Income tax is a tax levied on the amount you make from gifts and working, sales tax is a tax levied on the purchase of a item, and a value added tax (VAT) is a tax levied on the production of an item.

My question is about reforming the American tax system to decrease the income tax (thus, the government would take less of your earnings) and balance this decrease in tax with a different kind of tax, either VAT or sales (which tax the things you buy).

Pros:

When looking at the numbers, there are 160,000,000 people in the US labor force. This includes the currently employed and those looking for employment. But the US population is 320,000,000. So, income taxes do not tax 50% of the nation's population.

The federal government receives 92% of it's revenue from income taxes. This means that 50% of the country only contributes 8% of federal revenue (at maximum, really it's less).

Income taxes only tax the work force, and cannot tax those who do not work. Thus, anyone who does not have a job that reports to the IRS pays nearly no tax. Drug dealers, prostitutes, unlicensed businesses, smugglers, or even those that don't report their cash tips evade the bulk of federal taxes. Federal taxation is all focused on one spot, and avoiding the taxes is simple work.

High income taxes discourages legal work. I can make $7.25 at McDonald's, then take $4 home after taxes, or I can say I'm unemployed and hustle, and all I must do is make $5 an hour to be better paid than minimum wage. Decreases income taxes effectively raises the minimum wage.

Reports done on income vs sales taxes claim that a 5% sales tax generates as much revenue as 6-7% income tax. Therefore, implementing a 5% sales tax could mean a balanced decrease in income taxes by 6-7%. Thus, all workers would effectively receive a 1-2% raise.

Many families are independently wealthy and they do not "work". Instead, they make investments for "capital gains". They do not pay "income taxes", they pay a lesser "capital gains tax". A sales tax would tax those with wealth as they made purchases, even if they did not have incomes.

It is a progressive tax, meaning those that spend the most money pay more.

VAT is the bulk of European tax systems, and the US has yet to implement this method in any way. For example, the UK's VAT is its third largest source of income.

Cons:

Along with drug dealers and cheats, children and the retired/elderly must pay sales taxes. This is an unfair burden.

Sales/Value added taxes are often claimed to be regressive, not progressive, meaning they tax the poor proportionally more than the rich.

Sales/Value added taxes discourages consumerism and tourism.

Sales/Value added taxes can also be evaded.

The consumer should not be double taxed, since the money they use to buy goods and services with is already taxed through income taxes.

I don't like the idea of raising sales tax to counter Income tax because it would hurt those who make less. Someone who already has a ton of money wouldn't be too affected by such a change, but the worse off folk would be in a bad position. Sure, someone who's making say minimum wage would save a bit from income taxes, but unless you don't buy things, that money will still go right out the window, and if you don't have a job, you're screwed.

In theory it sounds like a good idea but I think it would turn out quite bad in practice. I do think VAT should be implemented in the US to some degree but that's all I would agree on. I actually like the idea of discouraging consumerism, I'm not sure how exactly that's a con. If anything that would seem like one of the few true pros as a consumerist society is highly unsustainable and ultimately continues to be that way at the expense of poorer countries in the long run. I don't see how it's a good thing that it's taxing those that are unemployed as very few people are unemployed by choice but are rather put into a bad situation and increasing sales tax is only going to make it more difficult for them to get out of that situation as surviving will become even harder.  It would also heavily affect students living on their own (aka probably me in two years). You also mentioned that most European countries have VAT as a major source of income but you didn't seem to take into account that the income tax in most European countries is still comparable to the US if not higher.

Either way the cons still seem to outweigh the pros here. Like you briefly acknowledged it hurts those that are worse off some examples of which I already stated. Additionally something you forget to touch upon (other than saying it can be evaded) is how it's likely to cause illegal sales of various items to sky rocket due to becoming more profitable,  since people will want to avoid paying taxes or might have to in order to get by.  They will be more inclined to do so if it becomes easier. Otherwise I think it would also be especially brutal for large families or families with single parents. While at the same time meaning that the richest people can get away with paying less and the wealth gap widens. I think having a decent balance in stead of lowering the income tax and focusing on sales tax works much better in practice.

Txgangsta : Your calculations and assumptions are...odd. I don't know why you're implying that unemployment is at 50%, but a quick check shows unemployment in the US is at 4.7%, or 7,500 people unemployed. The other 160,000 people are not a part of the workforce because of age or disability, and creating a VAT will not suddenly cause them to contribute to government revenue.

Furthermore, the percent of people involved in illegal activities like drug trafficking or prostitution is low, and saying these people do not contribute is wrong. Criminals still contribute to the economy: they buy goods and services like everyone else, recycling money back into the system. Legalizing prostitution and drugs, or at least recreational drugs, will solve most of these problems, allowing the government to tax and regulate formerly illegal activities, but I suppose that isn't the point of the thread.

Now then. High income taxes do not discourage legal work. If you're making $7.25 an hour at McDonald's, the government does not take $3.25. With my limited knowledge of American tax policy, you'll probably be taxed for around 10% of your earnings, so you take home just over $6.50. Decreasing the income taxes increases the minimum wage far less than just increasing the minimum wage.

Replacing income tax with VAT has two major drawbacks. First, it harms the poor and the middle class, or at the very least doesn't help them. They still pay taxes, just in a different place now. They still have to buy goods which now cost more, and because their income taxes are already quite low, they don't save much. On the other hand, the VAT indirectly harms the economy by discouraging consumption. If things cost more to buy, people buy less and sit on their money, causing stagnation. Maybe you're someone who thinks we spend too much on things we don't need, but our present economy is founded on that principal. Reducing consumption with a VAT won't help there, it will just hurt the already weak economy and cause more job loss.

Mold and Crumbs :

I don't mean to say the we have 50% unemployment. But we have a total population of 320 million. Of that 320 million, there are children, retired, disabled, or otherwise that are not part of the "labor force". Of the labor force (which is only those with a job or looking for a job), there is about 160,000,000 people. Also, income taxes only affect those with income. Those outside the labor force do not pay income taxes (children, retired, disabled, and otherwise).

https://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=LN_cpsbref1
^^Link^^

Also, I think your numbers are missing some zeros. It can't be that only 7,500 are unemployed.

Finally, thanks for the comment =)

Txgangsta : That much was already clear. I gave you my source. Numbers are provided by the US Bureau of Labor Statistics. As of December 2016 there are 159,640 people in the labor force, 152,111 of whom are employed, leaving 7,529 unemployed.

Mold and Crumbs : I doubled checked, those numbers provided are in the thousands. That makes sense.

IF taxes are to exist, then sales tax are usually better but regressive - poorer people pay a higher percentage of their income to that. It encourages savings, which in the end grows the economy as a whole. But they 1) should exclude basic food products and 2) have some sort of refund for lower income households.

janus : To be fair, the poor pay a higher percentage of their *disposable* income to the tax than the rich. However, since it is not an income tax, they do not pay a percentage of their income at all.

And yes, even people like Mike Huckabee (who wants to eliminate the IRS and replace with sales taxes) say that the essential items can be tax free.

My actual idea is hinted at above - make a 5% federal sales tax but decrease income taxes by about 6%. In this way, I've given everyone a 1% raise with a job. I see the taxation of children and the disabled as sad, but I am willing to compensate families through services as necessary. I want to tax the retired. Also, the income tax would not drop for those in the top category (in 2016, the highest bracket was 39.6% if you made $415,050, if you and your spouse made $466,950, or $441,000 if you were "head of household"). This would increase federal revenue by just under 3%, encourage work, and perhaps we can actually begin to pay off our debt.