What would be wrong with dropping the income tax entirely?

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?

It would have to be phased in slowly, as any abrupt change could be devastating to the economy. Still, the political will to do this isn’t remotely in place, what with all the special interest groups having loaded the tax code with goodies for themselves. Not to mention the home mortgage deduction that would be suicide to end.

I can believe that economists think that consumption taxes are better than income taxes, assuming you’re starting from scratch. Not sure any of them have mapped out a transition process.

It seems to me that a consumption tax would probably be regressive, and unhealthy for a consumer-driven economy. I doubt the rich buy proportionality as many goods as the rest of us; you can only eat, drink and use so much after all.

Assuming that both Mitt Romney and I eat the same number of Big Macs and use the same amount of toilet paper, how would you get 120 times more tax revenue from his purchasing patterns compared to mine?

What they mean by, “is favoured” is that the tax would be non-distorting. That is, the rational allocation of resources with the tax in place is the same as the rational allocation of resources without the tax. This is not quite the same thing as saying, “you will get a better social outcome from doing this”.

You exempt survival items (groceries) but not luxuries (restaurant meals). Although Romney’s bar tab is probably less than mine, I’d expect his meal tabs to be bigger. Plus everything he buys to keep his house(s) running. I suspect his clothing bill is a lot bigger. Etc. Not rocket science.

My question is ‘What problem are you trying to solve?’ If you’re trying to solve the fairness of tax then doesn’t really matter to me. From my point of view tax is a way to move money from the wealthy to the not so wealthy, and the reason it is set up that way is because the majority of people are not so wealthy and they have voted for this as it makes their lives better. The reason the rich don’t complain too much is because it also makes the world they live in nicer (you know, roads, prisons, police etc.) and stops the poor from attempting to kill them every time they walk out of the door.

I wish people would stop talking about fairness when it comes to taxes, this is what the rich want you to say. It’s not designed to be fair for a very good reason, if fair means everyone paying exactly the same. But there are other meaning of fair such as 'some people are just not as lucky / well born / intelligent / healthy as you and well why not give them a hand when doing so does not greatly impact your life.

If you exempt (or tax only slightly) enough “necessities” to keep the tax from being very regressive, you won’t raise enough revenue. This is particularly true since many expensive luxuries are services – massage, chauffeurs, caterers, etc.,for which enforcement would be a big problem. The rich invest most of their income rather than consuming so, although it’s good to encourage such investment, where does the tax revenue come from?

I think that eliminating income tax would require that other taxes be instituted or increased. Real estate taxes would be an obvious one; I won’t mention more alternatives as that would divert my basic point into arguments about details. :cool:

Would the supplies for an extravagant party count as “groceries” or “restaurant”?

Why does this keep coming up? This isn’t one of those “opinion” things like whether it’s OK to wear socks with sandals. Moving to a consumption tax would cause a shift in taxes away from wealthy people and on to people making less money. So if you think the problem with taxes is that rich people pay too much and poor people pay too little then this is the system for you.

And how do you tax consumption of luxury services purchased during visits in other countries?

That’s not obvious to me.

OTOH I guess I was thinking of “consumption” more broadly than I was supposed to–as involving paying taxes any time you give money in exchange for anything–not just physical objects but financial instruments and things like that as well. So for example, you’d pay a tax when you purchase stock. And maybe even when you invest–you are in that case, after all, giving money in exchange for something, namely, the right to (hopefully) larger amounts of money in the future. So that’s consumption. (You’re consuming a future share of whatever you invested in.) So pay a tax. Maybe that’s way off, though.

Anyway the idea has stuck in my head since I read the suprising claim that the idea has broad “multipartisan” support among economists. Wish I could remember where I read that…

Taxes have multiple purposes and it is important to adjust them for multiple objectives.

For example, gasoline (or carbon) taxes are often denounced as regressive, but this misses the point that such taxes would have important positive public purpose. The regressive nature of such a tax is solved by making concurrent changes elsewhere, e.g. by making payroll taxes less regressive.

I don’t think OP is looking for more regressive taxation; he just wants to eliminate the many drawbacks of the income tax, replacing it with other taxes with approximately the same net progressive/regressive level. I agree this would be good, but it isn’t clear how. Taxes on luxuries would not be enough. Big taxes on real property would help, but there are other ways.

Unfortunately, to avoid confusion a phase-in period might be needed with income tax phased out over several years, with the new taxes phased in. During the transition phase there would be twice the bookkeepping :smack: – probably a good reason this will not come to pass.

It should be. Consumption is not proportional to income, even after you eliminate “necessities”. You think a person making ten million a year consumes 100 x what someone making $100K does?
There are two other problems. Producers would lobby like hell to get whatever they make onto the “necessity” list, and thus tax free. A car is a necessity in some places, after all. That will distort things. Second, for equal revenue the tax would be very high, which would knock the hell out of sales for things with elastic demand.

A small stock transfer tax does have its advantages. But a large tax on stock purchases would destroy the market. People might buy a share of stock every so often and hold it, but the real traders swap things around incredibly rapidly. There is a problem with volatility, yes, but the benefit is that the market can react quickly. No way if the exchange of stock involves a large tax penalty. If you don’t believe me, wander over to a market page and look at trading volume. That would get shot to hell with a large tax.

Do you take The Journal of Voodoo Economics by any chance? :stuck_out_tongue:

I appreciate you being so forthcoming with an attitude that I think many people have. But the idea that one would embrace unfairness as part of tax policy is dangerous to say the least. When fairness is no longer a factor, fuck it, Romney can pay 90%. Gates 99%. And the idea that tax policy should be set by those who want the government to provide stuff to them is a bit short-sighted. Because why wouldn’t they just want more and more? This is what is scary about the U.S. now, as fewer and fear people are required to pay income tax. The number is approaching 50%. NOT good.

What has changed, the tax formulas or the incomes?

It was on the Planet Money podcast the other day. They found a bunch of ideas that economists from across the political spectrum, from liberal to conservative, agree on, yet are guaranteed losers at election time. One of those was that a consumption tax makes better sense than an income tax.


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.

Whatever you think of the proposed change, he’s right that most economists would (at least traditionally, and if only in theory) support a switch to a consumption-only tax regime. Haven’t much time for a lit review at the moment, but in 1980 Alvin Warren wrote:

This stuff is by no means my area, but from my own experience among economists I see no reason to think that opinions have shifted drastically since then.

I think it is very fair for the richest to pay many times more taxes, given that they benefit so much more from the institutions and circumstances of society.