Consumption taxes in theory and politics

No, abolishing the IRS isn’t a good idea.
But a progressive consumption tax still might be.

Kevin Drum is right, and he’s wrong.

Yes, the idea of abolishing the income tax and going to a national sales tax collected at point of purchase is a non-starter for operational reasons. (That wouldn’t, of course, keep Team Bush from campaigning on it if it polled well.)

Yes, a VAT (collected at every point in the value chain) is technically feasible, and can do more or less the same job, but:

Yes, the rate would have to be very high if we were really going to dump the income tax entirely.

Yes, it’s possible to more or less simulate a VAT with an income tax that excludes investments, but

Yes, that would shift taxes massively from the rich to the poor. (And also, as Kevin doesn’t mention, from the middle-aged to the old, since the middle-aged tend to save while elderly tend to run down their assets, consuming more than they earn, and would thus face taxes on an amount higher than their current incomes.)

And finally, Yes, as promoted by people like Dennis Hastert the whole thing is mostly a combination of smoke and mirrors and a backdoor way of making the tax system less progressive.

But No, it doesn’t have to be that way. There’s no reason why an income tax adjusted to hit consumption spending only couldn’t be made progressive by excluding the first $20,000 or so of annual spending, as in Laurence Seidman’s USA Tax proposal.

I’m not convinced that a USA Tax is the panacea some of its proponents (including Robert Frank) seem to think it is. For one thing, I’m still trying to figure out how you could handle homeownership and big medical bills under such a tax system. For another, as David Boyum has pointed out, it’s not clear how taxing income when it’s spent rather than when it’s earned changes the incentive to save, since the only way to avoid taxation in the long run is never to spend the money. Finally, the transition problems would be extreme.

Still, a progressive consumption tax is potentially a good, serious idea, one that doesn’t deserve to be thrown out with the bathwater.

Update:

Mike O’Hare writes:

To paraphrase Mark Twain (writing about something else), a VAT is wrong. It is ill-conceived. It is immoral. It is un-American; in sum, it is French.

It is also quite Republican. You’ve probably noticed that the real congestion on your freeways is caused by older cars driven by people you wouldn’t have to dinner. Their cars, and the ticky-tacky houses they take up space with, and all the weird food they make Safeway clutter up the store with (do we really need jicama to be a great country?) need to be suppressed with a nice Pigovian tax.

Those of us who accumulate some wealth like we’re supposed to, on the other hand, desperately need protection from public sector looting and I submit that a fat VAT, no estate tax, and no capital gains tax could put this country on a solid economic footing, namely a base of lower classes reliably hungry enough to work for what we think they should charge.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com