Consumption taxes

There’s no reason a consumption tax can’t be progressive.

Conservatarians love to pretend that their opposition to most domestic government programs, the tax cuts they want to make for the high brackets, and the tax preferences they want to give to investment income compared to labor income all reflect a commitment to liberty or to economic efficiency.

Liberals are suspicious that “liberty” and “economic efficiency” always seem to be served, according to conservatarian opinion, by helping the rich at the expense of everyone else, and taking as much as possible from the poor.

So as the Bush Administration, having (with the help of semi-reformed Randite Alan Greenspan) already changed the Federal tax system to make much less progressive, gropes its way (with the support of Alan Greenspan) toward a tax system based entirely on consumption (by allowing the rich to shelter unlimited amounts of money in tax-deferred accounts), thus making it less progressive still, let’s not forget that all of the efficiency arguments for a flat consumption tax apply just as well to a progressive consumption tax.

The only difference is who wins and who loses: the top 2%, or the rest of us.

Footnote: I’m less persuaded than everyone else seems to be that raising the national savings rate ought to be a policy objective. With real incomes roughly doubling each generation, reducing consumption today in order to make future generations even better off seems perverse. On the other hand, increasing the proportion of families that have noticeable wealth rather than living paycheck-to-paycheck ought to be an objective, for lots of reasons. I’m just not sure how to do it.

What I’m sure of is that a highly unequal distribution of income, such as we have now to an increasing extent, reduces overall well-being (due to the diminishing marginal utility of income), damages prospects for future growth (both by worsening the effects of capital-market imperfections that make it hard for poor people with high ability to finance their human-capital investments and by increasing the number of children brought up in poverty), increases social tension and crime, and (at the top) threatens to convert a republic into a plutocracy.

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