We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.
Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]
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Samizdata quote of the day It’s not possible to prevent people, particularly people whose goal is power, from abusing it. All we can do is deprive them of it.
– This comes near the end of a very good piece by Rand Simberg about the IRS, what it did, why, and what to do about it.
Which is what our own Jonathan Pearce also said recently.
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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Agreed. Many people warned (in detail) about how the income tax would work – how it would give (must give) arbitrary power to the authorities, which they would abuse. Each individual and each private organisation would be subject to constant fear of audting and other abuse (either for political purposes or just on the basis of informers or even arbitrary whims). There could (many distinguished scholars warned) be no such thing as privacy once the income tax was conceded.
However, government spending is now so high in the United States (and elsewhere) that getting rid of the income tax is considered politically very difficult – although not “poilitially impossible” as it is in Britain and eleswhere.
The reason it is not considered “politically impossible” is that the United States does not have a national sales tax (although most States already have a State level sales tax) – hence the so called “fair tax” movement.
Yes Murray Rothbard the key problem is indeed the level of government SPENDING – but a national sales tax would be less bad than the IRS.
That is why the establishment (such as my dear friends the Economist magazine people) want to add an American national sales tax ON TOP OF the income tax (getting this terrible idea through by promising lower rates of income tax – which would be put back up later).
Once a national sales tax (starting off as a tax on INTERNET sales?) is put in place the chance of getting rid of the income tax (and the IRS) will be over.
Oh, by the way, guess who is going to be in charge of Obamacare.
The IRS.
By the way….. I do know that by saying a sales tax (whilst terrible) is less bad than taxes on income, I am in some bad company – for example Thomas Hobbes.
Not even Hobbes was always wrong – although (yes) there is no such thing as a “good tax” all taxes are terrible. The key problem is indeed (yes Murray Rothbard) government SPENDING (i.e. the ever growing “entitlement program” Welfare State).
The key driver for government spending is the “help the poor” (and old and sick) ideology – no amount of evidence that these schemes make the horrors WORSE (“Losing Ground”) holds back this ideology – which is based on blatent contradictions such as “compulsory charity” (dry rain, square circle). Just as the driving force for regulations is the false idea (really doctrine rather than just “idea”) that regulations “protect the worker” (for example the BBC ideology that a higher mininum wage will prevent factory buildings collapsing – no I do not understand this either, because there is nothing rational to understand in it) and “protect the consumer” (protect the consumer by forcing up prices?).
When dealing with Social Justice ideology (the doctrine of “postive rights”) reason is helpless – as one is dealing with ravings (such as the already mentioned “compulsory charity”, dry water – square circle). Contrary to what is often claimed I am, and have always been, a MODERATE – all my life I have wanted REFORM (not revolution), I fully accept that it is useless to (for example) tell a group of 80 year olds “if taxes had been lower when you were 20….”
However, I have long believed that if gradual reform (trying to roll back unsustainable, irational, government schemes without hurting the helpless who depend on them at the moment) failed, then libertarians would act as a “saving remanent” a group of people who could help rebuild civil society after de facto bankruptcy and so on.
Sadly the emergence of Social Justice supporters within libertarian ranks has shaken my faith that any functioning saving remanent will exist.
There is no way to reason with Social Justice supporters – becasuse their faith (Social Justice – “justice as fairness”, “compulsory charity”) rejects reason (indeed it is the rejection of reason). One might as well try to reason with someone who thinks that regulations mandatating higher wages will prevent buildings collapsing – it can not be done (it is like trying to reason with a rabid dog).
In the face of the supporters of Social Justice (and the IRS that such an ideology inevitably produces – and which Woodrow Wilson knew it would produce, and welcomed it for that reason) all one can do is put one’s head in one’s hands and weep.
Weep for the horrors of the past – and for the horrors to come.
This black/white view of the world lacks pragmatism.
Clearly there needs to be some government and that must be funded. Income taxes provide several benefits, compared to other forms of taxation, particularly: (i) takes the tax when the money is available to those who must pay it; (ii) taxes in proportion to ability to pay; (iii) is almost entirely to largely predictable in advance; (iv) allows reasonably detailed calculations on ability to pay, including support of dependents and other costs. One particular disadvantage relates to disclosure of information that would otherwise be private – I cannot disagree that this is, in absolute terms, undesirable; even that it is the dominant disadvantage.
However, as with most of life’s activity, there needs to be a trade-off (hence grey and not black or white).
Also, and particularly in the case under discussion, tax officials have clearly acted wrongly – according to all their own standards and authorities. The solution is punishment of the guilty, not wailing and gnashing of teeth. And particularly not using (as is so common with the left and other statists) this type unfortunate event to pursue an only marginally related agenda.
Best regards
@Nigel
While your list of justifications is true, these are primarily benefits for bureaucrats or politicians along the lines of Colbert’s plucked goose…
It ignores the fundamental fact that through income tax, especially taxes on labour, the government claims the right to withhold a significant proportion of a persons wages and through the complexity of the tax code (certainly in the UK & US) ensures maximum compliance from the proles while granting generous tax breaks to lobbyists client groups.
The only way to defeat this is through an initial reform to flat unitary taxation of income (including payroll taxes such as employees national insurance & explicitly employers national insurance)
In the longer term all taxation should be reduced to a single sales tax & land value tax. Only then will the perverse incentives to vote for taxes on others be removed.
John Galt quotes Colbert on ‘goose’ taxation policy. Whilst I can and do clearly appreciate the sarcasm (and likely cynicism) of the quotation, given the long time since Colbert and his dirigiste and mercantilist policies, he does not strike me as the natural ally of a Randian. Also, if the taxed truly benefit from an enlightened taxation mechanism, who cares if that benefit also helps the taxman live with him/herself whilst doing his/her job.
The unnecessary complexity of any tax code is a wrong in itself (as is the misuse of authority to tax, selective or otherwise): it says little or nothing about the rights and wrongs of taxation itself.
Concerning UK income taxes (including both NICs), I agree strongly with John Galt, and have commented so in the past (I’ll start by not boring you with links nor me with the bother of finding them). My view, in summary, is that Employers’ NIC should be phased out: it is a devious tax, somewhat hidden from those who really pay it, and unfairly avoiding those remunerated other than directly for their labour. Employees’ NIC is a historical anachronism, its legitimate separation from Income Tax being long gone. The two should be combined, rendering redundant the labour of some in HMRC and so reducing costs. The next round of tax cuts (very necessary) would be an ideal opportunity to start phasing out Employers’ NIC.
And John Galt writes:
That differentiates it, just how, from other taxes? And it seems to work both ways (at least for the squeezed professional, and other middle, classes).
And John Galt writes:
See above. But IMHO “only way” overstates the case; the primary requirement is to cut government expenditure; tax cuts would follow. There is also a need to greatly decentralise government, and the taxation that funds it.
And John Galt writes:
No, and No! No! No! Land value tax offends (me) as failing to link taxation to profit, but only linking it to ownership: thus screwing up the timing of payments – to say nothing of the amount.
Also, all taxes (sales tax included) should allow different versions and levels of taxation according to the level of government that applies them. Transfer of taxation funds between levels of government is itself an evil. No level of government should be allowed to spend taxpayers’ funds that it itself does not vote for and raise: to do so is a circumvention of what limited democracy we actually have.
Best regards
That only matters if the tax plan exists solely to fund the government and not to control/punish the “enemies” and reward the “allies” of both parties. The confusion and sheer amount of pages in the tax code is by design and there is no political advantage in simplifying it, except for soundbites at election time.
It depends what you mean by “fund the government”. It’s not just about the fundamentals which only the state should provide (defence & courts), but all of the extras that have been added on over the years, from policing through bin collection to the NHS and 5-a-day advisor’s.
The vast majority of this could be more easily & cheaply provided by 3rd parties if only the government would recognize that everything they touch turns to shit.
If government was wound back to its boundaries from 1913, then we could get back to 1913 levels of spending and taxation and let the private sector pick up the slack.
Certainly this would require people to pay out money directly for things like health insurance, etc., but they would have a choice of multiple providers and hospital services rather than have to put up with whatever shit the government decides (including DNR & Liverpool pathway instructions).
The upside to this would be that people would be paying this out of largely untaxed incomes rather than the 50%-60% net after tax income that they pay at the moment.
I repeat what I have already said.
Government spending is vastly high – any level of government spending does damage (the more the worse). But the present level is critically high – around HALF of the economy in most Westersn nations.
This is not sustainable.
As for the income tax – the major scholars explained (in very great detail) why it is a tax that is particularly offensive (in offering chances for petty, and not so petty, tyranny). I am often silly – but going over stuff that is already well known (by people who have never read a word of these predictions – but have personal experience of the IRS or the Inland Revenue) is beyond even my level of sillyness.
Do I see the world in black and white terms?
Yes – because that is the nature of the universe.
The universe is a conflict between good and evil – and we fight that fight within ourselves (not just outside ourselves) every waking moment.
Am I pramatic?
With a big “P” – never (the Pragmatists were and are evil).
However, I certainly used to be pragmitic with a small p – and, in theory, I still am.
Sadly pragmatic politics appears to have utterly failed.
For me personally (even an honourable death is not something I have high hopes of getting – my death will be in the gutter and it will be disgusting and vile, humilation and deep disgrace)- and for the wider world.
Still defeat is never total – and never final.
For a reason I will not irritate people by stating.
I disagree with most of what Nigel Sedgewick has written here. Specifically, to his statements about the relative benefits of an income tax:
“i) takes the tax when the money is available to those who must pay it;” This refers not to an income tax per se, but rather to payroll withholding of the tax. The same thing would be accomplished with a sales tax, since that would be factored into your decision to purchase the item and collected at the same time. But I reject the entire concept as being somehow beneficial (to anyone except government functionaries), because collecting the tax (either tax) in tiny increments disguises the magnitude of the government’s take. I firmly believe that if payroll tax withholding (which was invented during World War II by Milton Friedman, to his undying dishonor) were repealed, and people were required to personaly write checks to pay their taxes (quarterly or annually, it doesn’t really matter) the public outrage over the level of taxation would be so great that it would force a reduction in the size of government.
“(ii) taxes in proportion to ability to pay;” This is the most pernicious canard in all of tax policy discussion. Ability to pay should be irrelevnt to a truly equitable tax system. We all receive the same “benefits” from government and should pay equally for them. Claiming that there is some “obligation” to pay more simply because you earn more (or, even worse and this is certainly coming, because you own more) is merely a sophist’s attempt to justify theft. Sixty years ago Walter Blum and Harold Kalven wrote “The Uneasy Case for Progressive Taxation”, and their analysis is just as cogent today as it was then.
“(iii) is almost entirely to largely predictable in advance;” Somewhat true, but it is certainly less predicatable than a sales tax, which isn’t merely “largely” but actually 100% predictable.
“(iv) allows reasonably detailed calculations on ability to pay, including support of dependents and other costs.” This is merely a restatement of the “ability to pay” argument, which I have already discussed.
To the extent there is some miminal level of government which must be funded (a proposition with which I agree; I am a minarchist, not an anarchist), a government rolled back to the size and scope of 19th century levels would easily be fundable through user fees, reasonable import duties and a few excise taxes. This is exactly how the US government was funded until the 20th century, and it worked just fine.
As a side issue, I note that Nigel remarked upon the “unnecessary complexity” of the tax code as being “wrong in itself.” This is only true if you see simplicity as a virtue in and of itself. But every complexity in the code and regulations was placed there intentionally and for a specific reason; it is of value to someone. In the aggregate the code’s complexity is vexing, and all of us (politicians especially) cavil against it, but in truth that complexity is a feature, not a bug. Politicians thrive on it, and it will never truly be eliminated, or even seriously reduced, without the complete repeal of the tax code.
Just about the only areas of agreement I have with Nigel are in his observation that US taxing authorities “acted wrongly”(duh!), in his denunciation of the Land Value Tax (although not for the reason he cited), and with his conclusion that “the primary requirement is to cut government expenditure; tax cuts would follow.” Quite.
Excellent, Laird – many thanks for settling form me some of the questions I was debating myself regarding taxation.
Great job, Laird. I was going to write mostly the same, with more emphasis on the “ability to pay”. “From each according to his ability” fails not only in theory, but demonstrably in practice as well, over and over. Progressive income taxation is just about as detrimental to economic prosperity as taxation can get. It not only discourages earning income, but does so more for the highest earners, who tend to be the most productive, the most innovative, and the ones employed in the most high value-added occupations.
To the extent that I can be a fan of taxes at all, I am a fan of sales tax, for the reasons you mention. Let people see it, broken out, every time they make a purchase, day after day after day. Let’s see politicians try to explain “We need a bridge to nowhere in Alaska, and for that you all need to pay 0.05% more in taxes.” Raising taxes might soon become a political harakiri.
While the apocryphal 51% of US voters pay no income taxes at all, there will still be a vast proportion of the pool of potential voters who are happy to vote for Obama and future Marxists pretending to be democrats.
It’s always easy to get voters to vote for taxes that only Republicans will pay. Like motherhood and apple pie…
True enough, John Galt, but remember that in the clause you quoted Plamus was talking about a sales tax, not an income tax. That “apocryphal” (?) 51% of voters would not be exempt from that, and would in fact have even more incentive than the better-off to vote to keep the tax rate down.
Absolutely positively NOT. A land value tax is a tax on an unrealised asset *of debatable value* (as opposed to a sales or income tax where value is established by the fact of transfer) and therefore turns freehold into mere rent-from-the-state. It is a tax on ownership rather than acquisition that makes the state the owner and the nominal ‘owner’ a mere tenant. Of all taxes to abominate, LVT is the very worst of the worst.
Perry, a LVT is a capital destruction tax, one can imagine the effects, the destruction of viable land holdings as they are sold off to raise capital, thin strips of land sub-divided, like French land with their inheritance laws directing division of assets.
However, is not a Poll Tax, a tax on existence, as Rothbard termed it, slightly worse? Obliging ascetics and those who wish autarky to raise money or face the consequences.
Laird,Plamus and John Galt have made some (of the many) traditional points about income tax.
Most importantly – that is it not compatible with a stable democracy.
Now whether a stable (non self destructive) democracy is possible at all is debateable – but it is certainly not compatible with the major source of government revenue only hitting some (a minority?) of voters. In theory an equal percentage income tax could be imposed on everyone (even the very poor) – but try doing that in practice (sales taxes do it automatically).
Perry deals with land tax – but the same point should be made.
Historcially local government was financed by property taxes (“the rates”) but the vote was limited to rate payers – when the vote was given to everyone, local democracy broke down in poor areas. These areas became totally dependent on external handouts from central government.
There was what is known in the United States as the “Curly [spelling alert) effect” Mayor Curley of Boston (back in the early 20th century) was not disturbed by wealthy people or even business enterprises moving out of Boston – he was not disturbed because, in Boston, these tended to be people of English ancestry (who did not vote for him) leaving the city more and more Catholic Irish (the people dependent on government aid – who did vote for him), Mayor Curly actually welcomed economic decline (becuase it directly benefitted him – it meant he was more and more likely to win elections).
In Britain classic “Curely effect” cities included Liverpool (where the Labour party leadership, privatly, REJOYCED over economic decline – as it mean they were more and more likely to win elections, the property and business owners leaving the city).
In the end business rates (property taxes on business) were taken over by national government – as they already had been in Japan.
Oh yes – Japan, as we are not really dealing with ethnic or racial politics (although it looks that way in the United States – unless one looks really closely and sees that black business owners are actually treated no better than white ones by the demented [no not “demented” – evil] regimes that control so many American cities).
In Japan far left city councils had driven certain cities into decline (via both taxes and regulations) on purpose…. their own version of the Curley effect.
Want a system where most (or all) government revenue comes from property taxes?
If you do then you will have to kiss farewell to democracy and restict the vote to property owners. I doubt such a move would be accepatable.
“If you do then you will have to kiss farewell to democracy and restict the vote to property owners. I doubt such a move would be accepatable.”
That approach would get my vote. Or, if not property owners per se, then at least limit the vote to actual taxpayers.
And I also have no problem with a poll tax (Rothbard notwithstanging; he was wrong about a lot of things). If you want to vote, pay for the privilege. Otherwise, stay home.
OK, so sales tax is the least worst of all?
Mr Ed – a nation of farmers (19th century France) accepting a system of inheritance law whose BASIC PRINCIPLE was the undermining of viable farming (although many other aspects of French law are to be admired). I an owner WANTS to break up an estate that is their choice (or should be), but they should not be FORCED to so (not even in death).
An early example of the victory of Social Justice ideology (“fair shares”) defeating common sense (experience) and Common Sense (reason).
For all the tradition of statism in the German lands there were ways round “fair shares” in German inheritance law (there are in French law also – but it was much more difficult), perhaps that is the reason that Alsace (yes the region of Eurocrats) is the only nonleftist region left in France. Alsace was historically under German (not French) land law.
Today even historically conservative Brittanny has been drifting leftwards for years – and, I believe, the “fair shares” doctrine has something to do with it.
After unification Germany was historically MORE statist than France (in both philosophy and practice) – however French statism has a more egalitarian twist.
And it is this egalitarian twist that is lethal in a large scale society.
Short version….
Liberty and equality are not compatible – and fraternity should not be a concern of the state.
To the reply “but what is wrong with France is out of control government spending and regulations – not land law”.
One should try and explain why French government spending and labour market regulations are even worse than those of (for example) Germany.
I believe the egalitarian twist (the concept of state solidarity) is the key.
Alisa:
That’s close to how I see it. In addition to the considerations raised so far, sales tax rewards savings, and it’s my understanding that savings rates in western countries have been declining for decades. As I understand it, saving is critical for economic growth, so a tax that promotes savings is smarter than a tax that does not, other things aside.
(“Sales tax rewards savings” in a relative sense, i.e., relative to other forms of tax, not relative to no tax. I’d like to think that goes without saying, but I’ve been called to task on it before, so I’m saying it.)
Tedd, that’s a good point on the face of it, but then it begs the immediate question: what good is savings, if it is not to be spent (in the form of investment), and thus incur a sales tax, eventually?
It seems to me that we’re having a theoretical discussion, not talking about the system we’re going to force our govts to adopt–at gunpoint–later on after lunch. :>)
If there is a national U.S. sales tax it will, necessarily, devolve into the VAT system (there being no way to predict, in advance, whether a purchase will be used as an item to be sold or in the making of such). It will also, you may count upon it, result in increased paperwork (it will become vitally important to be able to prove what you did with what you bought) and the building of a bureaucracy to handle the mesh of new laws that will inevitably be enacted to support the sales-tax/VAT system.
Furthermore, in a modern industrial nation the majority of citizens are not landholders (I think!). You’re going to tell Richard Epstein he can’t vote because he lives in an apartment??? –Well, probably it’s a “condo,” but it’s only a few years ago that Peter Schiff announced he’d finally broken down and bought instead of renting. Or how about Ayn Rand?
That’s the best case–assuming that all income and capital gains taxes were abolished at the same time.
Only property-owners get to vote? Watch how people collude even more than they do now to buy up land for the purpose of influencing government.
The best method that I can see is to fund government through user fees (to the extent possible–most services are not compatible with libertarianism’s understanding of the proper role of government anyway) and, more importantly, by paying for the right to vote.
If you wish to vote, you pay a flat charge–the same for all. If you don’t have the money, find a second job, borrow it, or save till the next election.
In order to vote in any given election, you pay for the purpose. You may not purchase more than one vote. Votes are non-transferable. You must pass an exam on your country’s constitution (if it has one) and its political history before every national vote (yes, in America that would be every four years), and if I had my way the States would require the same for State elections.
It is not unlibertarian to require completed military service of voters.
Voting may be done electronically, by the way, for purposes of easy tallying–but printouts will be generated at the time of the vote, one to be kept for the election commission and one by the individual voter.
I really believe this would be by far the best system. Not that it’s completely corruption-proof: Nothing is; in this case the obvious flaw is that there’s no way to prevent a candidate from going around the neighborhood and giving people the money to vote, in return for the promise that they’ll vote for him.
NO political system will work unless everyone involved is committed to the principle of honesty.
Alisa:
I’ll premise my answer by saying that I’m very much a layman on economic issues, so I’m sure I have this at least partly wrong, if not completely wrong. But, as I understand it, unless your savings is cash in a mattress, it is invested, in one way or another. Either you invest it yourself or you stick it in a bank, which loans or invests it. Either way, the capital is available for business expansion. And it’s the availability of capital that’s important for economic growth (as opposed to having it spent or tied up in depreciating assets).
(Sorry, “preface.”)
Tedd (and from at least as lay a woman:-)), that was my point: once you invest your money, it is used to purchase stuff, thus incurring the sales tax – my point being that such tax does not encourage savings as capital for investment (good), rather than just as money in the mattress (indifferent).
I missed Alisa’s question.
Yes I would say that taxes on sales are the least bad (still BAD but least bad).
Whether that means there has to be a general sales tax – or a few duties on specific goods, is another matter.
Texas (as recently as 1960) had very low property taxe, and neither a income tax, corporation tax or a general sales tax (although there were specific duties on a few goods).
“But Texas had oil” – not a msssive source of revenue in 1960.
As recenly as 1965 – the little mountain country of Andorra has no income tax, no social security taxe (or social security taxes) no property tax (worth taking about) no real company taxation, and very little sales taxes.
Indeed Andorra (again as recenly as 1965) was very close to having no real government at all – and hardly anyone noticed.
Feudal Sark was quite similar.
In theory there was a mighty feudal overlord – in reality he was just this nice man tending his roses.
Althogh people can remember their feudal duties in an emergency.
As with Tolkien’s Shire (the Hobbitts are the English as they used to be – well perhaps not the hairy toes).
The Shire does not have taxation – but it does have a government, both the elected Mayor (who is the top person at the annual dinner – so a vitally important role) and an hereditary Thrain – a farmer by the name of Took.
But in hard times…..
Well any of “Sharkey’s” men who entered the Took country – was shot.
Shot as bsndits – by order of the Thrain.
The Barclay brothers should take note.
The nice man tending his roses could (if pushed too far) order them shot….
And it would not take an income tax or a sales tax to finance it.
The Hobbits are tougher than they look.
Maurice B. was telling me today about a relative of his who did the stone work on St. Andrews church (now a scruffy “arts centre”).
The man not only did a full days work – he also walked ten miles there and ten miles back home (every day).
Alisa:
I’m not sure I follow you. Do you mean that, since the items purchased when a business expands are also subject to sales tax then there’s no net gain?
I suppose that’s true, but I think most sales taxes don’t work that way. In Canada, companies pay only the net of sales tax they pay and tax they collect on sales. Value-added taxes tax only the “markup,” or some such.
Tedd, first off I’ll take this opportunity to ask anyone who can answer is there any material difference between a sales tax and VAT?
To our actual discussion, you posited originally that sales tax would encourage savings – presumably because people would tend to reduce “needless” spending and thus save more? Or did I misunderstand your point?
Alisa.
There are plenty of detailed differences – but no real material difference beteen a “value added tax” and a sales tax.
I use the terms interchangeably – and I am right to do so.
One other thing……
The American practice is to quote a price – and then add sales tax.
The British practice is to quote the price with the tax included.
The American practice is better – it reminds people that they are paying a tax.
Paul. Ford garages seem to have adopted the American practice, not making life easy when VAT was 17.5%, but 20% makes mental arithmetic easier.
I have long noted that Starbucks prints the tax paid on a product on the till receipt and it shows on the till, virtually unique in retail operations. A USP to me.
Alisa: VAT is vastly more complicated than a sales tax, it passes the VAT down a long chain from primary producer to manufacturer to retailer. One example. VAT on anilmals, per UK Customs and Excise.
http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_CL_000124&propertyType=document#P42_1513
And, of course, this complexity is why tax collectors and governments like VAT: it requires information to be reported to the about every aspect of economic activity.
Thanks guys.
Alisa:
That is the theory as it has been explained to me and, to me, it makes sense. If you think of it in a more direct way it seems obvious: If you were offered an income tax deduction for saving money instead of spending it you would probably be inclined to save more. Perhaps not a completely fair comparison, but that is in effect what a sales tax does: if you save the money instead of spending it you don’t pay the tax.
From the saver’s point of view it makes no difference whether the savings is in a mattress, a bank, or equity stock, other than the potential for return, or growth in value. (So, at the present moment in history, not much difference at all!) But from the economy’s point of view it makes a big difference. Savings (capital) that’s in a bank or in equity is available to someone to invest in the expansion of their business, whereas savings in a mattress is not.
A related point is that business expansion can only occur either through savings invested in the manner I described above or through inflating the currency (as in quantitative easing, or some similar mechanism). At least, that is my back-of-the-envelope, layman’s understanding. I’m sure Paul Marks and others could correct me on a number of points, and add considerable detail.
Tedd: thank you, you are correct and I now see that the root of my misunderstanding lied in my confusion between sales tax and VAT – IOW, your point stands for sales tax, my point applies for VAT.