The Fundamental problem with Income-based Taxation

2008-09-26T11:19:00.000-07:00

Governments need money. There is no doubt about that. The fundamental problem politicians, the world over have had with selling their proposals in terms of new programs to help citizens prosper has been that none of them can get away with saying “Want more? Then pay more”. Citizens all want the government to give them every possible convenience but precious few want to pay for them. Poor people think rich people should pay for them because poor people have less money. Rich people think it should be a fair and equitable taxation on a straight dollar for dollar line, because they don’t think they should be penalized for making more money, especially since they consume less government based services. Round and round she goes. Where she stops, no one knows! What no one on any side of the taxation system will tell you is that income-based taxation is fundamentally flawed. Here’s why:

Let’s say the rate was 25% (if only)

If you earned $100, you would net $75 after taxes.
Whoever gets that $75 would net $56.25
The next in line would net $42.18
The next… $31.64 …etc until in just a few turns of the hand, the government would own all of the money. That’s simply not the best way to do it.

Consider instead, a world where instead of taxing income, only sales were taxed. There are an unlimited number of goods and services. While the government would still make a percentage of money flow, the fact is that good and services are constantly creating new monetization opportunities, and many of them cost no money to produce. Furthermore, in a system that taxes only for goods and services, there are less tax payers, (businesses only) therefore less need for regulation (good bye IRS), and because rich people buy more things, they automatically pay a greater portion of the taxation dollar without ever feeling like they were taxed inequitably. It’s a win-win… and the people own the money. What could be better?