Consumption tax vs normal tax

[guest2013-1]

I was watching YouTube when this topic came up and it made a lot of sense to me (especially since only a small portion of this country are tax contributors carrying the rest on their shoulders)

Consumption Tax... essentially what it is, is extra tax on goods you purchase, much like VAT (or Sales Tax) but not claimed back or anything... for arguments sake, 20%.

Now we're already taxed more on certain goods than others (like alcohol and cigarettes vs bread). And I may totally be in the dark here re: everything taxable and how/what VAT contributes really and why it's there in the first place.

But having a "Consumption Tax" instead of normal tax would mean that you take away your full salary each month instead of paying SARS almost half (depending on your bracket).

This of course means you have more money in your pocket to spend, and SARS would then get paid tax based off of your consumption, because if you buy food or a new TV with your "new" money... SARS will get some.

Also, this means any illegal aliens we do have, and people who do not contribute to tax (either not working or working but not paying tax like they should) would be contributing their fair share as well INCLUDING ANY TOURISTS visiting... which is like an extra couple of million people contributing to our economy each year and "new" citizens also paying tax.

What do you guys think of this concept? Will it work?

Would you be more happier having full control of everything you get on a monthly basis or are you happy with SARS taking 5-12k in tax off your salary each month?

Do you agree that having that money in your pocket would benefit you and spur you on to buy more things?

Do you agree that this type of taxing would get the general public (and illegal aliens) who doesn't pay tax (including tourists spending their money here)... would now pay tax based on the stuff they buy now?

Would this be sustainable/actually grow our economy and government coffers?

Lemme know what you think. I reckon it could be interesting, especially with the debt situation we find ourselves in.

 

[warchylde]

The idea in concept would work but you would have riots as those that don't earn that much would actually be paying significantly more tax.... just my 5c... personally I would go for this.

 

[markings]

There could be different tax rates. Why should a Ferrari or Chanel perfume be taxed at the same rate as your groceries?
An even better idea than a consumption tax may be the Tobin tax. It taxes all bank transactions, in or out, at a very low rate, IIRC 0.1 percent would be sufficient. Sooner or later all money goes through a bank and will contribute to the taxes. All other taxes will be scrapped. Advantage, tax collection by only a few institutions which are highly computerised and could produce the amount of tax to pay at the push of a button.

 

[Conradl]

What do you guys think of this concept? Will it work?

Would you be more happier having full control of everything you get on a monthly basis or are you happy with SARS taking 5-12k in tax off your salary each month?

Do you agree that having that money in your pocket would benefit you and spur you on to buy more things?

Do you agree that this type of taxing would get the general public (and illegal aliens) who doesn't pay tax (including tourists spending their money here)... would now pay tax based on the stuff they buy now?

Would this be sustainable/actually grow our economy and government coffers?

Lemme know what you think. I reckon it could be interesting, especially with the debt situation we find ourselves in.

It will never work. You will be taxing people who simply cannot afford it, and VAT is already responsible for 25% of the budget. Put another way, 52million people are already contributing 25% of the budget, and 5 million another 35%. The 52 million people have no additional capacity to finance the shortfall that would exist if the 5 million people paid less. If you had R10000 a month extra to spend, you would contribute R2000 to VAT (assuming 20% VAT), leaving R8000 shortfall.

The average person would have LESS money to spend and the economy would suffer.

Progressive tax is the most fair system, since all people pay exactly the same amount of tax on certain amounts....

Also, the economy does not need more people buying stuff. We need more capital investment, and to encourage people to start businesses rather than buy a new car, or clothes, or electronic equipment - which is what most people would do if they paid less tax....

 

[guest2013-1]

First off, not everyone has a bank account (trust me on this one) so that idea won't really fly unless it's mandatory for everyone who wants money to have a bank account, which of course do away with cash (?)

I see where you're coming from Conrad, I'm not talking about pushing up VAT. I'm talking about adding an additional different tax onto goods.

However I do agree that basic necessities like food/electricity/water would of course be taxed way less than (or even kept at normal VAT rates) if you were to buy a car or a pack of cigarettes or even alcohol. This would make it cheap enough for those who can't afford to pay that much, plus it taxes them on the other things they do buy (when they can afford to)

Sure, your "contribution" would be less in a month because it's based on your own consumption of resources now, BUT you're not 1 of 5 million contributing anymore, you're 1 of 52 million people. So assuming everyone's the same across the board and taking your example, I calculate about a 500 billion increase in taxes being pumped into the government. Because if the shortfall is R8k, but your number of people contributing increases by a couple of 100%. It starts to sway into favor of the consumption tax... no?

At the end of the day I figured the consumption tax would be less of a pain in the ass trying to collect from 5 million people as supposed to the **** load of paperwork they have to deal with now. Unfortunately the way we run our resources in this country (appears) to not make us profitable even though gold is at an all time high and last I checked SA produced about 60% of the worlds gold? Why can't we be like Dubai (with their diminishing oil reserves) and have a tax-free country? Imagine the kind of investment that it will bring here...

But that's really just a pipe dream and deters from the other facts like how much SA spends on aide to Zimbabwe etc each year

 

[Claymore]

It will never work. You will be taxing people who simply cannot afford it, and VAT is already responsible for 25% of the budget. Put another way, 52million people are already contributing 25% of the budget, and 5 million another 35%. The 52 million people have no additional capacity to finance the shortfall that would exist if the 5 million people paid less. If you had R10000 a month extra to spend, you would contribute R2000 to VAT (assuming 20% VAT), leaving R8000 shortfall.

The average person would have LESS money to spend and the economy would suffer.

Progressive tax is the most fair system, since all people pay exactly the same amount of tax on certain amounts....

Also, the economy does not need more people buying stuff. We need more capital investment, and to encourage people to start businesses rather than buy a new car, or clothes, or electronic equipment - which is what most people would do if they paid less tax....

Spot on. A consumption tax is a type of regressive tax; because poorer people generally spend a higher proportion of their income (as opposed to investing or saving it), they will be taxed a higher proportion of their incomes than wealthier people - and are less able to afford it.

Also, the other problem with consumption taxes is that there are many things that are difficult to measure from a consumption point of view. For example, how would you tax consumption of pollution regulation, or military strength, or telecoms regulation, or those sorts of things?

 

[blunomore]

It sounds to me like a type of 'wealth tax' you are describing.

 

[guest2013-1]

Spot on. A consumption tax is a type of regressive tax; because poorer people generally spend a higher proportion of their income (as opposed to investing or saving it), they will be taxed a higher proportion of their incomes than wealthier people - and are less able to afford it.

Also, the other problem with consumption taxes is that there are many things that are difficult to measure from a consumption point of view. For example, how would you tax consumption of pollution regulation, or military strength, or telecoms regulation, or those sorts of things?

Consumption as in food/clothing/drinking water etc that we buy. So if you go buy Steers, you contribute to the consumption tax. Like I mentioned, basic supplies like food/water would obviously not be taxed as much... and I really don't understand how a poor person would consume more than a wealthy person? AFAIK if you're a wealthy (or "rich") person, you tend to consume more than the normal, average or poor person would do, because instead of generic R50 tekkies, you'll buy R1200 Nikes... etc

 

[HavocXphere]

Thread should read "Consumption tax vs Income tax" but close enough.

The end effect of a consumption tax is very similar to that of a flat tax, which is in use in a few countries (http://en.wikipedia.org/wiki/Flat_tax#Around_the_world). Main difference is that a flat tax isn't inherently regressive.

There would be admin savings, but on the whole it won't work in SA. Inequality is too high to make it feasible.

The vast majority of SA population is too poor to afford taxes. A flat/consumption tax would simply mean less food on the table for a lot of them. The tax net could be cast a bit wider than it currently is. But our guavamint doesn't want to antagonize their core voter base, so thats never gonna happen.

In SA we need the gov to stop wasting money like it grows on trees & crack down on tax evasion.

@blunomore: Not a wealth tax. Thats totally different: Your net worth x 0.02 = Tax (Hypothetical scenario of course)

 

[Claymore]

and I really don't understand how a poor person would consume more than a wealthy person? AFAIK if you're a wealthy (or "rich") person, you tend to consume more than the normal, average or poor person would do, because instead of generic R50 tekkies, you'll buy R1200 Nikes... etc

Proportionally speaking, not in absolute terms. For most things, wealthy people don't consume goods that are x times as expensive as their income is greater. For example, you talk about Nikes vs takkies. That's valid, sure, but then that's largely an exception. Wealthy people generally pay the same for many basic things (like water, petrol, etc.), and not as much proportionally on many other things (like accommodation, food, etc.).

 

[guest2013-1]

Proportionally speaking, not in absolute terms. For most things, wealthy people don't consume goods that are x times as expensive as their income is greater. For example, you talk about Nikes vs takkies. That's valid, sure, but then that's largely an exception. Wealthy people generally pay the same for many basic things (like water, petrol, etc.), and not as much proportionally on many other things (like accommodation, food, etc.).

I get what you're saying but I have to disagree. I haven't met many wealthy people who spend the same amount of money on food or accommodation. In fact, the amount of money they spend on accommodation alone would have paid for the house I live in n times over. Not to mention the 2-7k per month they spend on food (I know a couple of wealthy people so I've asked them). Sure they won't eat caviar every night but they do entertain friends a lot more than the average person with a lot more quality and style than normal/average/poor people does. The average footprint of a wealthy person compared to a poor person is also much greater than that of the poor person. They own more cars. They own more clothes. They have better schooling for their kids. They buy better quality stationary/supplies and books. They have wine cellars for their own collection (or most dabble in a hobby or two)... whereas the normal average joe or poor person can't afford those luxuries, but do spend money on cellphones or the internet and clothes/booze/braai etc

So yes, the only part I will agree with you on your point is that, if by chance, a poor person with some common sense, lands their ass and end up becoming a wealthy person, that they'll spend more or less the same as if they were poor, but even THEIR lifestyle would go up a few notches.

Thread should read "Consumption tax vs Income tax" but close enough.

The end effect of a consumption tax is very similar to that of a flat tax, which is in use in a few countries (http://en.wikipedia.org/wiki/Flat_tax#Around_the_world). Main difference is that a flat tax isn't inherently regressive.

There would be admin savings, but on the whole it won't work in SA. Inequality is too high to make it feasible.

The vast majority of SA population is too poor to afford taxes. A flat/consumption tax would simply mean less food on the table for a lot of them. The tax net could be cast a bit wider than it currently is. But our guavamint doesn't want to antagonize their core voter base, so thats never gonna happen.

In SA we need the gov to stop wasting money like it grows on trees & crack down on tax evasion.

@blunomore: Not a wealth tax. Thats totally different: Your net worth x 0.02 = Tax (Hypothetical scenario of course)

I agree, excessive government spending and 1.5million budgets on cars alone is a bit insane. And I did mention several times basic stuff like food won't be taxed as heavily (or none at all). But as soon as they buy a can of beer, they're a contributing member to the tax coffers of SA...

You guys have very valid points, and there is definitely a lot of inequality when it comes to the margin between poor and rich. But I'm going to give you guys another thing to ponder off of: Cellphones. 40 million+ in South Africa. That means even the poor can afford prepaid / a cellphone at least. 40 million people each buying R5 airtime? It's quite a big chunk of change in my opinion. And it's not like (most) use it for life and death situations or really need it to survive (unless they're phone sex operators)... but they still buy food? So whats the difference if they pay R8 for airtime instead of R5 for airtime due to the tax?

I know I'm drawing a lot of conclusions and a lot of averages here and I know you guys are set in the way you do / understand the tax situations etc... but I really can't understand why consumption tax instead of normal income tax would be a blight here. Remember, this doesn't even account for the numerous tourists also contributing to this countries well being and would most probably end up creating a whole lot more opportunities and jobs as people find themselves with "more" money in the end.

I thought it was an interesting concept anyway.

 

[HavocXphere]

I thought it was an interesting concept anyway.

Yeah def. Also works pretty well....elsewhere.

Oh and +1 for thread. Nice to see some economics & finance threads.

 

[Claymore]

I get what you're saying but I have to disagree. I haven't met many wealthy people who spend the same amount of money on food or accommodation. In fact, the amount of money they spend on accommodation alone would have paid for the house I live in n times over. Not to mention the 2-7k per month they spend on food (I know a couple of wealthy people so I've asked them). Sure they won't eat caviar every night but they do entertain friends a lot more than the average person with a lot more quality and style than normal/average/poor people does. The average footprint of a wealthy person compared to a poor person is also much greater than that of the poor person. They own more cars. They own more clothes. They have better schooling for their kids. They buy better quality stationary/supplies and books. They have wine cellars for their own collection (or most dabble in a hobby or two)... whereas the normal average joe or poor person can't afford those luxuries, but do spend money on cellphones or the internet and clothes/booze/braai etc

*Proportionally* speaking. Proportionally, the poor spend significantly more of their income on food and basic necessities than the wealthy do. And how many (relatively) poor people do you know who have spare money for their investments, savings, shareholdings, and so on? Even other, less obvious things - the wealthy can afford houses which are investments in their own right; renting a flat doesn't give you that. Ditto cars, antique furniture, and so forth. The poor spend money on consumables; the wealthy spend a higher proportion on investments and durable goods.

 

[Conradl]

You guys have very valid points, and there is definitely a lot of inequality when it comes to the margin between poor and rich. But I'm going to give you guys another thing to ponder off of: Cellphones. 40 million+ in South Africa. That means even the poor can afford prepaid / a cellphone at least. 40 million people each buying R5 airtime? It's quite a big chunk of change in my opinion. And it's not like (most) use it for life and death situations or really need it to survive (unless they're phone sex operators)... but they still buy food? So whats the difference if they pay R8 for airtime instead of R5 for airtime due to the tax?

You sum up the reason why it will not work right there. For the poor there is no extra R3. If they had to spend the extra money, then they would do so by purchasing LESS airtime - or less of something else. The issue here is not whether consumption tax should exist, because it does, and everybody already pays based on their consumption. The question is proportions and whether it would be good for the country.

Seriously not my intention to get personal here, but do you actually know any poor people, or people living on R2000 a month? Any increase in VAT, even a small one, would simply make it impossible for these people to live. The motivation for increased consumption tax (or any other tax model) simply breaks down when considering that the money simply does not exist elsewhere to fund the state budget...