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.)
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.
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.
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.
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.
and if I had some ham I could make a ham sandwich, if I had some bread.
) Actually, you don’t even get the fancy pieces of paper anymore, just electrons.