having the government collect taxes from your wages they would collect it from when you buy things.
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tonylovern
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ah, but here in america we DO pay a tax on what we make and spend. as for the drug users, i would argue that we get taxed plenty enough by the police and courts.
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FiredrakeRAGE
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'Fair Tax' thread

I'm in the middle of a paper - I'll reply further later.

--Firedrake

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FiredrakeRAGE
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Post deleted because I misread tonylovern's reply.

--Firedrake

[ December 10, 2005, 04:36 PM: Message edited by: FiredrakeRAGE ]

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Dave at Work
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What distinguishes a consumption tax from a sales tax then? Do necessities such as food get taxed at one level and nonnecessities at another? If so then luxury taxes come to mind. Basically I am getting that a consumption tax as you describe it is a beefy sales tax that replaces payroll taxes.

That sounds straightforward enough, but I have no idea what the actual implications are. For example, as hinted at above how do you lighten the tax burden on people living below the poverty level? Do you structure what is taxed at different levels so that necessities are only lightly taxed? What effect might this have on the poor who want to escape the cycle of poverty? I'm sure that there are many goods and services that might seem like a luxury to those of us in the working and middle class, but might be downright necessary for someone who wants to move up to those social strata. Do we tax those goods and services differently based on the income levels of those doing the consuming? If so how do we determine what level each individual should be paying. These are just a few things that jump to my mind as I consider what is a consumption tax.

Now as to the advantage you outlined above:

quote:
One of the advantages to a consumption tax is that we would be able to tax black market items such as drugs. When the people who sell the drugs go to buy things they will be paying for.
I don't think this is as much of an advantage as you think. First of all, they will already be paying sales taxes on the legal things that they buy now anyways. Of course the same could be said for a merchant selling perfectly legal goods. The difference between the two is that the honest merchant will be sending the sales tax portion of his revenue to the government before he spends it on other goods and services while the black marketeer will simply have his entire revenue stream to spend on goods and services without having sent in the taxes due on his illegal goods.

This brings up a disadvantage, in that the major advantage of incorporating has to do with tax structuring and would likely be lost by going away from an income type of tax. Let's say that I have skills as a system administrator and instead of working for someone else I want to work for myself. The first thing I would do is create a legal corporation to do business in my state with myself as owner. Now, I still have to pay sales taxes on goods and services that I consume and pass on sales taxes for goods and services that I provide, but income taxes are computed differently for corporations than they are for individuals. As an individual, my taxable income is computed based on my entire income while as a corporation I get to subtract business expenses before computing the taxable income. For example, Let's say that I have been having a good year. Now I have to decide what I want to do with the excess cash flow. Maybe I have been using my personal vehicle to conduct business and now I can afford to purchase a company vehicle suited to my business needs. Guess what, I get to deduct that expense from the corporate income while computing my taxable corporate income. Used properly, this allows a corporation to grow much quicker than if it didn't have that advantage and growing businesses mean more and better paying jobs.

Still, I don't know all the implications of going away from an income based tax system to a consumption based tax system, and I may well be off on my assumptions as to what a consumption tax is all about but right now I would be against it based on what I have put in this post.

Edited to add:

FiredrakeRAGE, I will take a look at that tread later. I hadn't seen it yet while I was drafting my post here.

[ December 10, 2005, 05:24 PM: Message edited by: Dave at Work ]

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Lisa M.
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We should certainly tax consumption. Geez, those tuberculosis freaks, coughing up blood all the time....
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Pete at Home
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So long as they exempt basic food & like necessities.
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Zyne
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lol Lisa!
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FiredrakeRAGE
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Pete At Home said:
quote:
So long as they exempt basic food & like necessities.
Why? It seems like not making any loopholes anywhere would ensure two things:

1) A relatively low tax rate
2) None of the 'special interest' syndrome that plagues our current system.

--Firedrake

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Lisa M.
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quote:
Originally posted by Zyne:
lol Lisa!

I knew somebody would get it.

Personally, I don't mind a sales tax, as long as it's fairly small. But it cannot replace income tax entirely. Income tax generally goes more to the feds, whereas sales tax is fundraising for the state. I think. My mom does my taxes.

Either way, I don't think that there should be a sales tax on necessary products, like food and medecine. But entertainment items? Why not?

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FiredrakeRAGE
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Lisa M. said:
quote:
Income tax generally goes more to the feds, whereas sales tax is fundraising for the state.
Yes, it does. That's an issue of apportionment though, not the taxation system. If a consumption tax were to be used, I'm sure that there would be a base Federal rate, and a separate State tax percentage.

quote:
Either way, I don't think that there should be a sales tax on necessary products, like food and medecine.
Pete said almost exactly the same thing. I replied:
quote:
Why? It seems like not making any loopholes anywhere would ensure two things:

1) A relatively low tax rate
2) None of the 'special interest' syndrome that plagues our current system.

The Fair Tax idea actually suggests that a flat tax rate could be used, and a given amount of money remitted to each person once a year (or quarter - whatever) to make up for the taxation on the minimal items.

--Firedrake

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Redskullvw
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Of all the types of taxes proposed since I began paying attention to taxes, ie late 1970's the Fair Tax proposal seems to be both fundamentally fair to both the poor and the rich. It also seems to avoid the problems with VATs or pure consumption taxes. It also erradicates the existence of black and grey markets. It also makes possible an effective rate much lower than we have now. It seems to me, as the system stands now, approximately 25% of the human citizens of america and the collective taxation of corporate America pays for the non taxpaying 75% of the rest of the humans in America.

It would seem to me that if everyone paid a tax, that poor people wind up paying zero tax, and corporations and individuals are allowed the advantage to invest freely, only idiots would be against such a system.

Of course many of those idiots happen to be demogouges, tax lawyers, accountants, politicians, political action groups, and non profits which all depend in one way or another upon the special status each enjoys under the current tax code.

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Everard
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"Why? It seems like not making any loopholes anywhere would ensure two things:

1) A relatively low tax rate
2) None of the 'special interest' syndrome that plagues our current system."

Grah. I can explain why this is a bad idea so easily in my head, but I'm too tired and I wrote too much crap today to put it down coherently. So forgive me if this is garbled.

Essentially, there's a segment of the population now that couldn't afford to pay a higher rate on things like food, basic shelter, medical care, etc. If you put a consumption tax on this things, they'll be out on the streets, or starve. In order to prevent that, you'd have to have a method of reinbursement. Which would create the IRS all over again. And the point of a simple tax system is that everyone can understand it. Taxing food, etc, puts in enough complications that you defeat the point of a simple tax system.

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Lewkowski
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Don't put a consumption tax on things like water, electricy, gas, and food and your fine.
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FiredrakeRAGE
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Everard -

I believe the Fair Tax system addressed this, as I explained above. Every person would be remitted a fixed amount of cash yearly (or quarterly). The remitted cash would be just enough to cover the tax on basic expenses (food, etc). Because the remitted amount goes to everyone and not a specific group (and is not varied by income level), it would allow for a significantly simpler system of administration. Instead of having to know the amount of cash each individual makes, the IRS would merely need to know the number of members per houseold.

--Firedrake

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Cytania
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Here in the UK and across most of Europe it is known as Value Added Tax or VAT for short.

Exemptions are expressed as zero rate tax, which sneakily allows these things to be taxed if desired, eg. domestic gas and electricity went from 0% to 5% in the mid-nineties.

-UK exemptions;

Food (but not confectionery/candy)
Children's clothes (but not furs)
Books (but not stationery)

-French Exemption

Eating Out

-German Exemption

Small home improvements (Somebody else vill DIY)

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LoverOfJoy
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As online shopping increases, sales tax (or consumption tax?) will become harder to collect.
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IrishTD
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Ev --

Don't forget that their take-home pay would go up. (Or at least it better...I could see the Congresscritters doing some blend of income and FairTax/Consumption tax....yuck).

LOJ --

There isn't a shortage of online retail able to collect sales taxes (just go buy from a store that has an actual location in your state).

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LoverOfJoy
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quote:
There isn't a shortage of online retail able to collect sales taxes (just go buy from a store that has an actual location in your state).
There also isn't a shortage of online retail that wouldn't charge me sales tax. I go for those.

Unless the tax is pretty low you'll likely find a lot of Canadian sites suddenly getting more business.

If the tax is greater than the increase in shipping you'd pay for shopping at an international site then I'm betting there'd be a massive shift to buying from foreign countries.

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Everard
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"Every person would be remitted a fixed amount of cash yearly (or quarterly)."

Yeah, but why remit when you can exclude categories?

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Redskullvw
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Paul

From what I have heard you say over the years, the Fair Tax proposal would seem to be the plan you yourself would have come up with if you were the person writing new tax law. Maybe you should get the book and read it yourself. Its in paperback now I think, and shouldnt be too hard to find since its on the NYT best seller non-fiction list.

I have a feeling if you read it youd probably be its biggest champion since most of it has been a part of your proposals for years. Matter of fact when I heard about it for the first time I immediately thought, that most of it had been your idea.

Anyway go get a copy, I think youd be a supporter. It is by far the fairest tax system either in theory or reality I have ever heard of.

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The Drake
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Excluding categories is dangerous for several reasons. For instance, let's say you exempt food. Does that mean that when somebody throws a wedding or garden party, that all that food should be tax free? That's entertaining others, not basic subsistence.

The prebate is the way to go, simple and 100% effective. There would be political wrangling about what the "minimum" should be.

Note also, a strong feature of the FairTax is that used goods are not taxed, unlike most sales taxes in current operation. So when a poor family has to buy a used car, it is tax free. Used furniture - tax free. Etc.

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FiredrakeRAGE
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Everard said:
quote:
Yeah, but why remit when you can exclude categories?
The major reason is that it will lead to the tax system we currently have. By not allowing any loopholes, we cut special interest groups out of the tax picture.

--Firedrake

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IrishTD
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quote:
Note also, a strong feature of the FairTax is that used goods are not taxed, unlike most sales taxes in current operation. So when a poor family has to buy a used car, it is tax free. Used furniture - tax free. Etc.
Correct me if I'm wrong here, but isn't the FairTax only on the national level? Or is it designed to work at the state level as well (I'd assume that it *should*)? If a state doesn't implement it, then they can still tax used goods (i.e. a car).
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LinuxFreakus
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Wouldn't people tend to avoid paying taxes by not buying as much? I know I would. I would just save my money and invest, I would rarely buy new things.
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Gary
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A federal consumption tax to replace the federal income tax is a really bad idea for the following reasons:
  • The FairTax turns every business into a tax collector. Every small service business and every Internet business that does not currently collect existing sales taxes will have to collect taxes for the federal government. That means relatively large investments for these companies and ongoing maintenence costs. The costs will no tbe simply absorbed by the businesses but passed on to consumers causing an increase in the cost for their goods or services.
  • Nothing will stop an internet vendor from simply relocating offshore to a country that will not collect those taxes.
  • The national retail sales tax rate under the FairTax plan is 23 percent. That's right 23 percent. Right now, about half of Americans pay no federal income taxes. While this will finally get them into the tax payment group, can they really afford a 23 percent increase in the price of goods or services they desire? Good luck selling this plan to those that currently do not pay federal income taxes!
  • The black market will flourish. Ever see what happens on Tax Free day in Texas? (tax free day means state sales taxes are not collected, runs right before the school year to allow everyone to buy "school supplies"). Its crazy in the stores and that's only to avoid paying an 8.25 percent sales tax. Dangle the 23% savings in front of those living paycheck to paycheck and you're virtually guaranteeing a huge black market.
  • 23% is just the beginning. The initial rate of 23 percent is supposed to begin in 2007. For years after 2007, "the rate of tax is the combined Federal tax rate percentage." This combined percentage is the total of three things: the general revenue rate (stated to be 14.91 percent); the old-age, survivors and disability insurance rate; and the hospital insurance rate. This is all but saying that the rate will be adjusted every year. How many think that adjustment will be downward? Riiigght.
  • Part of the sale of this plan is that it will lead to an end of the IRS. However, this is a federal tax and some agency will have to oversee it. At best, the Federal Sales Tax may reduce the size of the IRS but having never seen an actual reduction in the size of government in my lifetime I would be stunned if the IRS actually shrunk.

A better bet is the flat tax. The current proposal allows for the first $35,000 earned individually to be tax free ($70 for married couples). Those that currently avoid paying taxes because they are too poor to do so would still avoid paying taxes and not see a huge increase in their cost of living as they would under the consumption tax. It would also close the loopholes that allow very rich people to get away with paying virtually no taxes. The flat rate proposal currently lists 17% as sufficient to meet government revenue needs. Some may think it's too low but when you eliminate the deuctions and loopholes it packs quite a wallop. It also eliminates special interests - no deductions or other loopholes for special interests to exploit.

Unfortunately, the flat tax would still not elimintate the IRS.

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Redskullvw
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Gary here is a point to ponder...

Federal Tax Code already makes every single business a tax collector. And because of this many companies are either engaged in Grey market or black market activities. As for absorbing costs, the net effect of compliance costs is far less than under the current tax system. Meaning businesses that currently comply with the current Tax code would get a huge windfall if suddenly the compliance costs of the Fair Tax were adopted.

As for internet or mail order taxation, if they are US based, they will collect the tax, or they will wind up swallowing the cost if the good or service is domesticly sourced.

The black market is flourishing. Under the Fair Tax system, the only way a black market can exist is if someone actually smuggles goods across our borders. Something which is economicly feasible right now, but would cease to be under the Fair Tax.
and thats just the first three issues you had

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The Drake
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quote:
Originally posted by Gary:
[*]The national retail sales tax rate under the FairTax plan is 23 percent. That's right 23 percent. Right now, about half of Americans pay no federal income taxes. While this will finally get them into the tax payment group, can they really afford a 23 percent increase in the price of goods or services they desire? Good luck selling this plan to those that currently do not pay federal income taxes!

I'm just going to pick this one up. First, remember that the FairTax replaces not only the income tax, but also employer and employee shares of FICA taxes. Anyone who works pays FICA tax and payroll taxes.

Second, with the prebate, some proportion of those people will also be paying no tax (or receiving a net gain!). The effective rate of tax, after considering the prebate, remains quite low for low wage earners.

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IrishTD
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quote:
Wouldn't people tend to avoid paying taxes by not buying as much? I know I would. I would just save my money and invest, I would rarely buy new things.
Yet you probably still buy DVD's, CD's, clothes, food (meals out), other electronics, books, stuff for your house, etc. Would your spending habits -- particularly for smaller goods -- really change that much?

*****************
On another note, why hasn't anyone tried pushing the FairTax (or similar) at the state level? Maybe give it a trial run in a mid-sized state to work the kinks out -- and that's where you get nickeled and dimed a heck of a lot more (car registration, licenses of all kinds, sales taxes, income taxes, property taxes, etc.). Maybe instead of the Free State Project we could have the FairTax project....

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LinuxFreakus
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quote:
Originally posted by IrishTD:
quote:
Wouldn't people tend to avoid paying taxes by not buying as much? I know I would. I would just save my money and invest, I would rarely buy new things.
Yet you probably still buy DVD's, CD's, clothes, food (meals out), other electronics, books, stuff for your house, etc. Would your spending habits -- particularly for smaller goods -- really change that much?

*****************
On another note, why hasn't anyone tried pushing the FairTax (or similar) at the state level? Maybe give it a trial run in a mid-sized state to work the kinks out -- and that's where you get nickeled and dimed a heck of a lot more (car registration, licenses of all kinds, sales taxes, income taxes, property taxes, etc.). Maybe instead of the Free State Project we could have the FairTax project....

Yes, my spending habits would change a lot. If I could simply buy used goods and get a huge cost savings... you bet I would. I wouldn't mind buying things on the internet either... not to mention the huge black market that would likely spring up, selling things under the table to avoid taxes. We all know how well prohibition worked with alchohol.
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The Drake
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I don't really see any reason why there would be a huge black market, any larger than the people being paid under the table rather than pay 30-50% in federal withholding tax.
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DonaldD
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quote:
On another note, why hasn't anyone tried pushing the FairTax (or similar) at the state level? Maybe give it a trial run in a mid-sized state to work the kinks out -- and that's where you get nickeled and dimed a heck of a lot more (car registration, licenses of all kinds, sales taxes, income taxes, property taxes, etc.). Maybe instead of the Free State Project we could have the FairTax project.... - IrishTD
Well, for the same reason that it will complicate foreign trade: goods from outside the state will have tax "built-in" so to speak, and then will get dinged with a 30% sales tax when sold inside, whereas goods from inside the state will be manufactured tax-free, and only those goods sold in-state will provide revenue (not to mention how competitors from outside will scream about unfair trade practices: is there already such a thing as inter-state duty?
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DonaldD
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The Drake - there is already a black market for goods to avoid sales tax - and that's just for low levels of sales tax, 5-10%. If you can save 30% on a particular transaction, that's a huge incentive for the less than civic-minded.
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The Drake
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Of course there is. there is also a black market for labor and unreported income. You haven't indicated why you think that the FairTax would be more prone to tax evasion than income and payroll taxes.
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LinuxFreakus
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quote:
Originally posted by The Drake:
Of course there is. there is also a black market for labor and unreported income. You haven't indicated why you think that the FairTax would be more prone to tax evasion than income and payroll taxes.

It would make paying taxes optional. If you don't want to pay taxes then just find a way to get used goods, or find an offshore online retailer. I dunno about everyone else, but if there was a way I could legally keep all my money and spend it as I see fit, then I would do it. I think most people would.
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The Drake
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About the offshore thing, that doesn't really make sense. Since locally produced goods would no longer have embedded taxes (corporate income, payroll, etc.), there would not be a comparative advantage for foreign goods. In other words, you would either be paying the embedded taxes of other nations, or the consumption tax of this nation for goods locally distributed.

Once again, evasion is by definition illegal. Perhaps you're thinking of avoidance, Linux?

But in your own statement you claim you want to keep all your money and spend as you see fit, but if "as you see fit" means owning a car without a previous driver, then you can't avoid the tax.

Why don't you buy used goods now? You'd get a 30% advantage (minimum), which is the amount of federal taxes, more or less.

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LinuxFreakus
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quote:
Originally posted by The Drake:
About the offshore thing, that doesn't really make sense. Since locally produced goods would no longer have embedded taxes (corporate income, payroll, etc.), there would not be a comparative advantage for foreign goods. In other words, you would either be paying the embedded taxes of other nations, or the consumption tax of this nation for goods locally distributed.

Once again, evasion is by definition illegal. Perhaps you're thinking of avoidance, Linux?

But in your own statement you claim you want to keep all your money and spend as you see fit, but if "as you see fit" means owning a car without a previous driver, then you can't avoid the tax.

Why don't you buy used goods now? You'd get a 30% advantage (minimum), which is the amount of federal taxes, more or less.

Why doesn't it make sense? Corporate taxes are a joke, most corporations hardly pay any taxes now anyway, so the real cost of making the goods wouldn't change much, but the price to the consumer would increase due to the new consumption tax. In other countries, that would not be the case, therefore I could buy things elsewhere and save a bundle.

As far as owning cars go, there is no benefit now to buying new ones, and any percieved benefit some people have would only decrease if the prices suddenly went up even more. I have never bought a new car and I don't think I ever would unless there was some cost benefit to me.

[ December 13, 2005, 03:47 PM: Message edited by: LinuxFreakus ]

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