Follow Up: A Sales Tax Solution

I was thinking more about the “Fair Tax” idea and another benefit occurred to me. It would help those in debt. By taxing earnings debtors pay taxes no matter what. If you tax their spending they would have more incentive to save money. Of course people always have an incentive to make more money, but it’s usually easier to cut expenses than to get a raise. Well not just debtors would have more incentive to save money, but also anybody else. This would definitely help people in America who are in debt.

Current Scenario 1:

$30,000 income
$20,000 expenses
- $7,500 taxes on income (25% income)
$2,500 to pay off debt

Fair Tax Scenario 1:

$30,000 income
$20,000 expenses
- $5,000 taxes on expenses (25% expenses)
$5,000 to pay off debt

Scenario 1 shows how people will probably spend less. Look at Scenario 2 after cutting $5000 in expenses. Scenario 2 shows how people have an incentive to cut expenses.

Current Scenario 2:

$30,000 income
$15,000 expenses
- $7,500 taxes on income (25% income)
$7,500 to pay off debt

$5,000 in more savings (100% of debt reduction)

Fair Tax Scenario 2:

$30,000 income
$15,000 expenses
- $3,750 taxes on expenses (25% expenses)
$11,250 to pay off debt (125% of debt reduction)

$6,250 in more savings (125% of debt reduction)

Pro:

• People would have more incentive to save money
• People in debt could pay off their debt faster by earning more through cutting expenses

However I did come up with a major con of the system. People are more inclined to save money up front than to save money in the long run. People are all about instant gratification. Every time they would buy something they would see that 25-30% or so tax. Most people would probably rather only see their taxes once or twice a month rather than everyday even if it would save them money to get it regularly.

Con:

• People would rather have instant gratification, lower prices up front instead of lower cost in the long run.