The newly-formed Finnish parliament has released their preliminary agenda and I found the tax increases and decreases interesting. Essentially, they are going to lower income taxes and to offset it, increase consumer taxes. This means that "user pays" and a lot of people think this is a good thing, as if you don't consume, you save.
However....
That isn't quite the case, is it? Because it depends on what you are buying now and whether it is a necessity or not. In general, the poorest side who are struggling to make ends meet, are buying what they need to buy, not what they want to buy. Whilst they could make savings still in some areas probably, as I mentioned, saving doesn't make you wealthy.
But, lets dive a little deeper with an example to illustrate the problems and how it increases the wealth gap even further. I am going to use round numbers to make things easier for me to explain, but they are just representative of the conditions.
Poor end earning €2500 today and (12%) in tax will pay €300, will have €2200 to spend. There are also other compulsory deductions for unemployment fees and the like - sot hey will likely get around 1800 to spend. The things they spend them on is rent food, utilities, phone etc. There isn't a lot (if anything) left over. They have to be very careful with their expenditures.
If we imagine that there taxes are instead 10%, they will be paying €250 in tax and after the other compulsory deductions, have 1850 to spend. An increase of €50. But if there is an average increase of 4% on goods and services, they will be spending €74 more a month on what they consume, leaving them 24€ worse off.
If we look at someone at the other end of the scale who earns 10,000 and pays 27%, they are paying €2700 in tax. If that drops to 25% - they will be paying €2500 in tax. An extra 200 in their pocket. After the deductions, they probably have around €6000 in their pocket. However, are they spending 6000 a month? It is unlikely. So, they are probably saving or investing some percentage of it anyway. Let's say 1000 a month - spending 5000.
However, what they consume is different too, because even though they might have more expensive tastes compared to the poorer person, they aren't going to be consuming a huge amount more just to survive. They have more "extras" in their monthly shopping basket. These are things that can be cut out, and increasing the taxes makes it more likely they will be. This means that someone at the high end of the scale, might get the extra 200, plus change their buying habits to consume less, leaving more for them to invest with.
Interestingly, they are also increasing the personal investing account from 50K to 100K in size, which doesn't affect the lower end of the earners at all. This is still a good move however, as it might encourage more people to take control of more of their trading wealth.
Most wealthy people don't actually spend that much and likely, are able to put an increasing amount of their wealth into generative investments the longer they live. At some point, they have enough stuff meaning that all they are really covering is their day to day lifestyle, that when you own your own home, car and all the rest, is not much more than the person earning the 2500 a month. This means that they can keep expanding their wealth, even while they are taking a decent holiday every year.
Income tax cuts favor the people who are earning the most, because they are well, earning the most. It is like if someone was going to give someone in my family their weight in gold, it would be me, not Smallsteps, because I weigh about 5x as much as she does. Income tax cuts are going to benefit the wealthy more, while consumer tax increases are going to have a far greater impact on the poor, even though they aren't consuming extravagantly.
Tax is interesting, because it is one of the few mechanisms that a government has to affect the economy and it has a very real impact on people. However, if instead of jigging these "end user" taxes they instead chased down the taxes of the corporations. The Corporate income tax in Finland is 20%, yet none of the companies pay that amount, with most likely coming in at around half that. Claw back that tax, and there would be far less need for taking individuals more. And interestingly, the profits of the companies would go down significantly, meaning that they wouldn't be as lucrative and there would be more risk for investors.
Like it or not, for now at least, we likely have to pay our taxes. However, we should all realize that unless we are in the wealthiest sectors of the economy, very few government decisions are made to favor us. Instead, they are made to extract as much as they can until we have nothing left at all.
"You'll own nothing and be happy"
We'll own nothing - and be slaves.
At least we won't have to worry about taxes on what we earn.
Taraz
[ Gen1: Hive ]
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At one time I used to think consumption taxes might be the way to go, along with a flat tax. But you do a good job of showing how consumption taxes disproportionality impacts the poor more than anyone. I agree about flat tax. I would go further and eliminate deductions and other loopholes that corporations and wealthy use to get out of paying taxes. Just a flat stinking tax period.
Consumption tax might be useful on some things. For example a tax on highly processed or sugary foods, with the proceeds going back into the pockets of those who are eating healthily. Punish bad behavior, but also reward good behavior.
And tax paid locally where it is earned, rather than extracted out through parent companies to be paid in other lower tax areas.
I am always divided on the taxes. I pay around 20% each year meanwhile there is one guy who has 9 kids and he pays none and takes the poverty cut and govt benefits. Way to treat taxpayers. Like people can have kids and burden on others meanwhile those who pay taxes are being scrutinized heavily. I get it why rich people try to evade taxes now.
Now, look at it from the perspective of a business owner who has to pay staff, who are not willing to come to work in the office that has rent paid on it, are having "bare minimum Mondays" and are unwilling to do anything extra, but expect more and more perks.
When the cost is coming out of your own pocket, you are more discerning with what it is spent on.
The problem with taxes is often they relate to subsidies. There are far too many subsidies in the world that offset the real costs of things. When taxes get increased or slashed, one of the things I think often comes later is an adjustment to subsidies. People then see what things really cost and they freak out. I think this is likely a situation of bait and switch. They lower the tax on one hand, increase it on the other and then people freak out and in come subsidies to save the day. It’s a dangerous game, and one of substantial manipulation.
This is a big issue that shows how "unfree" the market actually is. It is all manipulated and because it is based on narrow focus, will continually break - whilst along the way, harm those who are not in the cool group.
Thanks for the explanation of the tax situation. It does make sense, but don't you think that taxation on consumption is, in principle, better than taxation on production?
Not necessarily. What happens when everything that is produced is made by a robot or AI?
To answer your request, let's follow a logical train of thought (this is the best I can do). When a robot produces value in the economy, it will be considered production and therefore not subject to taxation. Only humans can consume, and as a result, only humans are taxed. However, if humans do not produce, what will they use to buy and pay taxes? This shift in emphasis means that the focus moves away from who creates the value to who owns the units that generate the value. In a scenario where robots create all the value, humans cannot solely rely on selling their labor and must shift their focus to owning the means of production. Now, humans need to buy and/or create the units that produce, and because they don't have to pay tax on it, the motivation to do so will be high. These are my thoughts on the matter. Taxing consumption can still be effective.
Taxes are interesting but I think the wealthy take advantage of the laws a lot. From what I see, the rich can hire a very good accountant that will get you the highest amount of tax cuts and how to get those. The middle class and the average citizen can't get that though and we just get screwed over.
Absolutely. They have the best tax people, with access to the best knowledge - some of which they shouldn't be using, but do. Like the PwC case ongoing in Australia where inside information from the government was being used for customer tax planning.
Taxes are always a tricky thing. They've been trying to get it right for years all over and it seems like there is always someone who gets screwed over. If a politician could figure out taxes they could likely run the world.
It would be disruptive, but if tax "had to be a thing" it should be flat. The same for everyone. If it was 20% for example. Also, corporate tax should be paid in full to the places where the money was earned - no more dodging. This brings down the earnings on investments, which also encourages more spending at the top, pushing more into the economy through more hands. This gives the lower end more opportunity to earn and hopefully, they will invest a bit too, so distribution improves in multiple ways.
If I ran the world... :D
Good luck with that! I just feel like the best ideas are never easy to put into practice. I do like the idea of a flat tax.
A flat tax system would be great. Just think about how much money would be saved in simplification and cutting out middlemen.
True!
Initially, I thought the income tax cut would be great for the lower income families but your math quite simply shows otherwise.
Everyone tells me Norway has it all figured out. What are they doing.
Norway is a good example of people who understand investing and "not getting high off your own supply". They have oil, but aren't corrupt like Venezuela, so instead of it being leeched out, it was put into funds. Norway owns about 2% of all the stocks in the world. Not bad for a population of 5.5M people.
This means that they can invest into all kinds of things, including green tech. They have the highest per capita ownership of electric cars. They generate electricity from water and wind, selling their oil abroad. They also invest heavily into their people's education.
Costs are high in Norway if a tourist - but okay if local.
That sounds more like it. These dragons across the world getting fat and lazy lounging on their hoard of gold don't have power over Norway? Maybe it was a well-spent era of benevolent dictation that locked that system in place? I have been meaning to take a look at their history for a while and may just.
'Til then, we can live with our taxers and interest rate fiddlers pretending they have their houses of cards under control.
They are descendants of Vikings - they are use to working together to conquer larger opponents with coordinated attacks. I think it comes down to working toward a common good more than competing to be the best of the group.
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STOPI can as well see that the poor ones are truly affected. This same thing is happening in my country especially when our new president removed subsidy. A lot of people can no longer afford what they use to afford so the best thing they can do is to buy the things that they need majorly because of the hike in price of fuel so that they can have some money for transportation.
A lot of people here are not making enough money talkless of saving money
I remember learning this lesson in middle school here in the US (12-14 yo), that sales tax proportionally affects poor people much more than rich people. In fact, in US if you earn below a certain threshold, you don't pay any federal income tax at all. However, that difference is certainly made up in sales tax, which is typically around 8% in most states (each state/city sets its own sales tax rate).
Some states have no state income tax, while other states have no state sales tax. The rich have been flocking to the states that have no income tax recently (Texas, Florida, Tennessee, etc), while there has also been small uptick in states with no sales tax (New Hampshire, Delaware). Here in New York, I get the worst of both -- high income and sales taxes, so I'm definitely paying a premium to live near my parents in one of the greatest cities in the world. But I am definitely looking forward to the day when I leave NYC again, and this time I'm looking to leave the country, not just the state.