What would be wrong with dropping the income tax entirely?

[Avareth]

Originally Posted by kp_72110

I'm always curious why people think paying taxes to an inefficient system like a government entity is the best way to redistribute money? There are certainly better ways to make sure the people you want to help get the help they need other then through government. Taxes are such a poor way to really help people that sincerely need help.

A fairly small percentage of our taxes pay to help people who may or may not need that help, and who may or may not receive that help more efficiently through other means. Taxes primarily (ideally, anyway) pay for infrastructure. Who would voluntarily pay for the roads that everybody drives on? Who would voluntarily pay for an aircraft carrier for national security? Who would voluntarily pay for their own child's education, much less that of a worthy neighbor, who might end up curing cancer? Not enough funds would go to those sources voluntarily; taxes are necessary.

[kp_72110]

So by your logic, bureaucratic jobs are a necessary part of our economy. I strongly disagree but perhaps I'll start another thread on that logic. Flawed logic in my opinion. But I don't want to hijack any further.

[septimus]

OP wants to change Federal revenue, not reduce it. I thought Dopers were better at staying on-topic than this. Nevertheless ...

Originally Posted by Qin Shi Huangdi

There are few not too unreasonable ideas to start with-cutting back military spending ten percent...

In round figures, U.S. military spending is $700 billion or about $2200 per capita. That doesn't even include Homeland Security, etc. A 10% cutback would save $220 per capita. That's not chump change.

Originally Posted by Qin Shi Huangdi

... axing all extras like the National Endowment for the Arts and so on.

Whoaa! What's with you right-wingers and the NEA? And when did you start pretending your hatred for public arts was about saving money?

NEA spends $150 million (note the 'm' please) or 50 cents per capita. To mention it in the same paragraph as the military for savings shows innumeracy.

What are you going to do with your 50 cents, Qin? "Super-size, me"? I think I'll just save mine up for twelve years and treat myself to a haircut.

Originally Posted by Little Nemo

A problem with a consumption tax is that it's harder to enforce than an income tax. Using withholding, an income tax is generally collected at the point where a person is paid, which makes it easier for the government to focus its attention on that relatively limited area and enforce compliance.

But a consumption tax would tax a much much greater number of transactions and it would be virtually impossible for the government to watch a significant fraction of these. So it would be easy for people to evade the tax by buying things "under the table".

Simplicity and ease of enforcement is an important issue, but it's one reason that I agree with OP that alternatives should be explored. I mentioned real estate taxes which are almost impossible to evade, and there are others. I think sales or VAT taxes are relatively easy to collect, on the majority of material items. (Exempting items sold via Internet seems a mistake, but that's another topic.)

Income tax enforcement is more problematic. You speak of "collected at the point where a person is paid" but this works best against "the little guy." Waitresses are withheld on expected tips, whether they get the tips are not. But criminals, various types of entrepreneur, and some lawyers have plenty of unreported income. Instead of taxing income, there is considerable logic to taxing spending on luxuries.

Services and underground economy are a problem. Money spent on (or earned by) hookers and blow may be largely untaxed in both income tax and sales tax schemes. One way for government to make up revenue shortfalls would be to get in on the hooker and blow businesses but, again, that's a topic for a different thread.

[Little Nemo]

Originally Posted by kp_72110

I'm always curious why people think paying taxes to an inefficient system like a government entity is the best way to redistribute money? There are certainly better ways to make sure the people you want to help get the help they need other then through government. Taxes are such a poor way to really help people that sincerely need help.

It's not about redistributing money. The government mainly does things like defend the country, maintain a legal system, run schools, build roads, etc. People seem to be okay with this.

[Hellestal]

Originally Posted by Frylock

What about going entirely to a consumption tax?

Assuming certain basic cheap goods are tax free (as they currently are already) would this at least stop people from arguing unnecessarily about who is being taxed fairly?

Are there economic reasons why it can't work?

A while ago I read an article (don't remember where, sorry) which claimed that an all-consumption-tax system is favored by economists from across the political spectrum. Is there a consensus for or against the idea?

The idea behind a progressive consumption tax is that you get rid of the tax on income, but you still report all earnings to the tax authority... along with all savings. The savings aren't taxed, so you're only hit with a bill based on what you consumed, with a standard deduction of, I dunno, maybe 30k for a family of four.

If you earn 30k a year in such a family, and spend it all on necessities, you don't have any federal consumption tax bill. If you earn 100k and live an equally frugal life, meaning you have 70k of savings, then you also have no federal consumption tax liability. Any consumption past the initial deduction gets hit with a tax, and this can rise step-by-step as income tax liability does. Say that if your income is 50k and you spend 40k a year, that's 10k of taxable consumption, and it might get hit with a 20% rate, meaning 2k of tax liability. If you spend 130k in a year, 100k of that consumption is taxable. Maybe the first 50 is taxed at 20%, and the second 50 is taxed at 40%, meaning a total consumption tax liability of 30k. And so on.

I don't know what the rates would have to be, although the steepest marginal rates can theoretically be much more stiff than the ideal marginal rates on income taxes, because income taxes are more inefficient, in that they provide disincentives to work. Consumption taxes only provide disincentives to consume, which should mean more savings and thus more money available for future economic growth.

I've been thinking about starting a threat on the progressive consumption tax for probably about a year, but taxation isn't really my thing, and I haven't had time to do my homework properly on the topic. The basic idea, though? It seems solid to me. Implementation and enforcement? That's another question. Advocates say that we could keep track of income just as we do now, and we could keep track of savings much as is done currently with tax-exempt retirement accounts. That's definitely a huge difference from the bureaucratic hassle of a national "sales tax", but I still don't know exactly how efficiently it would work, how easy it would be for the rich to dodge the tax, etc. At minimum you'd have to have consumption penalties for moving savings overseas, even if it's claimed to be for "investment". There's no reason for the US federal government to subsidize foreign investment (or just as likely, foreign consumption) in that way. More random thinking about the implementation: You'd also have to be careful about someone living a mostly frugal life, and then making a huge purchase in a single year. If they empty out their savings all at once, there's no way they'd be able to afford the tax liability for so much consumption, unless the liability somehow levied at the time of sale. I don't know how that sort of case would be handled.

It's an interesting topic. (Far secondary at the moment to issues of macro and monetary policy, in my biased opinion, but still a very interesting topic.)

[Der Trihs]

Originally Posted by kp_72110

I'm always curious why people think paying taxes to an inefficient system like a government entity is the best way to redistribute money? There are certainly better ways to make sure the people you want to help get the help they need other then through government. Taxes are such a poor way to really help people that sincerely need help.

No, they are the most efficient method. They take in more money than charity ever has or will, including a huge amount from people who would cheerfully see the rest of us die before they willingly helped anyone besides themselves. The government has more resources and a better economy of scale than anyone else, and is often less corrupt and inefficient than private charity.

Originally Posted by kp_72110

So by your logic, bureaucratic jobs are a necessary part of our economy.

If you want to live in even a semi-modern society yes they are. Bureaucracy is a basic part of the infrastructure of society; for all its flaws, it is vital to innumerable things that couldn't be accomplished without it.

[Der Trihs]

Originally Posted by Hellestal

I don't know what the rates would have to be, although the steepest marginal rates can theoretically be much more stiff than the ideal marginal rates on income taxes, because income taxes are more inefficient, in that they provide disincentives to work. Consumption taxes only provide disincentives to consume, which should mean more savings and thus more money available for future economic growth.

Consumption taxes still provide a disincentive to work; if you aren't going to spend anything more than a certain amount of money, you don't need to work for more. They also provide a disincentive to hiring people by depressing demand. And saving only has potential to stimulate the economy if it's eventually spent and if there's something to invest in, which a consumption tax discourages (the latter by suppressing demand).

[Voyager]

Originally Posted by Qin Shi Huangdi

There are few not too unreasonable ideas to start with-cutting back military spending ten percent, raising the retirement age to 70 (when the retirement age was set at 65 by Bismarck, far fewer people lived to that age obviously), and axing all extras like the National Endowment for the Arts and so on.

Get back to us about raising the retirement age to 70 when you are within 50 years of it. It sounds a much better idea at 20 then it does at 60. It also sounds a lot better for people sitting in air conditioned offices on their asses (guilty) than for those working on roofs.

Also, if we raised the retirement age to 70, you'd never get a job when you get out of college, because people like me will be Bogarting them. I understand the incentive to raise the retirement age, but there are problems.

[Voyager]

Originally Posted by Hellestal

I don't know what the rates would have to be, although the steepest marginal rates can theoretically be much more stiff than the ideal marginal rates on income taxes, because income taxes are more inefficient, in that they provide disincentives to work. Consumption taxes only provide disincentives to consume, which should mean more savings and thus more money available for future economic growth.

Investment in what, given that consumption would be decreased.

Second, I posted a link on the relative amount of sales taxes versus income taxes are paid by those in different income classes. In California the sales tax rate is higher than the income tax rate (obviously not on the same base) and we see that top earners pay a far smaller percentage of their income in sales taxes than on income taxes. Maybe that would help you estimate how high marginal consumption taxes would have to be to make up - damn high for a back of the envelope calculation. Other people have mentioned the incentive to cheat. In California, at least, we are supposed to declare products purchased out of state or on-line and pay taxes on them with our income tax form. Let's just say compliance is less than 100%. I can just see fast speedboats smuggling iPads and minks from Canada.

[Nava]

Originally Posted by Patty O'Furniture

120 times bigger? Really? I guess I can't even imagine where I could buy a $30,000 suit but I guess they're out there somewhere.

While I know that items like those are often sold with a discount "because you are such a good customer!", the issue of Vogue Spain I read the other day had, among other things, a pair of shoes for 6300€

That's two shoes, not two cupboards full of shoes, ok? And no, they didn't come with a masseur and a pedicure either, nor was it the most expensive piece of clothing.





Spain raised its VAT two years ago. It's going up again, and some things which used to carry the "basic product" rate will now be considered "luxuries" (one of them is haircuts); the fact that "feminine higiene products" are considered "luxuries" is a sore point with many women, although apparently not sore enough. Which items are considered luxuries and which aren't can be a very controversial point.

What to cut? Oh boy. Again, we're cutting stuff left and right. There's even regional governments which had already planned a budget with superavit (which is how they should always be, damnit; that way if there's an emergency you cover it from the superavit) but which are having to cut more, cut more, and cut in spots where they didn't want to because it's being ordered from above and it's being ordered with the kind of legal instruments against which we have no recourse. Education. Healthcare. Those roads which are our pride and joy (you famously can tell when you're entering or exiting certain regions from the change in the road). But the Government is one of the biggest spenders, specially once you clump all its levels together: cut too much and the economy takes a big hit, leading to more people unemployed, to more people in need, to more companies and individuals going bankrupt. And to less spending - so less income for the Government too...

[Hellestal]

Originally Posted by Der Trihs

Consumption taxes still provide a disincentive to work; if you aren't going to spend anything more than a certain amount of money, you don't need to work for more.

You're referring to a real effect, and an interesting one, but you've got the effect reversed. If we're looking at a person with interesting labor/leisure preferences, such that they only desire a certain minimum level of income, then they would work less when they earn a higher wage (a labor supply curve that eventually slopes backward). In that case, a specifically targeted income tax, if such could be arranged, isn't going to provide a disincentive to work. It will cause the opposite: by lowering their income with the tax, they'll actually work more hours to maintain the standard level of consumption. In that sense, taxing income can provide -- in certain select situations -- an incentive to work more.

This is rare incentive to work, and it'd apply equally to both kinds of taxes.

The bigger effect is the other way, and it only applies to income taxes not consumption taxes. At higher income levels, the evidence is fairly clear that excessively high rates carry a lot of weight. The weight doesn't necessarily have to be disincentive to work (although that's likely a factor for spouses of high-earners, if not for high earners themselves), it could just as easily be tax avoidance. Sucks, but that's life. Whatever the reason, underlying incentives or practical considerations in tax collection, countries have had problems raising adequate funds through income taxes. Lots of social democracies in Europe had higher income taxes in the past, and those ended up coming down almost everywhere. They rely now on a mixture of income tax and a fairly stiff VAT of up to 20%. Japan too is talking about a push of 5% to 10% on their own consumption tax (which has no planned exceptions for things like groceries). The US will eventually need to make up its budget shortfalls in some way, and a lot of very sensible people are advocating a VAT. Problem is, that could, maybe, hit poor people harder, even given exceptions like groceries, than a properly instituted progressive consumption tax.

I'd bet a hundred bucks that we'll have a VAT within 20 years, but I think a progressive consumption tax is worth some genuine consideration as an alternative. And a progressive consumption tax has other potential advantages. (I don't agree with everything in that, by the way, but I think it's an interesting perspective that deserves more thought.)

Originally Posted by Der Trihs

They also provide a disincentive to hiring people by depressing demand. And saving only has potential to stimulate the economy if it's eventually spent and if there's something to invest in, which a consumption tax discourages (the latter by suppressing demand).

Demand is the number one issue right now with the economy.

It shouldn't be.

Demand problems aren't real problems. They are dirt simple to fix. Yes, we have insufficient demand at the moment, and it's completely ridiculous. The reason why demand is an issue is the stupidity of our policy makers. Any reduction of demand, whether it's caused by the collapse of a bubble or a new tax on consumption, can be offset by expansion of demand elsewhere, normally by easier money. It's true we don't have that sort of sensibleness going for us at the moment, but that's exactly why I previously said macro/money (meaning, the business cycle) is a more important issue right now. An economy should never, ever be dealing with a demand shortfall. Demand is easy to fix. Eventually, people will once again figure that out, though possibly after it's too late for the euro.

Originally Posted by Voyager

Investment in what, given that consumption would be decreased.

Investment in future consumption, obviously. That is what investment is.

And future consumption does not have to decrease, even with less current consumption. People in the 19th century consumed less in order to build more factories. Because of that, people today are able to both invest and consume more than people could even imagine in the 19th century. That is what investment is. It is not about having more consumption today, it's about having more available next year and next decade and next century. The whole point of consuming less now is to have more possibilities open in the future. The US saves too little, and that'll be extremely important again after the cyclical demand problem is over.

Originally Posted by Voyager

Second, I posted a link on the relative amount of sales taxes versus income taxes are paid by those in different income classes. In California the sales tax rate is higher than the income tax rate (obviously not on the same base) and we see that top earners pay a far smaller percentage of their income in sales taxes than on income taxes. Maybe that would help you estimate how high marginal consumption taxes would have to be to make up - damn high for a back of the envelope calculation.

This is absolutely true. Even to maintain mere revenue neutrality, it would have to be both much steeper and reach a much higher marginal rate. Where exactly? Dunno.

But so what? None of the traditional conservative objections to high marginal income tax rates apply directly to high marginal consumption tax rates.

If it's really doable -- an open question -- it would be a more efficient system, possibly better than a VAT which is the only feasible alternative I see. I think the current consensus about the budget (among people who know what they're about) has income tax rates going up, but still not enough to deal with our longer-term problems. We're going to have a federal consumption tax of one sort or another. A more fundamental overhaul should at least be considered.

Originally Posted by Voyager

Other people have mentioned the incentive to cheat. In California, at least, we are supposed to declare products purchased out of state or on-line and pay taxes on them with our income tax form. Let's just say compliance is less than 100%. I can just see fast speedboats smuggling iPads and minks from Canada.

This particular type of tax avoidance shouldn't fly if the tax administration works as advertised.

They can't pay for their smuggled iPads with wishes and dreams. They'll need to draw down one of their accounts, in some manner, to make the purchase. That would show up in the files, and be appropriately marked as consumption.

If their own recorded accounts are being avoided entirely, if income is being routed directly from their employers, or some illegally hidden overseas investments, with the funds transferred to the sellers of luxury merchandise in the US, then sure, that's a huge tax evasion problem. Maybe the advocates of this plan underestimate the anonymity of the current international payments architecture. I can't say for certain. Anyway, my tentative impression at the moment is that with the right oversight system, it could work without too much dodging. Willing to rethink that if there's compelling reason to believe the contrary. But the thing is, the rich already spend a lot of time trying to dodge tax. The question isn't whether this would be perfect, but whether it would work better than what we got.

[Nava]

Originally Posted by Hellestal

The idea behind a progressive consumption tax is that you get rid of the tax on income, but you still report all earnings to the tax authority... along with all savings. The savings aren't taxed, so you're only hit with a bill based on what you consumed, with a standard deduction of, I dunno, maybe 30k for a family of four.

If you earn 30k a year in such a family, and spend it all on necessities, you don't have any federal consumption tax bill. If you earn 100k and live an equally frugal life, meaning you have 70k of savings, then you also have no federal consumption tax liability. Any consumption past the initial deduction gets hit with a tax, and this can rise step-by-step as income tax liability does. Say that if your income is 50k and you spend 40k a year, that's 10k of taxable consumption, and it might get hit with a 20% rate, meaning 2k of tax liability. If you spend 130k in a year, 100k of that consumption is taxable. Maybe the first 50 is taxed at 20%, and the second 50 is taxed at 40%, meaning a total consumption tax liability of 30k. And so on.

That sounds like my income tax; the difference is that the government doesn't care whether my non-deductibles have gone towards consumption (which gets its own taxes) or not. I'm self-employed (autónoma) in Spain.


Money made in the last quarter - money spent on business needs in the last quarter = A
look up which tax range A falls into -> get B
A*B = amount due

That's every quarter. Once a year during income tax season:
(Money made in year - money spent on business needs in year - SS tax paid in year - (mortgage + retirement fund deductions)) = A'
look up which tax range A falls into -> get B'
(A'*B')-amount paid in quarterly installments = itty bitty amount which the government owes me


For the lowest income ranges, B equals zero.

[Fear Itself]

The only way this could be even remotely fair is if you also taxed the purchase of equities (stocks).

The argument against that (it would disincentivize investment) is no more persuasive than the argument that a consumption tax disincentivizes consumption. Both hurt the economy equally, and for the same reason, so if you are against one, you pretty much have to be against the other, or risk looking like an opportunistic hypocrite.

[Red Wiggler]

Originally Posted by Little Nemo

(I'll admit right off I haven't read all posts so I'm responding to the OP.)

A problem with a consumption tax is that it's harder to enforce than an income tax. Using withholding, an income tax is generally collected at the point where a person is paid, which makes it easier for the government to focus its attention on that relatively limited area and enforce compliance.

But a consumption tax would tax a much much greater number of transactions and it would be virtually impossible for the government to watch a significant fraction of these. So it would be easy for people to evade the tax by buying things "under the table".

Latest figures from the IRS estimate the voluntary tax compliance rate at about 83%. It's much simpler to audit and collect sales tax from licensed retailers (who only number about 10% as many as individual taxpayers) with their ability to do business on the line than it is to audit and collect income taxes from businesses and self-employed people.

There are many reasonable arguments against a national consumption tax instead of income taxes but compliance isn't one of them.

[John Mace]

Originally Posted by Hellestal

I've been thinking about starting a threat on the progressive consumption tax for probably about a year...

Dr. Freud is ready to see you now.

[puddleglum]

Originally Posted by Der Trihs

The economic right is less different from the Communists than they like to pretend; they mainly just want to call their totalitarian organization a corporation instead of a government, and their overlords CEOs instead of commissars. And they want to shove Jesus instead of Marx down everyone's throat as the one true prophet. As someone once said, if IBM merged with the Pentagon and took over the country, you'd have communism.

If IBM merged with the pentagon and took over the country you'd have communism and if I had some ham I could make a ham sandwich, if I had some bread.

[puddleglum]

Originally Posted by foolsguinea

The purchaser. Really. Plant all the trees you want, but if no one wants their fruit you still make no money.You're confusing material culture with the economy. In the short run, you make money because someone can pay for what you produce.

Money is accrued in the following ways: people spend money for your goods and services, people pay you rents, a patron (possibly the state) supports you, theft, or extortion.
The sale of goods and services requires demand: customers with purchasing power.
Rents collected on tenants without income just get you poor debtors.
A patron has to have means to support you. If the state, it may have to collect taxes or rents.
Theft and extortion require a victim with something to take.

Now, it is true that material culture is improved by people making things, and they deserve to be paid. Guess who pays them? Either customers or patrons. If you don't expect customers to afford your work product, then go with hat in hand to the state or some charity and see if they'll pay you out of a respect for the inherent social value of your work product. If it is your contention that your industry requires state subsidy, fine. Pace Bastiat, some do. But in a market economy, we traditionally subsidize the producers of popular goods by giving the people the ability to pay. If the people can't pay, the producer may lose his margin and go broke."

in a market economy, we traditionally subsidize the producers of popular goods by giving the people the ability to pay.
This is where you are wrong people are not given the ability to pay, people gain the ability to pay by producing something of value. The money is not wealth it is just a medium of exchange. Money in itself is worthless it is useful as a measure of the value of something. Without producing something of value to the rest of the economy the consumer can not have the money to spend. The more that is produced the more wealth that is in the economy.
I am sure the people in Haiti would like flat screen televisions and iPhones as much as the people in American do. The difference is that people in America produce enough to pay for them but people in Haiti do not.
What can be confusing to people is the talk of inadequate demand and the need for more aggregate demand. What is meant is demand at a certain price. Demand changes depending on price. For example, I enjoy eating crab legs. I would like to eat them all the time, but they are expensive so I hardly ever eat them. My demand for crab legs is huge, but my demand at the current price is small. Demand for thread before the industrial revolution was just as high as it was after, the difference is that the industrial revolution allowed people to produce more and fulfill the previously existing demand. Demand is practically infinite, what determines wealth is supply and for that you need production.

[puddleglum]

Originally Posted by Fear Itself

The only way this could be even remotely fair is if you also taxed the purchase of equities (stocks).

The argument against that (it would disincentivize investment) is no more persuasive than the argument that a consumption tax disincentivizes consumption. Both hurt the economy equally, and for the same reason, so if you are against one, you pretty much have to be against the other, or risk looking like an opportunistic hypocrite.

This is not true, investment is what drives the economy. If you hurt investment, you automatically hurt the economy more than if you hurt consumption. If I purchase a car for $10,000 I get a $10,000 dollar car. If I invest $10,000 dollars in a car business then that business if successful may produce $20,000 dollars worth of cars. The economy is up $10,000 because of the investment.
Investment is just delayed consumption, no one buys stock because they enjoy having fancy pieces of paper in a safe, they do it for future consumption. If the investment pays off then the future consumption will be higher than the present consumption so by taxing consumption you end up taxing people who invest, just at a different time.

[Voyager]

Originally Posted by Hellestal

Demand problems aren't real problems. They are dirt simple to fix. Yes, we have insufficient demand at the moment, and it's completely ridiculous. The reason why demand is an issue is the stupidity of our policy makers. Any reduction of demand, whether it's caused by the collapse of a bubble or a new tax on consumption, can be offset by expansion of demand elsewhere, normally by easier money. It's true we don't have that sort of sensibleness going for us at the moment, but that's exactly why I previously said macro/money (meaning, the business cycle) is a more important issue right now. An economy should never, ever be dealing with a demand shortfall. Demand is easy to fix. Eventually, people will once again figure that out, though possibly after it's too late for the euro.


Investment in future consumption, obviously. That is what investment is.

And future consumption does not have to decrease, even with less current consumption. People in the 19th century consumed less in order to build more factories. Because of that, people today are able to both invest and consume more than people could even imagine in the 19th century. That is what investment is. It is not about having more consumption today, it's about having more available next year and next decade and next century. The whole point of consuming less now is to have more possibilities open in the future. The US saves too little, and that'll be extremely important again after the cyclical demand problem is over.

it is true that investment is future consumption, but investment decisions are based on the expectation of future consumption. If all businesses increased investment today, by building and hiring, I agree that the demand problem would take care of itself. And I agree that the problem is dirt simple for the government to fix, if it weren't the case that one side is too stupid to see dirt simple things.
But one of the causes of the Bubble was that a lot of companies were investing in the expectation of consumption that were unrealistic. We had companies like pets.com who saw a market that did not exist, but we also had networking companies building out infrastructure far in excess of any realistic level of demand.
I agree that one of the reasons to consume less now is to have more later. Depressed consumer consumption during WW II is a good if forced example of this. But some reduced consumption today is the result of fear. And if the consumption tax is permanent, wouldn't the reduction in consumption from higher prices also be permanent?
To anticipate an objection - classically homo economicus would know that a well designed progressive tax would give him exactly the money in reduced income taxes that he would spend in increased consumption taxes, so his consumption rate should be unaffected. However, and I'd have to ask my daughter if there have been experiments on this, I would guess that the valuation of price versus perceived value would be sticky, and cause many people to see even things with the same effective price as being more expensive. Hell, I still think any shirts that cost more than the ones I bought in high school 40 years ago are ripoffs.
Would the government take its money not at the point of sale? See below for problems with that.

This is absolutely true. Even to maintain mere revenue neutrality, it would have to be both much steeper and reach a much higher marginal rate. Where exactly? Dunno.

Pretty high I'd guess. I certainly agree that a progressive tax is better than a flat one, but for the Romneys of the world you'd almost have to make it > 100% - especially in comparison to some reasonable high bracket tax rate.

But so what? None of the traditional conservative objections to high marginal income tax rates apply directly to high marginal consumption tax rates.

Sure. It encourages investment, supposedly. However, there would certainly be lobbying against a 1%er rate that would be high enough to make up for lost revenue, especially by conservatives, and we'd wind up with a lower rate as a compromise and lose revenue.

If it's really doable -- an open question -- it would be a more efficient system, possibly better than a VAT which is the only feasible alternative I see. I think the current consensus about the budget (among people who know what they're about) has income tax rates going up, but still not enough to deal with our longer-term problems. We're going to have a federal consumption tax of one sort or another. A more fundamental overhaul should at least be considered.

A supplemental VAT is another matter entirely, without many of the problems I mentioned.

This particular type of tax avoidance shouldn't fly if the tax administration works as advertised.

They can't pay for their smuggled iPads with wishes and dreams. They'll need to draw down one of their accounts, in some manner, to make the purchase. That would show up in the files, and be appropriately marked as consumption.

If their own recorded accounts are being avoided entirely, if income is being routed directly from their employers, or some illegally hidden overseas investments, with the funds transferred to the sellers of luxury merchandise in the US, then sure, that's a huge tax evasion problem. Maybe the advocates of this plan underestimate the anonymity of the current international payments architecture. I can't say for certain. Anyway, my tentative impression at the moment is that with the right oversight system, it could work without too much dodging. Willing to rethink that if there's compelling reason to believe the contrary. But the thing is, the rich already spend a lot of time trying to dodge tax. The question isn't whether this would be perfect, but whether it would work better than what we got.

Well, this would unify liberal and conservatives, neither of whom would be too happy at the government looking into our accounts to monitor our purchasing as a matter of course. Our credit card companies know what we're buying, but only on that card. The government knowing to the level of detail required to see if a purchase is on an excluded item or not would make almost anyone shudder. Except people who'd think this would be a wonderful data source to study purchasing habits, that is!

[Voyager]

Originally Posted by puddleglum

This is not true, investment is what drives the economy. If you hurt investment, you automatically hurt the economy more than if you hurt consumption.

Tell that to the people who invested in pets.com.

If I purchase a car for $10,000 I get a $10,000 dollar car. If I invest $10,000 dollars in a car business then that business if successful may produce $20,000 dollars worth of cars. The economy is up $10,000 because of the investment.

And if you invested in an Edsel dealership, you would have been better off buying the car. Investment is good if the probability of a return exceeds whatever RoI number you set. Investment is bad otherwise. Clearly businesses today see that investment is not a good idea. Do you think they are stupid?

Investment is just delayed consumption, no one buys stock because they enjoy having fancy pieces of paper in a safe, they do it for future consumption. If the investment pays off then the future consumption will be higher than the present consumption so by taxing consumption you end up taxing people who invest, just at a different time.

If you buy the wrong stock you had better enjoy the fancy pieces of paper, since that is all you'll have left. (I know this for a fact. ) Actually, you don't even get the fancy pieces of paper anymore, just electrons.

There have been times, late '70s early '80s, where there was a shortage of investment money, thanks to high inflation, and reducing consumption would have been a good thing. But that is not the case today.

[HMS Irruncible]

Originally Posted by Frylock

What about going entirely to a consumption tax?

Assuming certain basic cheap goods are tax free (as they currently are already) would this at least stop people from arguing unnecessarily about who is being taxed fairly?

Are there economic reasons why it can't work?

A while ago I read an article (don't remember where, sorry) which claimed that an all-consumption-tax system is favored by economists from across the political spectrum. Is there a consensus for or against the idea?

Let's say the richer taxpayer pays 100 times more than the poorer taxpayer*. That's what our current system is based on. In order to remain revenue neutral, any new taxing scheme would have to maintain that ratio. Does that hypothetical wealthy taxpayer make 100x more purchases than the middle class taxpayer? He probably makes more, but nowhere near 100x as much. Where would that missing revenue come from?

The consumption tax is seductive because it is simple and superficially sounds like a fair shake. But it's really just a less jarring way to propose "Let's cut taxes dramatically for the rich and watch the government crumble from lack of funding."

* I think we can all agree that simple math demonstrates that the richest Americans earn vastly more than 100x more than the lower-middle class ones, but 100 is a nice round conservative number for the sake of discussion.

[Voyager]

Originally Posted by HMS Irruncible

Let's say the richer taxpayer pays 100 times more than the poorer taxpayer*. That's what our current system is based on. In order to remain revenue neutral, any new taxing scheme would have to maintain that ratio. Does that hypothetical wealthy taxpayer make 100x more purchases than the middle class taxpayer? He probably makes more, but nowhere near 100x as much. Where would that missing revenue come from?

The consumption tax is seductive because it is simple and superficially sounds like a fair shake. But it's really just a less jarring way to propose "Let's cut taxes dramatically for the rich and watch the government crumble from lack of funding."

* I think we can all agree that simple math demonstrates that the richest Americans earn vastly more than 100x more than the lower-middle class ones, but 100 is a nice round conservative number for the sake of discussion.

You don't have to guess. From the link I posted on page 1, page 30.

The average income of the bottom 20% is $13,200. They pay an average 6.5% of their income in sales taxes, or $858. For simplicity, say CA sales taxes are 10%, this would mean they buy $8,580 of taxable goods, which is 65% of their income. (Pretty much all of it - their income tax is only 0.1% of their total income.)

The top 1% have an average income of $2,180,900, and pay an average 0.8% of that in sales taxes. That is $17,447, or taxable goods worth $174,470. Sounds like a lot, but it is only 8% of their income. California income taxes are 7.5% of their income, so they would have to pay nearly a 100% consumption tax to make up even the California income tax - and the Federal tax is much higher, even for Mitt. This of course assumes consumption patterns won't be changed by boosting the tax.
So, I'd say your intuition is correct.

[foolsguinea]

Hellestal, I can understand why economists looking for more empirical data would love to have the IRS track every purchase FOR SCIENCE! But wouldn't it be easier to get the effect of your progressive consumption tax by having a progressive income tax, and then giving exemptions for monies saved in defined ways?

So imagine a régime wherein we have a progressive income tax, but we exempt monies verifiably invested. It would be a little different from our present capital gains tax break, but the same sort of principle. To my New Dealer eyes, it looks like an attempt to change the way Big Capital gets tax breaks, so the working-class left is temporarily confused by a new tactic as the tax code appears to be "reformed." It's just right-wing bobbing and weaving.

In the end, with this proposed, you can expect me to be opposed to it alongside the other lefties.

[Fear Itself]

Originally Posted by puddleglum

This is not true, investment is what drives the economy.

Investment does not drive the economy. Corporations are sitting on two trillion dollars of cash, waiting for consumers to start buying again. No amount of new investment will stimulate the economy.

Investment does not drive the economy. Please stop spreading ignorance.

[Voyager]

Originally Posted by Fear Itself

Investment does not drive the economy. Corporations are sitting on two trillion dollars of cash, waiting for consumers to start buying again. No amount of new investment will stimulate the economy.

Investment does not drive the economy. Please stop spreading ignorance.

To be fair, the problem is that they are sitting on this money without investing it. If they actually invest this money it would help - assuming they do it here and not in China, of course. Giving banks and corporations and rich people tax breaks to allow them to invest does no good unless they do so.
Maybe we could give the rich tax breaks but take the money back unless they actually do invest it.

[foolsguinea]

I'd raise taxes and have public investment. That would count for a lot more.

[Bpelta]

A while ago I read an article (don't remember where, sorry) which claimed that an all-consumption-tax system is favored by economists from across the political spectrum. Is there a consensus for or against the idea?

FWIW, I recently read this article.

[Voyager]

Originally Posted by foolsguinea

I'd raise taxes and have public investment. That would count for a lot more.

You socialist you! Actually, since we have so many high return projects available, only some of which got done using the stimulus money, this is the best idea of all, and would siphon some of that pile of cash into more productive uses.

[Manlob]

If a consuption tax is implemented, how do you get around having saved money being taxed twice? Would somebody on the brink of retirement who saved for 40 years suddenly have to work an extra 10 years because his savings and Roth IRA would now be subjected to additional taxes?

[Full Tilt Boogie]

Originally Posted by Frylock

What would be wrong with dropping the income tax entirely?

What about going entirely to a consumption tax?

What about those who can't afford to 'consume'? How would they be taxed?

Are there economic reasons why it can't work?

Yes - and they are myriad. How would you fund an economy without income tax? You couldn't.

A while ago I read an article (don't remember where, sorry) which claimed that an all-consumption-tax system is favored by economists from across the political spectrum. Is there a consensus for or against the idea?

Sorry, without access to that article, you're gonna struggle here.

[Hellestal]

Originally Posted by Voyager

But one of the causes of the Bubble was that a lot of companies were investing in the expectation of consumption that were unrealistic. We had companies like pets.com who saw a market that did not exist, but we also had networking companies building out infrastructure far in excess of any realistic level of demand.

You put a lot of seeds in the ground, not all of them will grow to healthy plants.

Still, there's zero reason that the collapse of a housing bubble has to put so many people out of work who aren't in the construction industry. That's a cyclical problem that can be fairly easily fixed with the right policy. It's not a question of long-term growth.

Long-term growth is based on investment (along with some other deeper things like institutional integrity and culture). That's true despite the fact that some investments inevitably fail.

Originally Posted by Voyager

I agree that one of the reasons to consume less now is to have more later. Depressed consumer consumption during WW II is a good if forced example of this. But some reduced consumption today is the result of fear. And if the consumption tax is permanent, wouldn't the reduction in consumption from higher prices also be permanent?

Absolutely not.

Think about the history: if they'd figured out a way to levy a consumption tax in the 19th century to encourage investment, and it were permanent, would people today still be permanently living with less consumption than they'd had in the 19th century? No. Some investments fail, and as an absolute measure, more will fail if you have more investment. Even as a percentage, you're likely to see a higher percentage of failures with more investment, as all the low-hanging fruit is used up first. But we're not at the frontier of what we can accomplish technologically. Not even close. Eventually you have enough successes that we can create things more efficiently despite the tax, which means ultimately more is consumed despite the tax. The way to raise living standards, long term, is now and will continue to be more investment. (Eventually that will end, as the physicists remind us. But not yet.)

I happen to think that we're rich enough now that the most blessed among us can help out the poorest in areas like access to food and health care. I'm hardly alone in that opinion.

Yet investment still drives long-term growth. Growth is a tricky topic in some ways, but we know at minimum that we have to plant now to harvest later. We need to invest now to consume later. And how much we consume is going to be much more a function of long-term growth than it is dependent on a tax on consumption, even if the tax is permanent.

Originally Posted by Voyager

Sure. It encourages investment, supposedly.

Not "supposedly".

It unequivocally encourages investment.

That doesn't mean it's practical in the real world. That doesn't mean real people in real tax bureaus would be able to make it work. But if we eat fewer seeds, we have more to plant. That is necessarily true.

Originally Posted by Voyager

However, there would certainly be lobbying against a 1%er rate that would be high enough to make up for lost revenue, especially by conservatives, and we'd wind up with a lower rate as a compromise and lose revenue.

There'd certainly be lobbying, just as there is lobbying for loopholes right now.

How successful would it be? I'm not in a position to say but I have a few thoughts about that below.

Originally Posted by Voyager

A supplemental VAT is another matter entirely, without many of the problems I mentioned.

A VAT is going to be a significantly flatter tax. You can carve out a few exceptions here and there, especially with a standard rebate (similar to a Progressive Consumption Tax standard deduction), but all things considered, a VAT will be a much flatter tax than a PCT.

That's why the more conservative budget wonks like the VAT so much. (I'm not talking the hacks here, but the real wonks. There aren't many but they do exist.)

Originally Posted by Voyager

Well, this would unify liberal and conservatives, neither of whom would be too happy at the government looking into our accounts to monitor our purchasing as a matter of course. Our credit card companies know what we're buying, but only on that card. The government knowing to the level of detail required to see if a purchase is on an excluded item or not would make almost anyone shudder. Except people who'd think this would be a wonderful data source to study purchasing habits, that is!

Originally Posted by foolsguinea

Hellestal, I can understand why economists looking for more empirical data would love to have the IRS track every purchase FOR SCIENCE!

There is no bureaucracy keeping track of all these items.

There are no excluded items. Everything counts. They keep track not of all purchaes, but simply of money flowing out of a private individual's account, which is assumed by default to be consumption. For enforcement purposes, they'd also have to make sure that business expenses are genuine investment, not extra consumption on the side, but they try to enforce that now already, yes?

You don't need special exceptions for things like groceries if the standard deduction is made large enough that people at the bottom don't have to pay. The government doesn't need a list of everything you buy in this system, it only needs to know whenever money leaves an account. The big trick, to my mind, is making sure that US vendors only accept payment from valid accounts (or cash), but even that doesn't imply a master list of everything bought in the US, all in the hands of the evil bureaucrats.

If you still have the possibility of itemized deductions, those could be listed separately, with proof of those individual items filed at tax time every year, similar to what's done now. But the thing about many of those deductions today? They're explicitly intended to encourage more investment, along with the definition of "income" itself. Why is capital gains income taxed differently? Investment. Why the mortgage interest deduction? Housing investment. Buy an electric car? Green investment. Have kiddies? Human capital investment. (Okay, that last one is a little different.)

If you start the conversation by saying to conservatives, "Okay, investment is good and we're going to allow it... but for conservative economic reasons, we're going to tax the hell out of any big consumption, just like your economists say we should do", then every standard conservative (economic) argument vanishes. If people show up at Congress to lobby for less taxes for the rich, then they are, by necessity, lobbying that rich people be allowed not only to earn more, but also to consume more at lower rates. Do you really think that would fly? If we had a consumption tax system, and Congress-critters threw in special exceptions for consumption by the rich, when they're already not getting taxed on their income, do you think that would work politically?

I can't say I'm very good with politics, but one of the things that appeals to me about this is that there are no legitimate economic arguments left from conservatives if you institute this system. If the rich industrialists want to spend a billion dollars on an election, that is free speech, apparently, according to SCOTUS. But it's also, quite obviously, a large-scale consumption of advertising. Currently, it's not taxed as such... but it would be under a PCT system, just the same as all other chunks of large-scale conspicuous consumption. That means it would come with quite high marginal rates of taxation.

By giving up the notion of taxing income, we actually open some very interesting possibilities. Again, this is worth some consideration. A lot of our kneejerk notions of "fairness" are bound up in the present system, but that doesn't mean a new system would automatically be unfair. There are certain advantages here that are worthy of more careful thought.

[foolsguinea]

Interesting link. I think a lot of non-economists intuitively understand that infinite growth is a foolish idea, but our business culture tries to beat that common sense out of us.

[puddleglum]

Originally Posted by Fear Itself

Investment does not drive the economy. Corporations are sitting on two trillion dollars of cash, waiting for consumers to start buying again. No amount of new investment will stimulate the economy.

Investment does not drive the economy. Please stop spreading ignorance.

Most of this is just a product of the recession. As financial insecurity is high, and interest rates are low companies are borrowing money at low interest rates rather than spending their cash now and risking higher costs later. This is just part of the business cycle. It does not change the fundamental facts of the economy.
Another reason that businesses have so much cash is that almost a trillion dollars of the cash is from overseas profits. When that money is repatriated they have to pay taxes on it. As long as it stays overseas they do not have to pay taxes on it. One of the recommendations from the panel of economists was to eliminate the corporate income tax. If that happens a good bit of that trillion dollars would be repatriated and used in the US. Combining a progressive consumption tax with an elimination of the corporate tax like in the X-Tax plan would be a huge improvement in the tax code.

[puddleglum]

Originally Posted by foolsguinea

Interesting link. I think a lot of non-economists intuitively understand that infinite growth is a foolish idea, but our business culture tries to beat that common sense out of us.

This is a silly link. The physicist posits that over the last 400 years economic growth has led to energy use per capita going up, and population going up. Therefore if trends continue in 400 years the earth will have 50 billion people on it each using the energy of two suns. The truth is per capita energy use in the US and many other countries has gone down in the last 30 years and population growth for the planet is predicted to stop in about 25 years.
It shows the physicists ignorance of economics that just because he can extrapolate from a graph, he thinks he can tell the future.

[Voyager]

Originally Posted by Hellestal

You put a lot of seeds in the ground, not all of them will grow to healthy plants.

I'm a gardener, and some things, like radishes you plant lots of seeds of and winnow out all but the best. But that doesn't mean you plant any in sand.

Still, there's zero reason that the collapse of a housing bubble has to put so many people out of work who aren't in the construction industry. That's a cyclical problem that can be fairly easily fixed with the right policy. It's not a question of long-term growth.

Absolutely. First, some adherence to regulations could have cooled it by controlling access to credit. Second, interest rate increases might have helped a soft landing when the market was already overheated. (Krugman repeatedly called for this before the crash.) And after it crashed infrastructure investment could have helped with unemployment.
I was talking about the 1990s bubble which made me theoretically rich for a while.

Think about the history: if they'd figured out a way to levy a consumption tax in the 19th century to encourage investment, and it were permanent, would people today still be permanently living with less consumption than they'd had in the 19th century? No. Some investments fail, and as an absolute measure, more will fail if you have more investment. Even as a percentage, you're likely to see a higher percentage of failures with more investment, as all the low-hanging fruit is used up first. But we're not at the frontier of what we can accomplish technologically. Not even close. Eventually you have enough successes that we can create things more efficiently despite the tax, which means ultimately more is consumed despite the tax. The way to raise living standards, long term, is now and will continue to be more investment. (Eventually that will end, as the physicists remind us. But not yet.)

Sorry, I was not clear. I meant relative to consumption levels without the tax. Consumption levels will increase due to population growth if nothing else.
I live and work in Silicon Valley. There is some ideal mean of investment. Too little, and good ideas get starved. Too much, and bozos who couldn't tell an Ethernet cable from a rubber band put money into stupid ideas. Basic technological growth does not depend on venture capital very much, since it is too risky. (At least not in the electronics area.) Advances happen when they happen. New applications do grow relative to funding. The Internet, the IC, and the Web were not venture funded. Things like Facebook were, but they are not fundamental technical advances.
I certainly agree on the need for more investment. I don't see how putting a system in place which will at least temporarily drive down demand is going to help private investment.

I happen to think that we're rich enough now that the most blessed among us can help out the poorest in areas like access to food and health care. I'm hardly alone in that opinion.

Please don't take me for a Republican! I recovered from that disease quite some time ago. Sure we do, we just need the political will.

Yet investment still drives long-term growth. Growth is a tricky topic in some ways, but we know at minimum that we have to plant now to harvest later. We need to invest now to consume later. And how much we consume is going to be much more a function of long-term growth than it is dependent on a tax on consumption, even if the tax is permanent.Not "supposedly".

I worked 15 years for Bell Labs, usually 50% research funded - and I've seen since is that there is less and less interest in long term investments (which clearly have higher risk) and more interest in short term investments. My old CEO spent some money on medium term investments got got screamed at by Wall Street about it. What he did turned out good, and if he followed his advice I'd not be here now.
In the long term ... well, you know. If we were in a situation where the rich were stressed for investment funds, a tax increase on them would be a bad idea. We're not. If we were in a situation with rampant consumption, a tax on that would be a good idea. 2005 or so would have been an excellent time for this. Not now.

It unequivocally encourages investment.

Do you consider buying treasury bills investment? If so, sure - more free money means more to put somewhere instead of spend, and that could be considered an investment. I meant productive, job increasing, investment.

That doesn't mean it's practical in the real world. That doesn't mean real people in real tax bureaus would be able to make it work. But if we eat fewer seeds, we have more to plant. That is necessarily true. There'd certainly be lobbying, just as there is lobbying for loopholes right now.

I grow squash. I'm up to my ass in squash right now. People run from me. I throw some in the open windows of cars stopped next to me. Don't try to sell me ways of making my squash more productive. My demand is not great enough to justify that investment.

How successful would it be? I'm not in a position to say but I have a few thoughts about that below. A VAT is going to be a significantly flatter tax. You can carve out a few exceptions here and there, especially with a standard rebate (similar to a Progressive Consumption Tax standard deduction), but all things considered, a VAT will be a much flatter tax than a PCT.

In an ideal world a PCT is far better than a VAT. For one thing, those taxed more are less sensitive to prices, so the reduction in demand will be less.

That's why the more conservative budget wonks like the VAT so much. (I'm not talking the hacks here, but the real wonks. There aren't many but they do exist.)There is no bureaucracy keeping track of all these items.

There are no excluded items. Everything counts. They keep track not of all purchaes, but simply of money flowing out of a private individual's account, which is assumed by default to be consumption. For enforcement purposes, they'd also have to make sure that business expenses are genuine investment, not extra consumption on the side, but they try to enforce that now already, yes?

You don't need special exceptions for things like groceries if the standard deduction is made large enough that people at the bottom don't have to pay. The government doesn't need a list of everything you buy in this system, it only needs to know whenever money leaves an account. The big trick, to my mind, is making sure that US vendors only accept payment from valid accounts (or cash), but even that doesn't imply a master list of everything bought in the US, all in the hands of the evil bureaucrats.

If I write a check from my checking account to my investment account, is that consumption? People have brought up stock purchases - is that consumption? Is a birthday present of money to my daughter consumption?
Standard deductions are a serious flaw. For people like me and you, with good cash flow, it is no big problem. But someone living paycheck to paycheck has a much higher internal discount rate than we do, and investing extra money today in necessities for a refund an average of 6 months in the future is going to be very painful.

Why the mortgage interest deduction? Housing investment. Buy an electric car? Green investment. Have kiddies? Human capital investment. (Okay, that last one is a little different.)

Or housing consumption. Houses as investments that appreciated faster than inflation is a relatively new concept. Proof: all investments can go down. Wall Street risk models for the housing market seemed to have neglected that possibility.

If you start the conversation by saying to conservatives, "Okay, investment is good and we're going to allow it... but for conservative economic reasons, we're going to tax the hell out of any big consumption, just like your economists say we should do", then every standard conservative (economic) argument vanishes. If people show up at Congress to lobby for less taxes for the rich, then they are, by necessity, lobbying that rich people be allowed not only to earn more, but also to consume more at lower rates. Do you really think that would fly? If we had a consumption tax system, and Congress-critters threw in special exceptions for consumption by the rich, when they're already not getting taxed on their income, do you think that would work politically?

Conservatives today (as you can see in this thread) that an increase in the top marginal rate to the high 30s is going to destroy the incentive to invest and is unfair. And they are more successful with this argument than they should be, because in part I think people put themselves in the shoes of the poor, oppressed, 1%. Now a top consumption tax is going to be a lot higher than 38%, and we all pay sales tax every day, so the problem would be much worse. .
And look at what the House is doing, and tell me that a proposal has to be economically sane to work politically.

I can't say I'm very good with politics, but one of the things that appeals to me about this is that there are no legitimate economic arguments left from conservatives if you institute this system. If the rich industrialists want to spend a billion dollars on an election, that is free speech, apparently, according to SCOTUS. But it's also, quite obviously, a large-scale consumption of advertising. Currently, it's not taxed as such... but it would be under a PCT system, just the same as all other chunks of large-scale conspicuous consumption. That means it would come with quite high marginal rates of taxation.

Industrialists don't buy advertising. The contribute to PACS which do buy advertising. Would that be taxed? Charitable donations? I must admit that the notion of Meg Whitman (who did buy advertising) helping to fund Jerry Brown's budget is appealing.

By giving up the notion of taxing income, we actually open some very interesting possibilities. Again, this is worth some consideration. A lot of our kneejerk notions of "fairness" are bound up in the present system, but that doesn't mean a new system would automatically be unfair. There are certain advantages here that are worthy of more careful thought.

I agree that a new system need not be any less fair than the current one. I am less than convinced that just monitoring the input and output of accounts will work without a bit of a deeper dive. I also fail to see how any remotely feasible level of taxation at the high end will make up for the loss of income tax revenue. I think my analysis if the situation in California makes that very clear.

Maybe we should do an analysis of what the rich spend their money on and bring back the luxury tax, which is progressive. We can start by slapping a big tax on car elevators in private homes.

[Hellestal]

Originally Posted by Voyager

Do you consider buying treasury bills investment? If so, sure - more free money means more to put somewhere instead of spend, and that could be considered an investment. I meant productive, job increasing, investment.

Best not to get caught up in zero-interest-rate thinking. What we have now is (should be) an exception, not the rule.

If you buy Treasuries, or stocks, or gold ducats, or whatever, you are right that that does not count as Real Investment in the strict economic sense (where investment is the purchase of potentially productive capital goods). But in the normal situation?

Every buyer has a seller. They receive your money when you make an asset purchase. And what do they do with it? Maybe they're only rebalancing their own portfolios, so they sell one piece of paper to buy another. Again, that's not Real Investment. But... there will be another buyer and another seller. That seller? Maybe they're rebalancing their own portfolio. Etc. The dominoes fall, one by one.

Eventually, you hit the last domino. Eventually, you hit the person who is selling their financial asset not to buy another dead piece of paper, but to add to GDP. People don't sit on cash for no reason, in ordinary times. That last domino person must necessarily exist somewhere at the end of the chain of transactions. It doesn't matter if you're only buying Treasuries yourself, because the guy at the end of the chain is going to be buying something tangible, something real. It's probably going to be consumption. But if there's a consumption tax, this final domino might shift away from consumption and decide to purchase a newly-issued security, a new stake in newly created capital goods. And that is, in fact, Real Investment. So yes, increasing the incentive for you to buy treasury bills does create an incentive for Real Investment.

Granted, today the seller can just sit on cash. It's bizarre. The situation today is weird, we're talking Great Depression weird. Obviously, it won't last forever.

Originally Posted by Voyager

I grow squash. I'm up to my ass in squash right now. People run from me. I throw some in the open windows of cars stopped next to me. Don't try to sell me ways of making my squash more productive. My demand is not great enough to justify that investment.

The whole purported point of financial markets is to transfer squash away from people who are ass deep in it, and to people who can use it productively.

Everyone realizes this doesn't always work out so swimmingly. If you think genuine financial reform is a higher priority than tax reform, that's great, because I agree entirely.

Originally Posted by Voyager

If I write a check from my checking account to my investment account, is that consumption? People have brought up stock purchases - is that consumption? Is a birthday present of money to my daughter consumption?

I obviously wasn't clear about this earlier, so let me break it down with a few examples. There are lots of technically equivalent ways in which you could set up the administration of this system. I don't know which would be most efficient in practice for real-world tax collectors and citizens, but here is my way of thinking, which is a fairly simple way to approach it conceptually.

You have INCOME. All income of all kinds must be reported: all wages, all capital gains, all dividends, all inheritances, everything. If you earn it, they know about it. Hardly unusual, since that is largely what happens today with a few exceptions. There is in addition a SAVINGS account. This doesn't have to be one account, it can be an umbrella account with lots of subsets: bank checking, bank savings, stocks, bonds, foreign currencies, pirate treasure, etc. Putting money into SAVINGS comes with no tax incidence. If the money is there and it stays there, you don't have to pay Uncle Sam.

You get hit with the consumption tax any time money moves out of SAVINGS, or indeed, if recorded INCOME never shows up in the first place.

Buying a stock? Nothing changes. You aren't moving money out of the umbrella account, you're just moving things around, moving some money out of checking and into stock ownership. You're rearranging your savings inside the box, but it stays in the box. That's the same for any other kind of security purchase. It's only when you stop pushing paper around, and actually pull money out, make a withdrawal, that you get hit. The account balance can go down if an investment goes bad, but that's obviously not consumption. It counts as consumption for the purpose of the tax if there is a withdrawal. Any withdrawal.

Withdrawing cash to give as a present? That counts. Withdrawals count as consumption. That is not the definition for GDP purposes, but no matter. It's the right definition for ease of enforcement. It's safe to assume that if you're withdrawing money, it's to consume something, so that is the tax presumption. Your daughter might buy a Toblerone (consumption) or she might stick it in her own account (savings), but to keep track of which would require a Master List, and administratively, that's out of the question.

There are lots of equivalent ways to work this, and all sorts of devilish details that would have to be worked out -- especially with respect to people with no access to traditional banking! -- but the general idea is, you get hit whenever money leaves the SAVINGS account (or never shows up to begin with).

Originally Posted by Voyager

Industrialists don't buy advertising. The contribute to PACS which do buy advertising. Would that be taxed? Charitable donations?

No need to make things over-complicated. PACs don't count as charitable donations now. Nothing changes.

Money must leave their account to enter the PAC's account.

Money out of the account = presumption of consumption.

If they were donating more than 30k or whatever to help starving AIDS-stricken children in Africa, they could file the paperwork to overturn that presumption and get the itemized deduction. But donating to PACs? Free speech, sure, but buying a bigger megaphone so that more people can hear the freeness of your speech is still consumption, by definition. There is no deduction for that now, and there would be no deduction for that under a PCT. If they want to give a billion dollars to a PAC, they're free to do so, but they've gotta pay the piper, same as with any other kind of massive consumption. It doesn't matter that they're not buying the advertisements directly, it's still headed for consumption eventually, and the easiest way to enforce this is to charge at the beginning of the process, to hit the very people who make the conscious decision to move money out of their SAVINGS.

You take cash out to give to your daughter as a present, that counts as taxable consumption. They take cash out to give to a PAC, that counts as taxable consumption. Them's the rules. The tax authority doesn't have to have any idea where the money goes. They don't have to keep a master list of where you send the money. It's just that the withdrawal shows up plain as day in the account records, and that is what matters.

Maybe implementation would be a real bear, but the essence of the idea is fairly simple.

[Voyager]

Originally Posted by Hellestal

Granted, today the seller can just sit on cash. It's bizarre. The situation today is weird, we're talking Great Depression weird. Obviously, it won't last forever.

If the money from selling those T-bills went to productive government investments, we'd be in much better shape. Today they are going to make up for the inadequate tax rate we have. And unfunded adventures in times of relativel prosperity when we should have been running a surplus or close to a surplus.

The whole purported point of financial markets is to transfer squash away from people who are ass deep in it, and to people who can use it productively.

But many of my neighbors grow squash too!Inadequate demand for the supply.
If you don't like squash, think tribbles.

Buying a stock? Nothing changes. You aren't moving money out of the umbrella account, you're just moving things around, moving some money out of checking and into stock ownership. You're rearranging your savings inside the box, but it stays in the box. That's the same for any other kind of security purchase. It's only when you stop pushing paper around, and actually pull money out, make a withdrawal, that you get hit. The account balance can go down if an investment goes bad, but that's obviously not consumption. It counts as consumption for the purpose of the tax if there is a withdrawal. Any withdrawal.

That's one hell of a box. Don't get me wrong - the company I work for would make a fortune selling stuff for such a system (even bigger than the fortune it already makes) but there seems to me to be real privacy concerns. Yes, you report all income, but that is a relatively small number of inputs to the government. You report interest, but not your balance. You report stock sales, but not stock ownership. I'm not paranoid about privacy, but I think a lot of people would think this too much.

Maybe implementation would be a real bear, but the essence of the idea is fairly simple.

Oh, it could be implemented all right. (Though the FBI still doesn't have their computer system working, so maybe not.) It is the politics that would kill it.
And you still haven't told me where the money to make up for the effectively reduced taxes on the top earners would come from.

[Hellestal]

Originally Posted by Voyager

And you still haven't told me where the money to make up for the effectively reduced taxes on the top earners would come from.

You don't have reduced income if marginal rates are high enough.

You did the back-of-the-envelop calculation yourself. I didn't argue with it. A 100% income tax means we earn no income, but the same rate for consumption just means that people like you and me pay twice the sticker price for one last gallon of milk. Bill Gates pays even more. Considering that there would be zero taxes on bond interest, stock dividends, capital gains, salaries, etc, that hardly seems onerous to these eyes.

If you like, you can do a more careful calculation whenever you want. The one thing you'd have to remember is that the data you were using, a state sales tax, is going to be levied only at stores, which means it leaves off certain other kinds of consumption like rent. For owner-occupied housing, that means.......

....huh....

It can't work.

Like, a traditional security? Like a bond? It's an asset: it pays a stream of income. For a bond, this is interest payments. That income isn't taxed with a PCT. Only if people want to consume will it be taxed. A housing investment, i.e. building a damn house? It's an asset: it pays a stream of income. This stream of income is "rent". If you're a landlord, you're not consuming the stream of income yourself (that is, you're not living in the house yourself). That consumption comes out of other people's pockets, the renters. But if you own the house, that means you are literally consuming the stream of income yourself by living in the house. That is honest-to-god consumption.

For GDP calculations, "imputed rent" is added for owner-occupied housing. People are consuming the ability to live in that residence for a year. Nobody argues about this because there's nothing at stake if imputed rent calculations are a little off. But if you've got a consumption tax of this sort? Imputed rent should be included. If you don't include it, then the whole thing doesn't work. Without imputed rent, this particular stream of income, the ability to live in a house, can be consumed tax free, which means the whole damn system is distorted so all that money floating around is channeled into over-large homes instead of jet-skis.

Taxing this sort of consumption, the ability to live in a stupidly big home, is essential. But I can't see homeowners agreeing to that. Imputed rent would be an absolute nightmare. It's a huge, huge political problem. Economically, it still seems like a good idea, but there's no way you're going to get homeowners to pay accurate imputed rent values.

Okay, yeah. Political dead-end. Interesting but hopeless.

[Voyager]

Originally Posted by Hellestal

You don't have reduced income if marginal rates are high enough.

You did the back-of-the-envelop calculation yourself. I didn't argue with it. A 100% income tax means we earn no income, but the same rate for consumption just means that people like you and me pay twice the sticker price for one last gallon of milk. Bill Gates pays even more. Considering that there would be zero taxes on bond interest, stock dividends, capital gains, salaries, etc, that hardly seems onerous to these eyes.

Let me quote myself.

Originally Posted by me

(California is on page 30). For 2007, the bottom 20% paid 6.5% of their income in sales taxes and 3.2% in property taxes, and almost none (0.1%) in income taxes. The top 1% paid 0.8% in sales taxes, 1.4% in property taxes and 7.5% in income taxes. (Property tax versus sales tax rose with increasing income.)

We'd need about a 900% sales tax on the 1% to make up for their lost income tax contribution. I think I made it clear that 100% sales tax, unlike income tax, is theoretically feasible. Now raising tax rates on the rich is not going to affect demand as much as raising them on the poor, but 900% is going to have some impact!
The gap between income and consumption for the very wealthiest is so great that a consumption tax cannot practically bridge it.

If you like, you can do a more careful calculation whenever you want. The one thing you'd have to remember is that the data you were using, a state sales tax, is going to be levied only at stores, which means it leaves off certain other kinds of consumption like rent. For owner-occupied housing, that means.......

....huh....

It can't work.

Oops.
We could charge a mortgage consumption tax while taking away the mortgage tax break (from eliminating the income tax.) And taxing mortgages - which might be like taxing rent - would encourage people to pay them off faster - especially the rich. Around here it was big news that the CEO of Facebook got a 1% mortgage. I'm not offended, because he is probably a pretty good credit risk.
But he could obviously buy outright.
Now if someone could just come up with a means of taxing fully paid off property ...

Like, a traditional security? Like a bond? It's an asset: it pays a stream of income. For a bond, this is interest payments. That income isn't taxed with a PCT. Only if people want to consume will it be taxed. A housing investment, i.e. building a damn house? It's an asset: it pays a stream of income. This stream of income is "rent". If you're a landlord, you're not consuming the stream of income yourself (that is, you're not living in the house yourself). That consumption comes out of other people's pockets, the renters. But if you own the house, that means you are literally consuming the stream of income yourself by living in the house. That is honest-to-god consumption.

How about if you own an abandoned house? It is hard to argue that this is consumption. Fortunately we already know how to tax such things. One advantage of property taxes is that they are more stable than either income or consumption taxes, and don't fall as much during a recession when the government needs the money for stimulus. One of California's many problems is that property taxes are less of a contributor to revenue than they used to be. As my cite showed, they are less progressive than income taxes but much more progressive than sales taxes, even at the high end.

Taxing this sort of consumption, the ability to live in a stupidly big home, is essential. But I can't see homeowners agreeing to that. Imputed rent would be an absolute nightmare. It's a huge, huge political problem. Economically, it still seems like a good idea, but there's no way you're going to get homeowners to pay accurate imputed rent values.

Okay, yeah. Political dead-end. Interesting but hopeless.

Progressivity is a good thing, and PCTs would be good as a supplement. But the only way I can see to make them work is a luxury tax technique, or maybe a sliding scale based on purchase price. Maybe progressive property taxes would be good also, normalized to the state market. I've seen talk of making capital gains taxes progressive, that seems reasonable. So my objection is replacing income taxes with consumption taxes, not the concept itself.

[Hellestal]

Originally Posted by Voyager

Fortunately we already know how to tax such things. One advantage of property taxes is that they are more stable than either income or consumption taxes, and don't fall as much during a recession when the government needs the money for stimulus. One of California's many problems is that property taxes are less of a contributor to revenue than they used to be. As my cite showed, they are less progressive than income taxes but much more progressive than sales taxes, even at the high end.

The names don't really matter. You could call the imputed rent portion of the consumption tax a "progressive property tax", and that would basically be accurate. Basically. It could quite possibly even make the numbers feasible. (I still got a hunch it would work, but I don't have the time or inclination to be thorough on this one right now.)

It's still a political non-starter. Homeowners would balk at the size of it. Regular property taxes are hard enough.

Originally Posted by Voyager

Progressivity is a good thing, and PCTs would be good as a supplement.

When you're adding these supplements, things get very complicated very quickly. Too complicated.

That means a VAT. Governments have already figured that one out. That's the supplement that will eventually be coming.

Originally Posted by Voyager

But the only way I can see to make them work is a luxury tax technique, or maybe a sliding scale based on purchase price.

They've tried luxury taxes many times. The demand is generally too elastic. The yacht-construction workers lose their jobs, while the wealthy just find something else to buy to show off. You can't list everything that's luxury... except with something like a PCT.

Round and round it goes.

[foolsguinea]

Hellestal, you're my hero. You came in here with this grandiose cockamamie idea; we were all (well, at least I was) thinking, "What? Why is Hellestal pushing this silliness? Isn't Hellestal smart?" and then you talked yourself out of it. Bravo.

I sort of see why you think it would work in theory. It looks like the implementation would be horrendous, and people would complain about it for the same real reasons they complain about income taxes (which it would resemble). It would mean rebuilding a significant part of the tax code from the ground up, setting off an enormous amount of small-c conservative animosity, just to counter one political argument which isn't important to most people. Is that fair to say?

[Voyager]

Originally Posted by Hellestal

The names don't really matter. You could call the imputed rent portion of the consumption tax a "progressive property tax", and that would basically be accurate. Basically. It could quite possibly even make the numbers feasible. (I still got a hunch it would work, but I don't have the time or inclination to be thorough on this one right now.)

It's still a political non-starter. Homeowners would balk at the size of it. Regular property taxes are hard enough. When you're adding these supplements, things get very complicated very quickly. Too complicated.

Most homeowners wouldn't be affected. And back in 1980 Louisiana had an exemption for the first $50K or so of home value, which makes property taxes slightly more progressive. We paid something like under $100 a year in property taxes (local) on our house, which was under the limit.

That means a VAT. Governments have already figured that one out. That's the supplement that will eventually be coming. They've tried luxury taxes many times. The demand is generally too elastic. The yacht-construction workers lose their jobs, while the wealthy just find something else to buy to show off. You can't list everything that's luxury... except with something like a PCT.

Agreed - but the tax would be on purchases above a certain level, which would keep any one industry from being too hard hit.
And I see the practical problems already!

Round and round it goes.

Thanks it's been fun. And you almost got me to argue for the PCT out of contrariness.

[BigAppleBucky]

If an income tax were to be eliminated or greatly reduced, I'd favor a 100% estate tax. Let people keep the money they earned but not get money they did not earn.

I'd call that about as close to tax fairness as its possible to get.