# What's wrong with taxing consumption? **URL:** \ **Category:** Great Debates\ **Created:** [December 16, 2000, 5:53pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922 "2000-12-16T17:53:53Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [December 18, 2000, 8:51pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/21 "2000-12-18T20:51:10Z")
> [@](#): > > \*Originally posted by Mashie \* > 2. Making the IRS less complicated (one page form for everyone) would mean that the cost of running the IRS would be reduced. By size I mean cost. You got that right. Making a simple tax system will make collecting taxes so much easier. But then, what are all the accountants going to do? You’ll find H&R Block lobbying to keep a complicated tax structure! OK, joking a little. I have no plans to post my own tax-plan but I do agree: make it simple. This is the best place to start. ---
**Author:** ![Danielinthewolvesden](https://avatars.discourse-cdn.com/v4/letter/d/ce7236/32.png) [@Danielinthewolvesden](https://boards.straightdope.com/u/Danielinthewolvesden)\ **Post date:** [December 18, 2000, 11:13pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/22 "2000-12-18T23:13:41Z")
> [@](#): > > \*Originally posted by Mashie \* > \*\* > > > [@](#): > > > > \*Originally posted by Danielinthewolvesden \* > > 2. How would “making the IRS less complicated” reduce the size of government? It is not the IRS that make Tax laws- it is Congress. Heck- the IRS wants simple Tax Laws- easier to enforce. It is Congress that gives us a huge Tax Code. \*\* > > 1. Making the IRS less complicated (one page form for everyone) would mean that the cost of running the IRS would be reduced. By size I mean cost. \*\* First- the cost of the IRS is deminimus in the overall federal budget. Next- a simpler tax code would allow the IRS to bring in more money. Finally- why would they reduce the size of the IRS just because the Code got smaller? True, some folks who spend all their time of the phine explaining the tax laws would have to find something else to do- but there are scads of tax protestors, cheats & frauds out there- enuf to keep a TRIPLE size IRS with plenty to do. ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [December 19, 2000, 6:25am UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/23 "2000-12-19T06:25:16Z")
> [@](#): > > \*Originally posted by aynrandlover \* > > 1. The “rich” already pay a shitload of taxes and get the least out of it. They get the least out of it, eh? Well, I am impressed that you have done the calculation because I wouldn’t know where the hell to even start in our highly-interactive society. Clearly, however, you do and I am just itching to find out how much a person in each income bracket puts in and gets out. Please show all work. 😉 ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [December 19, 2000, 6:29am UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/24 "2000-12-19T06:29:47Z")
> [@](#): > > \*Originally posted by LateComer \* > > Thanks for your response, Daniel. This sort of thing infuriates me. If you don’t have the foggiest notion of how the US tax system works, you are not qualified to criticize it or propose your own system. This isn’t a knock at Duke who doesn’t know better, but at Mashie who should. I have gotten into what amount to shouting matches over this issue. I think that it rises to the level of urban myth. To paraphrase Will Rogers, “It’s not what people don’t know that scare me…It’s what they do know that just ain’t so!” You can expect to be doing a lot of shouting about this issue on this board too, **LateComer**. I’ve had to many times already. Maybe if enough of us shout, eventually they will hear us! ---
**Author:** ![Gadarene](https://avatars.discourse-cdn.com/v4/letter/g/e47c2d/32.png) [@Gadarene](https://boards.straightdope.com/u/Gadarene)\ **Post date:** [December 19, 2000, 6:43am UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/25 "2000-12-19T06:43:59Z")
> [@](#): > > \*Originally posted by aynrandlover \* > > 1. The “poor” pay the least of the taxes and get the most out of it. Those damn poor. Always getting the better of the rest of us! :rolleyes: ---
**Author:** ![The\_Ryan](https://avatars.discourse-cdn.com/v4/letter/t/7feea3/32.png) [@The\_Ryan](https://boards.straightdope.com/u/The_Ryan)\ **Post date:** [December 19, 2000, 7:58am UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/26 "2000-12-19T07:58:16Z")
If I understand it correctly, what the OP’s suggestion boils down to is an income tax where any money placed in a savings acccount is tax deferred. Except that such things as food would be tax deductible. Great. Even more complication of the tax code. What happens if someone buys 100 shares at $200, and the price drops to $100? Does that person get charged tax on that $10,000 of “consumption”? ---
**Author:** ![Badtz\_Maru](https://avatars.discourse-cdn.com/v4/letter/b/e36b37/32.png) [@Badtz\_Maru](https://boards.straightdope.com/u/Badtz_Maru)\ **Post date:** [December 19, 2000, 8:47am UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/27 "2000-12-19T08:47:25Z")
Why does everyone say that taxing the poor more (proportionally) is wrong? The poor are the ones who get the most government dollars spent on them! 8^) ---
**Author:** ![PunditLisa](https://avatars.discourse-cdn.com/v4/letter/p/4af34b/32.png) [@PunditLisa](https://boards.straightdope.com/u/PunditLisa)\ **Post date:** [December 19, 2000, 1:04pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/28 "2000-12-19T13:04:36Z")
You mean you want to TAX them IN ADDITION to being quarantined? Heartless bastards. ---
**Author:** ![hawthorne](https://avatars.discourse-cdn.com/v4/letter/h/c89c15/32.png) [@hawthorne](https://boards.straightdope.com/u/hawthorne)\ **Post date:** [December 19, 2000, 2:36pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/29 "2000-12-19T14:36:10Z")
Cool, something I actually know something about! First to clear up some misconceptions: > [@](#): > > _Posted by pohjonen_ > with the exception of necessities such as food, medical stuff, and a minimal limit on housing. Since we don’t generally allow a deduction for these things in income tax, it’s not clear why we should with a consumption tax. At least with a _direct_ (or personal - as opposed to an indirect/ sales) consumption tax it is not obvious that it would be desirable to tax elements of people’s consumption differently - just tax low consumption people less. > [@](#): > > _Posted by pohjonen_ > I read every year about the some of the big corporations who pay nothing on their profits [snip] > As it stands now, only people who own businesses can weasle out of their taxes, and us wage-earners have every penny we make right out there. This doesn’t work. A consumption tax _exempts_ capital income, so the result is less tax for the weasels. This is done in one of three equivalent ways: exempting the yield from capital, allowing immediate write off of capital (100% up-front depreciation allowance) or exempting the initial saving required to finance the investment. After any initial transitional arrangements, the result is the same in each case: no tax on capital. > [@](#): > > _Posted by Tretiak_ > A tax on consumption would be easy and fair. […]However, instead of measuring current income you measure current consumption, like this… > > C(t) = S(t-1) + I(t) - S(t-1) Actually your method would be harder than income tax, since it requires a comprehensive accrual measure of savings as well as income. When this tax was first proposed (by J.S.Mill) the difficulty of this calculation was such that most economists considered it impractical. However, a different kind of calculation (pioneered by Irving Fisher and refined by Nicholas Kaldor and the 1970s UK Meade committee) allows consumption to be calculated on a cash-flow basis. Crudely speaking, taxable consumption is found not by measuring “actual” savings and deducting it, but by calculating the difference between all incomings and deducting all non-consumption outgoings (including loan repayments). > [@](#): > > _Posted by Tretiak_ > Since a principle of equity in taxation would be that similarly situated individuals should be treated the same, a consumption tax is better suited to meet this requirement then an income tax. This is a pretty important point. If we want to tax people according to economic position, there are good arguments that consumption is a better proxy than income, both for the reason you mention (consumption is less volatile) and also (according to some) it is better to tax for the purpose of fairness on the basis of what you take out rather than what you put in. There are however some serious difficulties (even outside the transitional period) to do with the use of consumption as a proxy (of which more anon - but to skip ahead: the security benefits of accumulated wealth and the treatment of gifts and bequests). **flowbark** mentions two types of direct consumption tax. Note that in principle either of these can be applied with flat or progressive rate structures. Also note that these taxes unlike sales taxes do not have to be regressive with respect to income. The Hall-Rabushka tax is essentially a wages tax which can be contrasted with the Fisher-Kaldor-Meade personal direct expenditure tax. As noted above in my remark to **pohjonen** , these are exactly the same in the long-run. The important difference (and a major reason these things are unlikely to happen) is the distribution of windfall gains and losses in the transition period (say from when the change is taken seriously as a policy proposal to 10 years after implementation). The Hall-Rabushka method is simple but would give enormous windfall gains to existing holders of assets (which shouldn’t come as a great surprise given this variant’s supporters). **flowbark** ’s point 6 can be addressed by the cash-flow method of calculating consumption. **Kimstu** mentions Bob Frank, who takes a slightly different tack on all this. His view is that conspicuous consumption is a wasteful activity at high income levels and that you could happily soak the rich’s consumption without making them worse off. IMHO a good, but very dangerous argument. > [@](#): > > _Posted by Danielinthewolvesden_ > 2. How would “making the IRS less complicated” reduce the size of government? It is not the IRS that make Tax laws- it is Congress. Heck- the IRS wants simple Tax Laws- easier to enforce. It is Congress that gives us a huge Tax Code Good pick-up **DITWD**. Far from reducing the size of government, there is a strong case for saying that simplicity in tax systems increases the government’s power to extract revenue. If you are worried about this sort of thing, a ramshackle progressive tax may be a pretty effective brake on the Leviathan tendencies of government (see Brennan and Buchanan (1986) _The Power to Tax_ for this and numerous other counterintuitive tax propositions for intelligent anti-government types). > [@](#): > > _Posted by aynrandlover (and echoed by Badtz Maru)_ > The “rich” already pay a shitload of taxes and get the least out of it. As has already been pointed out, this is not nearly as simple as you seem to think it is. Certainly in terms of transfers, this is - almost by definition - true. How about other types of government spending? Who benefits from contract enforcement? National defence? If every fancy contract is facilitated by the credible promise of disinterested adjudication, how much does (say) Bill Gates benefit from government? Protection of intellectual property? Shitloads, I’ll warrant. I wouldn’t say that I can sensibly apportion benefits of government spending, and I’d advise you to think a little deeper before you do too. **The Ryan** ’s objection would vanish under cash-flow accounting, but is a good reason why you couldn’t in practice use the method proposed by **Tretiak**. [/quote] This is getting long, and it’s 1am in Oz. I will return and put the pros and cons of consumption taxes v income taxes tomorrow, if people want. For now:[ul][_]This was a hot topic in the 1970s. The simplicity, equity and efficiency benefits have been shown to be over-stated.[_]The transitional problems are enormous unless you don’t care about equity.[/ul] ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [December 19, 2000, 3:53pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/30 "2000-12-19T15:53:57Z")
50% of nuthin’ is still nuthin’. If you don’t pay taxes you get the infrastructure for free. I’m no better, really. The lousy 1200 bucks or so a year I pay in taxes pales in comparison to the roads I use, the local police force (which, suprisingly, do a good job where I just moved to), subway subsidies, and so on. On the other extreme we have the fabulously wealthy who pay a fabulous amount of taxes. This–and I’m sure we can agree on this point–doesn’t stop them from hiring their own protection, hiring safer and more lucrative investors than banks, and so on. They pay to be protected, and then pay more to private firms to keep that protection. As well, the wealthy are likely to use the infrastructure more. This comes as no suprise to me. They’ve paid for most of it, for god’s sake. I don’t see why we need numbers to point this out, jshore. ---
**Author:** ![VileOrb](https://avatars.discourse-cdn.com/v4/letter/v/9e8a1a/32.png) [@VileOrb](https://boards.straightdope.com/u/VileOrb)\ **Post date:** [December 19, 2000, 4:55pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/31 "2000-12-19T16:55:53Z")
Just because you get more benefit from the government than you pay for doesn’t mean that someone is paying more than they get. Having a government is a good thing. I’m thinking that everyone gets more than they pay for. Regardless of how inefficient we perceive it to be, the government does a lot for us all and it’s a bargain. Certainly it could be even more of a bargain if it were run better, buit it’s still a bargain. I suspect that the rich are getting just as much of a bargain as the poor. I suppose those who pay nothing get a higher percentage of value, but would you rather, once a month, pay $0 for $1000 of value or pay $1000 for $1,000,000? I’m not trying to say that the rich definitely get more value, I’m unsure of how to calculate that. I am saying that just because you, annrandlover, are getting a great return for your dollar, does not mean that the rich aren’t doing even better. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [December 19, 2000, 5:21pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/32 "2000-12-19T17:21:03Z")
Never said the rich were losing money on the deal. Everyone (in theory) has access to the same services. The rich pay for this _more_ than the rest of us. What more can I say? ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [December 20, 2000, 4:57am UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/33 "2000-12-20T04:57:57Z")
> [@](#): > > \*Originally posted by Badtz Maru \* > Why does everyone say that taxing the poor more (proportionally) is wrong? The poor are the ones who get the most government dollars spent on them! 8^) Hey, maybe if we keep just repeating this over and over, people will just accept it as true! I even have a theory of why it might be so. See, I think it all comes down to special interests groups. Those poor people use their immense poverty to lobby the government by paying off politicians with their non-existent money! Then, when the politicians get into power, they turn around and reward these people by throwing money at them! Yeah, I think I am beginning to see how our whole political-economic system works now. I am so glad to be clued in! 😉 ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [December 20, 2000, 5:10am UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/34 "2000-12-20T05:10:13Z")
> [@](#): > > \*Originally posted by aynrandlover \* > I’m no better, really. The lousy 1200 bucks or so a year I pay in taxes pales in comparison to the roads I use, the local police force (which, suprisingly, do a good job where I just moved to), subway subsidies, and so on. $1200!?! Holy shit, **aynrandlover** , if I subscribe to your theory, then I am subsidizing you big time, buddy! Seriously, it is sort of amusing that we are both arguing against our own economic self-interests (at least from a simplistic point of view of what those interests are). Compared to you, I am one of those rich folks getting soaked big time! And you are one of those poor folks who I don’t mind if I am really subsidizing a bit (or else you got one hell of a crafty tax accountant…in which case I might mind a little more!). Carry on!!! ---
**Author:** ![woolly](https://avatars.discourse-cdn.com/v4/letter/w/ebca7d/32.png) [@woolly](https://boards.straightdope.com/u/woolly)\ **Post date:** [December 20, 2000, 5:32am UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/35 "2000-12-20T05:32:27Z")
[QUOTE] \*Originally posted by picmr \* Nicely informative post picmr. If nothing else I’d be interested in your views on consumption vs income tax. Would also be interested to hear your thinking as to why the introduction of a consumption tax (GST) in Australia, thought to be electoral suicide (and still might be), appears to have become a dead issue. Is this an example of your point “The transitional problems are enormous unless you don’t care about equity.”? ---
**Author:** ![hawthorne](https://avatars.discourse-cdn.com/v4/letter/h/c89c15/32.png) [@hawthorne](https://boards.straightdope.com/u/hawthorne)\ **Post date:** [December 20, 2000, 10:57am UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/36 "2000-12-20T10:57:40Z")
> [@](#): > > _Posted by woolly_ > Would also be interested to hear your thinking as to why the introduction of a consumption tax (GST) in Australia, thought to be electoral suicide (and still might be), appears to have become a dead issue. > > Is this an example of your point “The transitional problems are enormous unless you don’t care about equity.”? The consumption tax **woolly** mentions is a VAT-type sales tax of 10% on a fairly broad base. Electoral suicide? Well I don’t expect anything like Canada or the response to _Fightback_. Also the ALP seem to have got themselves in a bit of a bind over what to do about the GST (I agree with Della-Bosca, but I can’t believe he said it). Far from not caring about equity I think the government made a pretty fair attempt to deal with transitional inequities – although the package overall is mildly regressive and hits women pretty hard – it is just that these things get complicated very quickly. For example the government’s promise to compensate pensioners for losses on accumulated savings was revealed to be likely to be valueless because of the interaction between that and other promises (the promise that pensions would continue to exceed 25% male average weekly earnings). I doubt that this was anything the government planned to do. The thing to remember is that this was a pretty small package (even including what little reform was in the Ralph package) compared to abolishing income tax entirely and replacing it with either a wages tax or a personal direct expenditure tax. Also there was _very little_ tax mix change in the ANTS package - almost all of it was replacement of the Wholesale Sales Tax and various state taxes. The income tax cuts are pretty much independent of the sales tax changes, unlike what was proposed in Option C (Hawke/ Keating) and Fightback (Hewson). This means that the change of tax on capital was not really that great, so the transitional problems – whilst non-trivial – were not huge. I’ll get to the income/ consumption question a little later. picmr ---
**Author:** ![hawthorne](https://avatars.discourse-cdn.com/v4/letter/h/c89c15/32.png) [@hawthorne](https://boards.straightdope.com/u/hawthorne)\ **Post date:** [December 20, 2000, 1:49pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/37 "2000-12-20T13:49:10Z")
Real life has intervened a bit so I can’t post a serious income tax/ expenditure tax comparison tonight. A response of mine to this question in a previous thread can be found in this old thread:[10% paying 66% of taxes in unfair to the other 90%?](http://boards.straightdope.com/sdmb/showthread.php?postid=528332#post528332), but it is a little terse. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [December 20, 2000, 2:35pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/38 "2000-12-20T14:35:01Z")
**jshore** Hahaha. I think I might have been exaggerating my taxation a bit, but not that much. I probably pay around 3000 a year. Even still, I am a burden on the system. I just find it to be a load of crap. I’ll probably never be one of those “rich” guys I so admire, I just don’t have the motivation for it. But damn, wealthy people IMO aren’t there to serve my interests. The way some people make it sound the rich are paying to keep themselves rich. Looks like we made them slaves to their own dollar. ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [December 20, 2000, 11:11pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/39 "2000-12-20T23:11:08Z")
As someone who is rich, at least in the sense of having an income way higher than I spend, I can tell you that your tears would be best put to use elsewhere. It ain’t particularly hard to stay rich once you get rich. See, the big secret is that the best way to make money is simply to already have money. Then, you just throw it into some mutual funds, do nothing, and watch it make more money. And, if you really buy into this whole market capitalist religion, you can even pat yourself on the back as being a freakin’ saint by contributing to investment, innovation, … Admittedly, things may be a little less easy now that the stock market bubble has burst, but in the long run, I think those with money will do fine as long as they just don’t wrecklessly spend it all. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [December 21, 2000, 4:37pm UTC](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922/40 "2000-12-21T16:37:23Z")
Or get it taxed to high heaven 😛 [Previous page](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922.md?page=1) [Next page](https://boards.straightdope.com/t/whats-wrong-with-taxing-consumption/45922.md?page=3)