Replacing income and payroll taxes with a payroll-exempt and dividend-exempt VAT

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kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Replacing income and payroll taxes with a payroll-exempt and dividend-exempt VAT

The Fair Tax Book claims that VAT (value added tax) is the most efficient collecting government revenue (while arguing that the FairTax is the fairest kind of tax). Either way, the authors of the book admit that a VAT is a less painful way to fill up public coffers. I think we can replace the income tax and payroll taxes by a VAT that exempts both payroll and dividends. Not only does this means that companies can afford better pay for thier workers and shareholders, they essentially get a tax break when the employee's and shareholders (usually employees themselves) are paid more. By replacing the income and payroll taxes with VAT exempting payroll and dividends, the employment rate and the return of investment will skyrocket, and there will be more jobs allowing more goods and services to be provided. American workers would regain competitive confidence and be more able to pay their debt to future generations.

If exempting payroll and dividends causes the rate to be unmanagable, payroll and dividends should still be exempted while a consumption tax that matches the VAT rate would help to reduce the required rate. In that case, the tax base would be equal to Gross Profits MINUS Payroll PLUS GDP. According to Bruce Barlett, opponent of the FairTax, payrolls are 85% of GDP. GDP itself is simply the sum of Gross Domestic Profits. Therefore the tax base would be 115% of GDP, and this means the tax rate does not have to be high at all (around 17% to match 20% of GDP). If people earning more money through work save their money, then that money will remain untaxed indefinitely.  Those savings are passed on from parents to children, helping them pay down loans and other things.

So in my proposal, business would cut taxes by investing a greater proportion of their revenue in labor and capital markets. This tax avoidance behavior would on a direct 1:1 basis facilitating the
growth of investment in American supply of labor, which in turn increases the revenue
generating capacity of American businesses.

What could be less painful on our wallets than
getting rid of income taxes and payroll taxes while using the values of payroll and dividends as a tax base exemption to allow for greater income opportunities?

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Replacing income and payroll taxes with a ...
kmarinas86 wrote:

The Fair Tax Book claims that VAT (value added tax) is the most efficient [means of] collecting government revenue (while arguing that the FairTax is the fairest kind of tax). Either way, the authors of the book admit that a VAT is a less painful way to fill up public coffers. I think we can replace the income tax and payroll taxes by a VAT that exempts both payroll and dividends. Not only does this means that companies can afford better pay for thier workers and returns for their shareholders, they essentially get a tax break when the employees and shareholders are paid more. By replacing the income and payroll taxes with VAT exempting payroll and dividends, the employment rate and the return of investment will skyrocket, and there will be more jobs allowing more goods and services to be provided. American workers would regain competitive confidence and be more able to pay their debt to future generations.

If exempting payroll and dividends causes the rate to be unmanagable, payroll and dividends should still be exempted while a consumption tax that matches the VAT rate would help to reduce the required rate. In that case, the tax base would be equal to Gross Profits MINUS Payroll PLUS GDP. According to Bruce Barlett, opponent of the FairTax, payrolls are 85% of GDP. GDP itself is simply the sum of Gross Domestic Profits. Therefore the tax base would be 115% of GDP, and this means the tax rate does not have to be high at all (around 17% to match 20% of GDP). If people earning more money through work save their money, then that money will remain untaxed indefinitely.  Those savings are passed on from parents to children, helping them pay down loans and other things.

So in my proposal, business would cut taxes by investing a greater proportion of their revenue in labor and capital markets. This tax avoidance behavior would on a direct 1:1 basis facilitating the
growth of investment in American supply of labor, which in turn increases the revenue
generating capacity of American businesses.

What could be less painful on our wallets than
getting rid of income taxes and payroll taxes while using the values of payroll and dividends as a tax base exemption to allow for greater income opportunities?

1) The major problem the FairTax has is political. A consumption tax of 23% (inclusive of total consumption spending) translates into a 30% sales tax. However, by bringing the rate down to 17%, it becomes equivalent to a 20% sales tax.

2) While the FairTax has no embedded component to it, it is neutral to how a business spends its money. However, my proposal would provided preferential tax treatment to payroll and dividend compensation. This will allow consumers to purchase the items they need with less debt. Enriched consumers are also more likely to invest in new enterprises.

3) Payrolls would be exempt from the VAT, so government would give up some revenue as the payrolls grow in value.

4) Dividends would be exempt from the VAT, so government would give up some revenue as a investors get their return.

5) Cutting payroll and flaking with investors by not returning dividends would be met with a reduction of tax exemptions. As a result, companies who do not bailout on their stakeholders will be financially preferred by the government.

DurangoKid's picture
DurangoKid
Status: Silver Member (Offline)
Joined: Oct 25 2008
Posts: 174
Re: Replacing income and payroll taxes with a ...

In all likelyhood, a VAT would be added to the current system.  No existing taxes would be repealed.  The effect would be ever higher taxation.  Arguably, we should be paying less tax to the Federal Reserve, treasury bond holders, and the Pentagon.  Everyone knows these three will be the first in line for their cut of any new revenue.  Giving them more revenue just encourages them to do more stupid things.

Ragnar_Danneskjold's picture
Ragnar_Danneskjold
Status: Silver Member (Offline)
Joined: Feb 23 2009
Posts: 100
Re: Replacing income and payroll taxes with a ...

The 16th Amendment must be repealed first.  Otherwise, I see no point in discussing this.  We don't need yet another tax.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Replacing income and payroll taxes with a ...
DurangoKid wrote:

In all likelyhood, a VAT would be added to the current system.  No existing taxes would be repealed.

If that were the case, then it would be proof positive that there is no revolution against unfair taxation.

 

DurangoKid wrote:

The effect would be ever higher taxation.  Arguably, we should be paying less tax to the Federal Reserve, treasury bond holders, and the Pentagon.  Everyone knows these three will be the first in line for their cut of any new revenue.  Giving them more revenue just encourages them to do more stupid things.

Then the only solution is to leave this country. If everybody leaves, they will no longer have people to recruit ;).

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Replacing income and payroll taxes with a ...
Ragnar_Danneskjold wrote:

The 16th Amendment must be repealed first.  Otherwise, I see no point in discussing this.  We don't need yet another tax.

It takes millions of dollars to prove that the FairTax will work, and as a result, the bi-partisan co-sponsership is very unequal between Repulicans and Democrats. The majority of Congressional Democrats are simply not convinced of its merits. The support for FairTax is saturating, and that's why it is so important that a new idea be brought up that doesn't take millions of dollars to prove to members of both parties that it will work. When a viable alternative is demonstrated, only then can there be enough support in Congress to repeal the 16th Admendment.

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