Thursday, March 03, 2005


The New York Times > Business > Greenspan Urges Tax Code Simplification:
[Greenspan] did say that many economists would back a consumption tax, “particularly if one were designing a tax system from scratch.” Since the United States is not starting from scratch, he said, enacting a consumption tax “raises a challenging set of transition issues,” notably how to protect taxpayers who have long arranged their financial affairs based on the old regulations and the assumptions surrounding them.

Democrats have asserted that a consumption tax would hurt poor people, so any Congressional debate would likely bring calls that a consumption tax exclude items that poor people must buy, just as some states exempt food or clothing from sales tax. (Representative Nancy Pelosi of California, the House Democratic leader, said today she feared that a consumption tax might be regressive. …)

Mr. Greenspan said a consumption tax might encourage people to save (over all, Americans save less than do people in many other countries), but that “getting from the current tax system to a consumption tax raises a challenging set of transition issues.”
It's not the transition that's tricky, it's the principle.

Consumption taxes and income taxes make different assumptions about the relationship between people and the government. A consumption tax with exemptions for necessities is taxing luxury spending. Without those carve-outs, it's taxing economic activity. Economists will tell you that taxing a thing makes it less popular. Do we want to make luxury spending or all economic activity less popular? No.

An argument can be made that an income tax has the opposite effect. If I taxes take 15% of your earnings, and you need that money for stuff, you'll work 15% harder (or however much harder you need). No similar argument works for consumption taxes, and that's why people impose “sin taxes” on things like cigarrettes and booze. Obviously there is some level of taxation which makes this impossible, and it's probably a fairly low level. This isn't an argument for massive taxation.

I don't quite see the same effect kicking in on consumption taxes, because the link between the work and the taxes is less clear. The easiest way to avoid a consumption tax is to spend less, which is bad. After all, people aren't saving less because they are just so wealthy. They can't afford health insurance. They can't afford to pay their debts. They spend money on food, rent, clothes, movies, car payments, car insurance, home insurance, life insurance, unemployment insurance, health insurance, and the occasional vacation.

Countries with consumption taxes also provide most of that insurance through the state. In exchange, people pay a tax on consumption. That makes some sort of sense, I suppose. At each stage in production, the additional value in a product is taxed, as a meaningful measure of the labor involved. Is it more meaningful than wages? I don't know. When the state takes on more of a role in ensuring equal wages, consumption is a fairer way of assessing actual labor. But we don't do that, and wages should be a fair estimation of labor, too.

Consumption taxes are regressive. States with those taxes take measures to assist the people most impacted by regressive taxation. So, if Bush and Greenspan want a consumption tax, let them strengthen the safety net.

This is especially true of Social Security. Senior citizens keep spending money, even if they aren't earning anything. Social Security benefits would have to grow massively to accommodate the fact that we expect seniors to spend their savings. An income tax does that. A capital gains tax and an estate tax do that. They encourage people to earn, to save, and to spend. Consumption taxes do none of that. They just hurt people who aren't making ends meet anyway.