In this article from CNN, http://www.cnn.com/2012/09/24/opinion/mccaffery-romney-tax/index.html?hpt=hp_c1 the author argues that for the poor and middle class, the amount you spend is the same as, or preferably less than, the amount you earn. So if the tax rate stayed the same, taxing spending would end up being the same as an income tax. But it would hit the rich much harder.
So basically since the really rich often don’t have ‘income’ they can legally not pay much in taxes.
Would this work, or is he not taking something into acount?
People are going to argue that it’s a regressive tax - poor people will pay a larger percentage of their income than the rich in taxes. Some will try to mitigate that with benefits, a poverty line stipend, and no tax on essentials.
Do we have good data on exactly how successful the wealthy are currently at avoiding their income taxes?
Consumption is what drives the economy. I want the super-rich to spend freely, get that money circulating.
I would be fine with rich people who genuinely have no income paying no income tax, provided that that money was fairly taxed whenever it was earned. (I don’t believe there are many such people; as a rule people with piles of money, even if exceptionally risk-averse, are going to park a chunk of it in some kind of instrument that generates income. Why wouldn’t you?) Naturally this would mean abolishing the separate capital gains/dividends rates and taxing investment income at the same rates as ordinary earned income.
We should tax assets and things that are harmful to the environment and health only. This encourages spending which stimulates the economy and helps reduce the ability for inter-generational wealth transfers maintaining wealth within families who underperform in actual productivity.
Consumption is what drove the economy into the ditch. Shifting taxation away from income and towards consumption encourages better behaviour. People have a choice in how much tax they want to pay. Buy a 19" tv and you’ll pay $5 in tax. If you really feel you need a 56" 3D LED tv than you can pay $1000.
For those that are dumb enough to think diminishing marginal utility is a reasonable justification for progressive income tax, this is the perfect measure of who has disposable income that they don’t care about. Two people making the same income can be taxed base on how much they value each dollar they earn. The one who doesn’t value it and buys the bigger tv will pay more tax.
Canada has had the GST for a while now, first at 7% and now at 5%. There was a GST credit applied to people making under a certain income. They got that regardless of how much GST they paid.
The usual answer, however, is a base level of tax-free spending. Your first 15,000 of spending is not taxed. After that, you could have a flat rate, or graduated rates.
(Heck, you could even have a negative rate for the lowest rates, which would provide the social safety net, in lieu of welfare or food stamps. )
With a consumption tax, anyone who paid taxes on income and saved it would then have to pay tax again when that money is spent. The evil rich with large stockpiles of savings look like the juicy target of such a tax, but there are also average people who responsibly saved for retirement that would be hurt by a consumption tax. Sounds like a good idea to anyone young or who has no savings.
Don’t the rich save a larger % of their income than the middle class? And the middle class save a larger% than the poor?
So if you’re taxed on spending rather than income then the poor who spend every paycheck because they don’t make enough to have any savings are paying tax on 100% of their income. The rich who make $10 million a year, spend $1 million, throw the other $9 million into savings, are paying tax on 10% of their income?
Seems like it’s built to benefit those who accumulate wealth but don’t spend it. Those living paycheck to paycheck will never benefit.
I’m not opposed to it in theory - in fact, I think it might be a good way to encourage low and middle income people to save (which I suppose is the optimist’s way to view less spending). I’m just unclear on the application. Obviously, other countries have figured it out, so it’s my own ignorance I’m fighting, not an insurmountable issue. For example:
How does this work? The only thing I know about is a sales tax, where the store adds 10.25% (or whatever) to my bill, and their computers keep track of how much of that goes to the city and how much to the state, and once a Fiscal Quarter they print out their records and cut a couple of checks to the proper clerks.
But how does it work if my first $15,000 in spending isn’t taxed? How do they track it and know when to start charging me Federal Spending Tax? Or is everyone charged the tax at the point of purchase and cut a refund check at the end of the year? That would still seem to be a hardship on the poorest folks, who have to come up with money out of pocket and wait for a refund. With an income tax, you can elect not to have it deducted out of your paycheck during the year, if you’re very very sure you won’t owe anything at the end of the year and you want your paycheck to be as large as possible. (or at least most of it - I’m not sure if you can opt out entirely)
I couldn’t speak to the details, but an annual or quarterly or even monthly refund would work. A point-of-sale code might also work: the cash register would simply have two buttons, for taxed and non-taxed purchases. A debit-card arrangement might be used to automate things, although this would be anathema to privacy advocates. Clearly, there are a lot of points of view, and no conceivable system will satisfy everyone.
Others have proposed going to a property tax for the basis of government funding. The advantage here is that it’s a lot harder to conceal real property than it is to conceal income. The disadvantage has already been seen in corruption in real-estate evaluation and assessment. A property tax system would also be regressive…unless there is a built-in offset. e.g., houses worth $120,000 or less would not be taxed.
In nearly all cases, the well-to-do will simply pass costs along to others: to customers and to renters. Without some distinct effort at redistribution, life itself is regressive.
Replacing income tax with a consumption tax would produce black markets for most everything valuable. Smuggling would become lucrative. It would become easier to sell stolen goods as black markets become bigger, which would most likely increase theft and break-ins.
Really? It had nothing to do with easy credit and broken market mechanisms? It was because we bought TVs that were too big? It wasn’t the consumer credit market that drove this recession.
It only encourages less domestic consumption. Whether or not this is better is situational. We could certainly use more domestic consumption in the economy right now.
A lot of people aren’t spending money on 56"TV’s some of them spend a lot of it on food clothing and shelter.
Why is this dumb?
I agree that a consumption tax can be progressive but are you suggesting funding our government with what amounts to a luxury tax?
They also have an income tax.
Ed McCaffery is a tax lawyer. He has been pushing for a consumption tax for a while. He has yet to explain how we would overcome the transition issue and his numbers on how to make the plan revenue neutral don’t add up.
He also wants to get rid of the estate tax mostly based on ideological grounds (he’s also a trusts and estates lawyer).
One of his main arguments seems to be that the rich can avoid income taxes by having no income. Well, duh. They can also avoid the consumption tax by earning all their money here and spending it all somewhere else. We will start effectively tax the wealthy when we stop letting the wealthy write our tax laws.
The Romney problem isn’t a income versus consumption tax problem. Its mostly a “why the fuck do we tax unearned income at less than half the rate of earned income” and “why the fuck do we treat the work that hedge fund managers do as unearned income for tax purposes”?
Emack, you pop in every once in a while to give us your unique version of economic theory then someone like Hellestal comes along and wipes the floor with you. All your novel ideas turn out to be fatally flawed and yet you keep at it. I have to admire the persistence.
Well to make it more fair it would have to be a progressive tax, not by item but by annual purchases.
So the government would need to keep track of everything you buy so all transactions must be done by a bank card.
The first $10,000 you spend, no tax. 10K+1 to 20k 5%, 20k+1 to 50K 15%
50k+ 1 to 100K 30% 100k and up 40%
Should we tax spending instead of income? No. Should we tax spending in addition to income? Maybe. I don’t see any advantage to replacing a progressive income with a slightly more regressive consumption tax. Adding the consumption tax might help balance the budget though.
Not to mention the stall in middle class incomes along with pressure to consume, funded in no small part from phantom home equity.
Indeed. The retail industry thinks this is a terrible idea.
In 1980 I was on the QE2, and was lucky enough to share my table with the QE2’s chief engineer - who I suspect was not poor. He bought all his family’s clothes in NY - even ones made in Europe - to avoid VAT.
Well, I suppose this plan would put the speedboat smugglers on the Great Lakes back in business, and let the coyotes from Mexico make extra money smuggling jewelry as well as immigrants.
Remember the increase in the middle class saving rate at the height of the recession? How did that do for the economy?
Fact is, the rich couldn’t spend all their money if they tried, unless they are nitwits like Michael Jackson. The poor and much of the middle class spend a lot more of it. The last time we had this discussion I showed spending rates of the rich, in California at least, based on sales tax collection by income level. I believe the context was that Hellestal (who know a lot more than I do) was intrigued by a consumption tax - he saw how it would work out from this data. Not well.
Let’s face it - it is just another attempt to sneak in a tax cut for the rich and a tax increase for everyone else.