I’ve written before that I’m a fan of the FairTax — it’s a flat consumption tax would do a lot to boost tax compliance, boost U.S. exports, and reduce complexity. So, it was with some interest that I read a New York Times article on a new proposal for a consumption tax. It only took me a few seconds to be horrified by what I read.
By replacing federal income taxes with a steeply progressive consumption tax, the United States could erase the federal deficit, stimulate additional savings, pay for valuable public services and reduce overseas borrowing — all without requiring difficult sacrifices from taxpayers.
First of all, the words “steeply progressive” send chills up and down my spine — and not chills of excitement. But let’s ignore that for a moment. How is it possible to simultaneously erase the deficit, provide brand new services, and eliminate borrowing — all without requiring difficult sacrifices from taxpayers?
As far as I call, it’s not possible.
Under such a tax, people would report not only their income but also their annual savings, as many already do under 401(k) plans and other retirement accounts. A family’s annual consumption is simply the difference between its income and its annual savings. That amount, minus a standard deduction — say, $30,000 for a family of four — would be the family’s taxable consumption. Rates would start low, like 10 percent. A family that earned $50,000 and saved $5,000 would thus have taxable consumption of $15,000. It would pay only $1,500 in tax. Under the current system of federal income taxes, this family would pay about $3,000 a year.
That’s great for low-income families. What about high income families?
Consider a family that spends $10 million a year and is deciding whether to add a $2 million wing to its mansion. If the top marginal tax rate on consumption were 100 percent, the project would cost $4 million. The additional tax payment would reduce the federal deficit by $2 million. Alternatively, the family could scale back, building only a $1 million addition. Then it would pay $1 million in additional tax and could deposit $2 million in savings. The federal deficit would fall by $1 million, and the additional savings would stimulate investment, promoting growth. Either way, the nation would come out ahead with no real sacrifice required of the wealthy family, because when all build larger houses, the result is merely to redefine what constitutes acceptable housing. With a consumption tax in place, most neighbors would also scale back the new wings on their mansions.
Uh-huh. That’s a mind-blowing definition of “no real sacrifice”. Give the rich an “inventive” to build smaller houses and they’ll be better off because they won’t have to compete with other rich people to build ever bigger houses. Wow.
Let’s also look at the idea that expanding a house isn’t investment. Expanding a house results in jobs for construction workers, foremen, and architects. It results in orders for more bricks, lumber, plaster, flooring, roofing, insulation, etc. Isn’t that beneficial to the economy?
The alternative to spending money how they want is that people save more, whether in banks or investment accounts. That would make credit cheaper for all kinds of borrowers — mortgage borrowers, automotive borrowers, education borrowers, home improvement borrowers, and businesses of all kinds.
What are people going to do with these cheap new loans? Buy things, I suppose. In the end, isn’t consumption just another form of investment?
Let me clear: I think this particular consumption tax is a horrid idea. Wealth isn’t the measure of how much money someone has in their bank account, it’s the measure of much useful things they have. What good does $20,000 in the bank do me, if I can’t use it to buy a bigger house, a bigger car, a better education, or a holiday in the Wisconsin Dells? It seems that this tax would encourage me to save, then penalize me for enjoying my savings.
Sounds like social engineering dressed up as tax policy — exactly what I dislike about current state of income taxes.
I vote “No”.
One Comment
The “steepness” of progressivity is just another ruse that will lead to more manipulation and political control by the privileged class (politicians and lobbyists for the wealthy and special interests). The freedom of enterprise in this country is being systematically destroyed by our “social activists” in Washington.
The plan that truly returns power to the people is the FairTax plan ( http://www.fairtax.org/site/PageServer?pagename=about_main )which untaxes income, scraps the tax code ( http://snipurl.com/scrapthecode ), eliminates 53% of the Washington lobbyists that game it, and it eliminates hiding taxes in the cost of goods and services by eliminating business income and payroll taxes (that puts us at a competitive disadvantage, globally, because of 22% price inflation built into prices, on average).
Since, as Greenspan has instructed, only citizens end up paying taxes, it is VISIBILITY that will ensure our economic system’s survival. Renown economist Laurence Kotlikoff believes that failure to enact the FairTax - choosing instead to try to “flatten” what he deems to be a non-flattenable income tax system - will eventuate into an irrevocable economic meltdown ( http://snipurl.com/meltdowninprogress ), because of the hidden aspects of the current system that make political accountability impossible.
Prices AFTER FairTax would look SIMILAR to prices BEFORE FairTax - NOT 30% HIGHER - as opponents contend; competition would see to it. The FairTax rate on new items would be 29.9% (on the new, reduced cost of items because business isn’t taxed under FairTax - thus lowering retail prices by 20% to 30%), or 23% of the “tax inclusive” price tag - this is the way INCOME TAX is figured (parts of the total dollar).
The effective tax rate percentages, that different income groups would pay under a FairTax consumption tax, are calculated by crediting the monthly “prebate” (rebate of tax on necessities) against all likely monthly spending of citizen families (1 member, and greater based on figures established by the Dept. of HHS - a single person receiving ~$200/mo. A family of four receiving ~$500, in addition to family earners receiving their WHOLE paycheck). Prof.’s Kotlikoff and Rapson (10/06) have concluded,
(From study: http://snipurl.com/kotcomparetaxrates ) “…the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.
“Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax.”
Further,
(From study: http://snipurl.com/kotftmacromicro ) “…once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there’s a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent.”