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*End Is Forever*
04-07-2008, 21:08:57
http://news.bbc.co.uk/1/hi/business/7490346.stm

Well, more likely P&G profits rise than cheaper Pringles, but one can but hope...

Scabrous Birdseed
04-07-2008, 21:19:43
Oh just tax everything sold uniformly already. Except cultural products.

Dyl Ulenspiegel
04-07-2008, 21:22:47
But tax cultural potato products.

Kitsuki
04-07-2008, 21:23:53
Originally posted by *End Is Forever*
[url]

Well, more likely P&G profits rise than cheaper Pringles, but one can but hope...

I want commission for this remark! :shoot:

mr_B
04-07-2008, 21:23:55
what about bananas

Dyl Ulenspiegel
04-07-2008, 21:25:27
There is 1.3 % banana starch in Pringles.

*End Is Forever*
04-07-2008, 21:32:07
Originally posted by Scabrous Birdseed
Oh just tax everything sold uniformly already. Except cultural products.

Cultural products being...?

alsieboo
04-07-2008, 21:52:19
wow. Might actually go buy some now

Immortal Wombat
04-07-2008, 22:41:27
Originally posted by *End Is Forever*
Cultural products being...?
Football shirts?

MDA
07-07-2008, 13:06:32
yougurt and cheese? :)

Debaser
07-07-2008, 13:11:20
Stuff like those little Routemaster models and keyrings they sell everywhere in London?

Vincent
07-07-2008, 13:35:02
Bowler hats

Scabrous Birdseed
07-07-2008, 16:48:44
Originally posted by *End Is Forever*
Cultural products being...?

Books and theatre tickets and stuff. Obviously deserving of a tax break.

Funko
08-07-2008, 07:59:21
Just get rid of VAT altogether and replace it with a higher income tax.

mr_B
08-07-2008, 08:03:57
what in the VAT sits does not get sour

Scabrous Birdseed
08-07-2008, 08:10:32
Originally posted by Funko
Just get rid of VAT altogether and replace it with a higher income tax.

QFT

Dyl Ulenspiegel
08-07-2008, 09:14:03
Would make sense, but will never happen. VAT is a hidden tax the politicians love. While adding 10-15 %-points on income taxes would kill them.

Greg W
08-07-2008, 10:08:33
Scrap income tax and all sales taxes, and introduce higher company taxes.

Funko
08-07-2008, 10:48:59
Originally posted by Dyl Ulenspiegel
Would make sense, but will never happen. VAT is a hidden tax the politicians love. While adding 10-15 %-points on income taxes would kill them.

Yeah, I know. :(

KrazyHorse
08-07-2008, 12:34:02
Originally posted by Scabrous Birdseed
Books and theatre tickets and stuff. Obviously deserving of a tax break.

Why?

KrazyHorse
08-07-2008, 12:34:46
Originally posted by Funko
Just get rid of VAT altogether and replace it with a higher income tax.

Income taxes (compared with consumption taxes like the VAT) are disincentives to savings.

Funko
08-07-2008, 12:47:31
It only makes a difference to your incentives to save if you never plan to spend it. If you are saving for something specific then you just have to save 17.5% more to pay for the tax on whatever it is you buy.

mr_B
08-07-2008, 12:52:54
Originally posted by Greg W
Scrap income tax and all sales taxes, and introduce higher company taxes. fokU

Dyl Ulenspiegel
08-07-2008, 13:08:34
Originally posted by KrazyHorse
Income taxes (compared with consumption taxes like the VAT) are disincentives to savings.

So as consumption taxes may be deferred, they are in effect a tax subsidy for savings. BURN THEM!

KrazyHorse
08-07-2008, 13:11:55
Originally posted by Funko
It only makes a difference to your incentives to save if you never plan to spend it. If you are saving for something specific then you just have to save 17.5% more to pay for the tax on whatever it is you buy.

This is completely untrue, assuming that "income tax" does not solely mean "earned income tax". Because the principal is taxed when you earn it as well as the interest it results in a higher effective tax rate.

For instance, say that you have made 10000$ (pretax) which you can either spend or save and the rate of return is 8% (comounded annually)

If there is no income tax then you can spend 10000$ now or you can spend 21589$ in 10 years. Now, assume that there is a 30% income tax rate. You can spend 7000$ now, or you can wait 10 years and spend:

7000$*(1+0.08*(0.7))^10 = 12071$ in 10 years, giving the effective tax rate on 10 year delayed consumption as 44.1% (note that all these are on a tax-inclusive basis while the VAT and other consumption taxes are generally quoted on a tax-exclusive basis)

KrazyHorse
08-07-2008, 13:12:54
Originally posted by Dyl Ulenspiegel
So as consumption taxes may be deferred, they are in effect a tax subsidy for savings. BURN THEM!

I don't see that. The taxes are deferred, but you are not charged taxes on the principal alone...

KrazyHorse
08-07-2008, 13:20:03
Flat, constant (over time) consumption taxes (or, equivalently a flat, earned-income only tax) remove the distortion on intertemporal consumption choice.

If you charge a 17.5% VAT (tax exclusive basis) then, relative to the non-taxed alternative you will consume 14.9% less today, or 14.9% less tomorrow, or 14.9% less a hundred years from now.

Assuming that people (as a group) properly plan their consumption to maximize utility then removing the intertemporal distortion results in a deadweight gain...

King_Ghidra
08-07-2008, 13:24:20
this thread moves too fast

Dyl Ulenspiegel
08-07-2008, 13:29:25
So what to make of "Income taxes (compared with consumption taxes like the VAT) are disincentives to savings." then?

Income taxes subsidise consumption?

Funko
08-07-2008, 13:34:51
Originally posted by KrazyHorse
This is completely untrue, assuming that "income tax" does not solely mean "earned income tax".

Yes, that was what I meant. Income tax is earned income tax. Tax on savings or investments is capital gains tax, tax on businesses is corporation tax etc.

You haven't included the increased cost of goods in your spending power. You also take the 10,000 dollars pre-tax. The only saving I can do income tax free is into a pension. If all your savings are tax free then it'd totally change the equation. And if you scrapped income tax VAT would have to be higher than income tax currently is to make sure the government got the revenue it required. You also haven't factored in that you can't actually live without spending money if you just put everything into savings.

The problem with VAT is that it is horribly regressive. It hits the poorest people the hardest. Unless there are massive income tax breaks for low incomes then high VAT means that the poorer you are the higher proportion of your annual budget you pay in tax.

KrazyHorse
08-07-2008, 13:36:34
Income taxes subsidise immediate consumption at the expense of delayed consumption, yes. Taxes have to be raised somehow. Since some revenue comes from the relatively high tax on delayed consumption, then in a world where delayed consumption is treated equally with immediate consumption the taxes on immediate consumption would have to be higher than they are currently (including income and direct consumption taxes).

Obviously both income and VAT are taxes, so neither actually increases consumption (now or later); it's just that income taxes reduce delayed consumption more than they reduce immediate consumption.

KrazyHorse
08-07-2008, 13:50:24
Originally posted by Funko
Yes, that was what I meant. Income tax is earned income tax. Tax on savings or investments is capital gains tax, tax on businesses is corporation tax etc.

At least in North America, capital gains, interest, dividends etc. are all reported on your personal income tax forms. The word "income" refers to all sources of personal revenue, from earned as well as unearned sources. Rates on different forms of unearned income are sometimes different from those on earned income, and are sometimes identical. For instance, in the US, interest income is taxed at an identical rate to earned income. Capital gains on long-held assets (1 year? more?) are a flat 15%, while on "speculative" assets are 30%. Dividends are taxed at 15%, IIRC (this is one of Bush tax cuts). Nevertheless, when you say "income taxes" it's generally taken to mean a broad range of sources of income...

You haven't included the increased cost of goods in your spending power.

Inflation is another source of intertemporal distortion. It points in the same direction as the distortion from taxing principal as well as interest.

You also take the 10,000 dollars pre-tax. The only saving I can do income tax free is into a pension.

In the "no tax fantasy world" case I am simply providing the numbers to show you what the baseline is. The point is that compared to a world where there are no taxes you can either consume 30% less now or you can consume 44.1% less ten years from now (given the totally made up numbers I quoted).


If all your savings are tax free then it'd totally change the equation.

Errr...what? Please read what I wrote again. In a world with no tax I left the principal at 10000$ or let you spend 10000$ immediately. In the world with a flat 30% income tax I let you save 7000$ at a rate of return 30% lower than the nominal rate, or I let you spend 7000$ immediately.

And if you scrapped income tax VAT would have to be higher than income tax currently is to make sure the government got the revenue it required.

Of course, but I don't see your point.

You also haven't factored in that you can't actually live without spending money if you just put everything into savings.

?

What? I'm not assuming anything of the sort. I'm showing you what happens when it comes time to make a choice with your disposable income. Say you made 60000$ and spent 50000$ keeping body and soul together. The last 10000$ is what I'm interested in...

The problem with VAT is that it is horribly regressive. It hits the poorest people the hardest. Unless there are massive income tax breaks for low incomes then high VAT means that the poorer you are the higher proportion of your annual budget you pay in tax.

a) It depends what you mean by "annual budget". I agree that relative to income those who are poorer will pay more of their salary in tax than those who are richer (since the richer ones tend to save more)

b) I am in complete agreement that there needs to be redistribution. Which is why I would suggest significant lump-sum payments to every individual...

Dyl Ulenspiegel
08-07-2008, 13:57:47
Originally posted by KrazyHorse


If there is no income tax then you can spend 10000$ now or you can spend 21589$ in 10 years. Now, assume that there is a 30% income tax rate. You can spend 7000$ now, or you can wait 10 years and spend:

7000$*(1+0.08*(0.7))^10 = 12071$ in 10 years, giving the effective tax rate on 10 year delayed consumption as 44.1% (note that all these are on a tax-inclusive basis while the VAT and other consumption taxes are generally quoted on a tax-exclusive basis)

Not to argue about the principle, just for the possible takes on this:

For an equivalent VAT that shaves off 30 % (42.9 % rate) you'd get 7000 instant "net" consumption or 15112 deferred "net" consumption. The ~3000 in difference is the result of paying the tax later.

Now I can view this effect as an interest free tax credit for saving, or I can see it as a tax penalty on instant consumption. Neither is really neutral.

KrazyHorse
08-07-2008, 14:00:53
Redistribution is a poor argument for income (broadly defined) compared to consumption taxes. There are more efficient ways to accomplish it (which do not distort intertemporal preferences).

A better argument against a wholly-consumption funded revenue system would be that the rates would be so high that avoidance activities would significantly reduce revenue and increase deadweight losses. However, the current rates of income tax (from all levels of government) are generally higher than current rates of consumption taxes, so even this argument would suggest that we should still be moving toward higher consumption taxes and lower income taxes.

KrazyHorse
08-07-2008, 14:09:37
Originally posted by Dyl Ulenspiegel
Not to argue about the principle, just for the possible takes on this:

For an equivalent VAT that shaves off 30 % (42.9 % rate) you'd get 7000 instant "net" consumption or 15112 deferred "net" consumption. The ~3000 in difference is the result of paying the tax later.

Now I can view this effect as an interest free tax credit for saving, or I can see it as a tax penalty on instant consumption. Neither is really neutral.

That's the whole point of comparing to the "tax-free fantasy world".

In a world with no taxes there are no taxes. I hope you can agree to that. In the world with the flat 30% income tax the effective tax rate on 10 year delayed consumption is 44.1% while on immediate consumption it's 30%.

The 3000$ difference comes from taxing the delayed consumption at a higher effective rate than the immediate consumption. That's no a matter of opinion. That's a fact. I'm not making any sort of moral judgment on taxing deferred consumption at a higher rate, but do you see why there might be a deadweight loss associated with it? The differential rate will probably cause people to drop deferred consumption more than they drop immediate consumption (taxed world compared to no taxed world). This is a change in overall behaviour due to the tax system (savings ratio to post-tax income is lower than the fantasy world savings ratio to nominal income would be) and these tend to lead to deadweight losses.

KrazyHorse
08-07-2008, 14:12:59
It's the same argument as that with the principle residence mortgage deduction in the US...

If I don't tax interest on mortgages for principle residences then I'm taxing other investments at a higher rate than housing. This leads to overinvestment in housing...

KrazyHorse
08-07-2008, 14:14:42
It's not often a North American tells two Europeans that they're doing things better than we are and has them argue back...

KrazyHorse
08-07-2008, 14:16:23
It should also be noted that it's generally far easier to avoid income taxes than it is to avoid a multi-staged consumption tax like the VAT...

Dyl Ulenspiegel
08-07-2008, 14:28:28
"The 3000$ difference comes from taxing the delayed consumption at a higher effective rate than the immediate consumption."

That is what I said expressed slightly differently.

Also, accept your Canadianness. :D

Dyl Ulenspiegel
08-07-2008, 14:35:04
Originally posted by Funko


The problem with VAT is that it is horribly regressive. It hits the poorest people the hardest. Unless there are massive income tax breaks for low incomes then high VAT means that the poorer you are the higher proportion of your annual budget you pay in tax.

Well you have to do a cost/benefit calculation for the "poorer". We here in funnymountainland have regressive taxes for social insurance, VAT* and other consumption taxes, and a progressive income tax. Overall, they give pretty much a flat tax from maybe 10k /year income on.

The redistribution effect comes through thinks like "free" eduation and healthcare which could be seen as a per capita lump sum of ~2000 and ~3000 annually, which is lot more worth for a low income earner.

*VAT has small progressive components, like lower or zero rates for food.

Funko
08-07-2008, 14:57:42
Originally posted by KrazyHorse
Nevertheless, when you say "income taxes" it's generally taken to mean a broad range of sources of income...


I never used the term "income taxes". I said income tax. It's obviously a transatlantic difference. When I talk about income tax I am talking about the specific UK tax that's called income tax, which is a tax on your earnings from paid work. Other sources of income have different tax thresholds and are taxed at different rates. For most people Income Tax is the only one of the "income taxes" they have to pay and most people don't need to do a tax return.

Your 'tax free fantasy world' seems to be exactly that.

KrazyHorse
08-07-2008, 15:29:36
a) Continuing on this semantic quibble, do you not consider investment earnings, dividends, interest etc. to be income?

b) The fantasy world scenario is there for two reasons:

i) To convince you of the fact that VAT is relatively more advantageous for savers compared to a system of income taxes (which include taxes on all forms of income)

ii) To demonstrate why an income tax (again, broadly defined) is in general more distortionary than a consumption tax

Funko
08-07-2008, 15:30:50
semantic quibble, schmemantic quibble.

Dyl Ulenspiegel
08-07-2008, 15:34:58
schmemantic schmibble

Scabrous Birdseed
08-07-2008, 15:56:50
Sorry, I know very little about economics, but what exactly is the point of encouraging people to save rather than consume? I can see it from a personal standpoint, but doesn't the economy grow faster if people (especially the rich) don't save?

Dyl Ulenspiegel
08-07-2008, 16:47:28
Only short term. In national accounts, savings equal investment, which means they also translate into demand (for structures, machines etc) and provide the capital stock for production. The US is just beginning to suffer the consequences of artificially reducing savings.

Artificially raising savings doesn't make much sense either, though.

KrazyHorse
08-07-2008, 17:14:49
Originally posted by Scabrous Birdseed
but doesn't the economy grow faster if people (especially the rich) don't save?

Kneejerk Keynesianism/broken window fallacy. Savings today = more money tomorrow. For both the individual as well as society.

There is relatively little evidence that the economy is operating at chronic undercapacity.

A savings rate of 0% or a savings rate of 100% are both obviously non-ideal. Key to finding the "right" (optimal utility) level is to allow people to capture the full marginal product of their savings. Taxation which punishes savings (future consumption) relative to current consumption will push savings levels below their optimal levels. This change in behaviour leads to a deadweight loss, unless you can demonstrate that there are other distortionary trends it offsets/

Scabrous Birdseed
08-07-2008, 18:09:52
Hey dude, just asking. It's not like I support economic growth anyway - we need to reduce consumption and energy use in a major way.

KrazyHorse
08-07-2008, 18:11:28
I'm not trying to insult you; it's just that I see it a lot...

Kitsuki
08-07-2008, 19:21:03
Originally posted by Dyl Ulenspiegel
Only short term. In national accounts, savings equal investment, which means they also translate into demand (for structures, machines etc) and provide the capital stock for production. The US is just beginning to suffer the consequences of artificially reducing savings.

Artificially raising savings doesn't make much sense either, though.

However, it's arguably better at the moment for people to spend (within their limits) during a downturn as it helps stave off recession by keeping the economy going. If everyone saves, is cautious with spending and cautious when considering moving house then the economy slows even faster...

Dyl Ulenspiegel
08-07-2008, 20:15:06
Worked brilliantly for Japan.

That policy makes sense in a normal cycle. "At the moment" you have the slow bursting of bubble economies, and rebalancing the savings rate, deleveraging and getting down asset prices is required for future growth.