Consumption Tax?

[Propertarian]

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FWIW, Bill Gates tax rate under this scheme would be like .00002 %.

[/ QUOTE ] I'm not talking about eliminating the income and investment tax (I would like to see the regressive sales tax eliminated, however)...I would just like to replace them.

[Copernicus]

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1. Making it even as progressive as the current income tax system would be difficult.

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Not really. Simply charge a higher percentage for more expensive items. Most cash registers are computers these days anyway, so it can all be done automatically. The only real problem is finding a way to allow consumers to buy in bulk (say 1 16 pound package of beef instead of 16 1 pound packages), but I doubt that would be terribly difficult.



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That still isnt very progressive, unless you are going to tax home sales which would help.

Taxing more expensive items a higher rate doesnt automatically make it a progressive tax. You have to tax specific purchases that represent a larger percentage of wealth at a higher rate.

Eg a higher tax rate on cars would make the system more regressive, since the wealthy (other than a handful of collectors) spend a smaller percentage of their wealth on cars then middle and low income families.

There are few items that I can think of that arent of that nature, and the total cost and total sales of those items (eg true luxury items...boats come to mind) couldnt be taxed at high enough a rate for there to be much progressivity.

[Propertarian]

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away from consumption purposes into investment. That may or may not be a good thing in itself, but it seems that it would lead to an increase, not a decrease in inequality, particularly since investments would now grow tax-free.

[/ QUOTE ] Well, this proposal is in part a hope for comprimise, and another at disincentivizing zero-sum conspicious consumption/keeping up with the Jones's syndrome.

More importantly, this reminds me of an important issue: what does it mean to want to decrease relative inequality exactly? We obviously (in my mind) need some relative inequality for incentives.

If you study the list of objections to relative inequality, you'll find out that the most of the harm comes from some having have a lot less than the average income in an area (the poverty line is more useful than some would have as believe), not from some people being really wealthy. So I suppose when I say relative inequality should be decreased, what I'm saying is that their shouldn't be many (or any) people too far under the median or average income; that nobody should be really poor, not that nobody should be really rich.

[Propertarian]

Here's how I think the consumption tax should work: The tax reform proposal progressively taxes income AFTER saving rather than just taxing all income; with the first 20k or so(adjusted upwards automatically with inflation) being exempt.

Link to an article in which Cornell Economist Frank justifies this proposal

[Copernicus]

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Here's how I think the consumption tax should work: The tax reform proposal progressively taxes income AFTER saving rather than just taxing all income; with the first 20k or so(adjusted upwards automatically with inflation) being exempt.

Link to an article in which Cornell Economist Frank justifies this proposal

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a consumption tax that taxes income?

Edit: the article clarifies what you mean, but that isnt what most people would consider a tax on "consumption" though if "savings" is defined as "everything that isnt spent on products or services" I guess its back to the same thing.

Im not sure how it really solves anything though.

[Copernicus]

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Here's how I think the consumption tax should work: The tax reform proposal progressively taxes income AFTER saving rather than just taxing all income; with the first 20k or so(adjusted upwards automatically with inflation) being exempt.

Link to an article in which Cornell Economist Frank justifies this proposal

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Thinking more about the article, there is some empirical evidence that the kind of behavior change he is talking about would not be easily forthcoming, and that is in 401(k) participation rates.

401(k) contributions are not only non-taxable, so that deferring $1 of income costs much less than dollar, but they are matched 50-100% by employers...far more incentive than a deduction to income taxes. Yet something like only 80% of eligibles participate at all, and only 40% of eligibles contribute at the maximum matched rate (including the top paid 20% who contribute at close to the maximum).

Also, since the deduction itself is highly "regressive" (in its impact on taxable income)tax rates would have to become increasingly progressive, and we (the supply-siders) know how negative the effects of that can be.

If somehow the "savings" deduction wasnt just a deferral of taxes into the future (eg 401(k) money is still taxed when it comes out), but carried some permanent incentive (eg earnings on the savings were permanently tax free, with some limitatons/phase outs for the wealthy), then there might be some chance of behavior modification, and the supply side impetus might reach down to a lower income level, so the new non-taxable income would be paid for by increased economic activity, requiring a smaller/less progressive increase in rates for the wealthy.

[AlexM]

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Because taking away the tax benefits would cause an immediate devaluation in most homes of 25% or more.

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So once again a problem caused by government requires "more government" as its solution. Lovely.

[AlexM]

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1. Making it even as progressive as the current income tax system would be difficult.

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Not really. Simply charge a higher percentage for more expensive items. Most cash registers are computers these days anyway, so it can all be done automatically. The only real problem is finding a way to allow consumers to buy in bulk (say 1 16 pound package of beef instead of 16 1 pound packages), but I doubt that would be terribly difficult.



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That still isnt very progressive, unless you are going to tax home sales which would help.

Taxing more expensive items a higher rate doesnt automatically make it a progressive tax. You have to tax specific purchases that represent a larger percentage of wealth at a higher rate.

Eg a higher tax rate on cars would make the system more regressive, since the wealthy (other than a handful of collectors) spend a smaller percentage of their wealth on cars then middle and low income families.

There are few items that I can think of that arent of that nature, and the total cost and total sales of those items (eg true luxury items...boats come to mind) couldnt be taxed at high enough a rate for there to be much progressivity.

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Yes, it wouldn't be flat out more for more. A $5000 car would not be taxed nearly as much as say a $5000 pair of shoes. It would be just as complicated and convoluted as our current tax code, just less people would deal with it directly. Stuff like bread and milk need not be taxed at all. Clothing, you might have no tax for items under $5-10 with a heavy tax for items over $500 and a ludicrous tax for $20000 dresses. There's no reason the government can't do this is they want.

Once again, I'm not supporting it, just pointing out the viability.

[Copernicus]

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Because taking away the tax benefits would cause an immediate devaluation in most homes of 25% or more.

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So once again a problem caused by government requires "more government" as its solution. Lovely.

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Only if you perceive it as a problem. Home ownership is a huge driver of the US economy, so most dont see it as a problem.

[AlexM]

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Here's how I think the consumption tax should work: The tax reform proposal progressively taxes income AFTER saving rather than just taxing all income; with the first 20k or so(adjusted upwards automatically with inflation) being exempt.

Link to an article in which Cornell Economist Frank justifies this proposal

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Ok, a consumption tax is a sales tax, not an income tax. Trust liberals to take a word and try to corrupt it to their own ends. Personally, I consider a sales tax to be the slightly lesser of two evils (which are both still evil), because while I'm still getting robbed from, at least with a sales tax they're not intruding in my life beyond the robbery. I don't have to fill out forms, save 7347 receipts or explain my financial behavior, and that's a definite improvement. It's kinda like the difference between a mugging and a home burglary. At least with the mugging you can still feel safe in your home!