This is on “The People’s Budget“:
Matt Yglesias has a much better solution for progressives; a progressive consumption tax.
This capital gains proposal is especially silly. I’m 99% sure they won’t allow unlimited write-offs of capital losses, which means the effective cap gains rate would be even higher, and risk-taking would be discouraged. And why even have a corporate income tax system? Even from a progressive perspective it makes no sense at all.
This proposal taxes rich guys who live a hedonistic lifestyle at a much lower rates than equally rich guys who are thrifty, and leave something for others. That’s progressive?
A progressive consumption tax system composed of a mixture of modestly progressive VAT and steeply progressive payroll taxes and carbon taxes and land taxes. That’s all you need. K.I.S.S.
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>>>his proposal taxes rich guys who live a hedonistic lifestyle at a much lower rates than equally rich guys who are thrifty, and leave something for others. That’s progressive?<<<
What's the definition of progressive in this context? Are we talking about :
(a) progressive: adjusted so that the rate increases as the amount of income increases
(b) progressive: favoring or promoting progress; "progressive schools"
(c) progressive: liberal- a person who favors a political philosophy of progress and reform and the protection of civil liberties
etc.
It is a bit confusing….
Not really. (c) and (b) are the same allied philosophy. Progressive schools promote progressivism and graduate progressives.
Taxing the rich more than the poor is the same philosophy.
In which case why is taxing the “thrifty rich” any different than taxing the “profligate rich”? Shouldn’t the fact that we tax the rich more than the poor all that matters?
Because the thrifty invest more, as opposed to spending more, and the tax rate on their investment earnings is effectively higher. Hiking corporate taxes and then taxing dividends as ordinary income is a great way to disincetivize investment.
In today’s economic scenario do we need more investment from the rich or more consumption?
Rahul,
Even from a Keynesian POV. what’s the difference between more investment and more consumption? They’re both “good money”.
You can also get a progressive consumption tax by making a cash payment to everyone at the beginning of each month. The average tax rate increases with spending while the marginal rate is unchanged.
In FairTax lingo, it’s called a prebate.
I think phasing out other taxes in exchange for a progressive consumption tax is a rare example of a concept / policy that aligns the edges of the political spectrum against the middle.
Explain how “limited liability” stock is not a subsidy.
Then you need to explain how buying bonds doesn’t make one liable for a business’ behavior. Or do you think it does?
Maybe I’m misunderstanding something, but what’s a “modestly progressive VAT”? Would it be a VAT with different percentages for different types of goods/services?
what’s a “modestly progressive VAT”?
In Britain: zero rate on food, water supply, children’s clothing (and presumably some other things I’ve forgotten). Reduced rate on your heating: gas, electricity. 20% rate on everything else.
This leaves room for classification fuss at the margins – does a bag of peanuts count as food or as a snack? Doesn’t seem to matter much.
There should be a ‘luxury rate’, methinks.
Aw, don’t encourage the buggers.
“There should be a ‘luxury rate’, methinks.”
Ted Kennedy and other “progressives” in the US used to think so too. Funny how experience can make a mockery of lofty rhetoric:
http://www.freerepublic.com/focus/news/819936/posts
Fair enough.
‘Funny how experience can make a mockery of lofty rhetoric:’
Chill out mate, it was just an idea.
Regardless, the differnt rates of VAT in the UK system are a bad idea. They distort consumption decisions and althouh they make the VAT more progressive, it would be less progressive than just say taxing childrens clothes and handing out the proceeds lum sum to parents (rich people buy more stuff). It’s not as if the UK is overburdened with naked chidren. Same with food, is too little food really a problem in the UK?
Oh yeah, zero rate on (I think) books and newspapers.
That’s cool. Although we do have that in the US through Amazon.
It would be a European style VAT with low rates on essentials and high rates on luxury goods. As income rises the composition of these two changes with people, as a percentage of their income, demanding less basics and more luxury goods. It’s exactly the reverse though of what the Ramsey rule recommends (luxury goods have a higher elasticity than basics, therefore the distortion is larger). The political solutions however are constrained to this and to the Ramsey rule recommendation with a steeper tax rebate to compensate for this regressivity: it is not clear whether the latter would be less distortionary than the former.
But what about those rich people that have only a relatively small amount of consumption? The VAT, even if more on luxury goods, will mostly miss those rich people. If I am a rich Ebenezer Scrooge I can mostly avoid the luxury goods tax.
I almost think the luxury goods taxes miss the point. A luxury good at least goes some way in transferring wealth. When targeting the ultra rich we ought to be incentivising consumption rather than saving. I’d be happier if a Rockefeller spent his way to bankruptcy rather than if he left fat estates for his brats.
Rahul, there’s been some debate on exactly this topic around the ‘econoblogosphere’, started off by a post by Steve Landsburg, starting here: http://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-taxed/. There’s a summary here: http://marginalrevolution.com/marginalrevolution/2011/04/dead-man-taxing-for-the-last-time.html
Thanks Martin! Something new to learn everyday!
You can tax their income and their wealth. The VAT is not supposed to be the only tax, just a very good one – it raises lots of revenue and discourages consumption.
This is great, but how do we get there from here?
Switching to a VAT would be a massive tax on old people – their savings are getting double-taxed since they already paid income tax on a lifetime of earnings. “Sock it to the old” is not exactly a recipe for a winning political solution in the US.
Since old people are most responsible for the US debt (the US spending more than it received in taxes), it seems entirely appropriate that they should bear more of the brunt to pay off such debt.
Sumner’s last paragraph is deeply un-self-aware, and, indeed, self-refuting. Even on a site filled with econo-nerds, we have a hard time figuring out the definition of this shadowy beast called a “progressive VAT.” And he’s telling us, The Stupids, to “Keep it Simple?” Homeboy please.
Sumner makes a mistake that I used to make. He thinks (and I thought) that having a wide variety of low taxes is somehow desirable. No. In reality, this is a recipe for a complex system filled with loopholes, tax arbitrage, and regulatory gaming. We need some sort of Universal Tax and Universal Benefit system that will allow us to have a democratic fight about how we are to share the benefits and burdens. Otherwise, we end up with a 72,000 page tax code like we have now and corporate welfare subsidies like the Movie Industry tax credit and Mohair farming tax credit and Middle Class welfare like the Home mortgage interest deduction and charitable giving tax deduction.
Scott Sumner, kill that noise.
We need a high-exemption Flat Tax. End of story.
“Sumner makes a mistake… [that] …having a wide variety of low taxes is somehow desirable. No. In reality, this is a recipe for a complex system filled with loopholes, tax arbitrage, and regulatory gaming.”
But isn’t that the system that benefits those most adept at “redistributing” wealth from the less clever to themselves? In other words, the exact system the typical rich conservative would prefer? If so, wouldn’t one expect those [eg Sumner] who support the party with the track record of favoring the rich, to be making no mistake at all when they propose it?
Yeesh.
Is it nice being so sure your opponents are greedy bastards?
“Is it nice being so sure your opponents are greedy bastards?”
It’s a fair question John.
I’ll start out by asking what makes you so sure you know whom my opponents even are?
I’ve been told that when I was a toddler, I went through the common childhood stage of grabbing everything in the house and claiming it as “mine…mine…mine”. If anyone tried to take it away from me, I apparently had a temper tantrum and refused to give it up. My parents were able to convince me, in a most unambiguous manner, that my behavior was not socially acceptable and would not be tolerated. They were able to instill in me the understanding that just because I was able to get my hands on something didn’t mean I owned it forever. Sometimes it may belong to someone else, other times it was only mine temporarily, and there were still other times when it was in everyone’s best interest for me to share it.
When I entered the working world and came to the realization that a good chunk of the money I thought I had deservedly earned had been deducted from my paycheck, I went through the same anger and frustration. Why should I have to pay for someone else’s pension and medical care? One day, someone told me to think myself lucky it was only money I had to contribute to the common good. Had I been born at a different time and been of draft age during a war, I would have been expected to make a far more expensive contribution.
In middle age, we boomers became very aware of our demographic impact on the future economic health of our countries. We had discussions at work all the time about it, and had no illusions about the next generation’s inability to foot the bill for us, even if they were willing to. At the same time, the companies where we had worked for 20 years had unilaterally abandoned the “give us 35 years of loyalty and we’ll give you a lifetime pension” agreement we had been hired under, in favor of matched 401k contributions and indiscriminate downsizing. The prevailing advice became: save now because social security won’t be there, and there’ll be no pension from your employer.
In Scott Sumner’s scenario, I’m a two-marshmallow eater. In fact, if it were an option, I’d probably be a three-marshmallow eater. I was able to save enough to cover my family’s needs for the rest of my life expectancy, without having to depend on one cent from social security or Medicare. For those of you without economics degrees, that puts my net worth smack bang in a percentile equal to many of the commenters on this blog who I have challenged. Even though I would like to believe I was smarter or harder working than those who did not reach the same goals, the truth is I was lucky enough to be in the right place at the right time, or more important, not in the wrong place at any time. I knew more than a few people who had a lot more talent and work ethic than me who were killed in car and plane crashes while doing their jobs. What this means to me is I have no right to feel smug about what I’ve been fortunate enough to accomplish, and no divine right to own it forever.
I’m a firm believer that everyone is driven by his or her own self-interest. In the first part of the definition that would make me a cynic, but unlike cynics, I believe that behavior driven by self-interest results in positive outcomes, not negative ones. Even someone who gets a high or a good feeling doing nice things for others, is arguably motivated by self-interest to some degree.
After being subjected to the effects, both positive and negative, of political policy for 4 decades in 2 countries, I’ve slowly come to share the belief that our governments are plutocracies. The elite control things, and that’s been a cornerstone of politics since the first competitive SOB became the chief of the first human tribe. Before you have a hissy fit, please allow me to say I don’t have a problem with that. In fact, I think it’s a good idea. The most competitive and naturally gifted should be the ones to lead a society. They should also accumulate the most wealth for the same reasons. No problem with that either. That’s just the way it works, and I’m not campaigning for its reform or abolishment.
Where I draw the line, is when people start behaving as if they do, in fact have a divine right to everything they’ve been fortunate enough to receive. This generation did not invent disdain for the previous one, nor did it invent: “I was fortunate enough to get pulled into the lifeboat. Prepare to repel all boarders!” We all did it ourselves, just as the ones before us did.
I have no right to speak for others, but when I’m faced with the reality that the cost of maintaining services that I believe to be crucial to the success of the society to which I owe my existence will require me to pay more in taxes, I would feel selfish and ungrateful if I justified they were undeserving and that I had a divine right to what I considered mine…mine…mine. When the behavior I exhibit is “selfish”, I know darned well the underlying emotion is “greed” on my part.
So, are my opponents greedy? Only if they have the same values as me. Are they bastards? Sorry, can’t answer that one.
Yes, yes, I know… I’m going to get slammed with the obligatory 50 comments saying: “You can pay all the taxes you want, but get your hands out of my pockets.” For those who feel the necessity to post that response, please spare the rest of the readers the indignation.
I apologize for the long-winded dissertation and life story, but I felt John deserved an honest and proper answer, and I don’t have the skills to paraphrase all of this into a three-line blog comment that would do it justice.
You don’t owe your existence to society. People did just fine 100 years ago on the farm by themselves.
You did not learn the lesson your mother tried to teach, you’re still grabbing at other people’s property. I don’t know how you go from I can’t take someone else’s property to “Where I draw the line, is when people start behaving as if they do, in fact have a divine right to everything they’ve been fortunate enough to receive.”
No one has a divine right to anything, but I sure have a greater right to something that I have earned or created than what someone else does.
Another twist in logic is that because you’ve done well for yourself you don’t expect the same behavior from others. We all have different abilities and ambitions, and if I had less of either than you does not justify me grabbing your property as a two year old would.
As for greedy, it’s been well established that the group who has the stronger belief in property rights tends to be the same on that is the most generous, by a decent margin, to charities. Giving to charities though, allows us to distinguish better between those who have lower abilities than ambitions.
Tom:
Thanks for reading my reply. Enjoy your share. Agree to disagree.
You are certainly entitled to your opinion, as am I. What I find disturbing is that when you implement yours, I have to pay for it. When we implement mine, you don’t. ( I think we’d argue about the level of safety nets, not whether that should exist).
Tom:
Think of “your having to pay for it” as a sort of “protection money”. You are bribing Steve’s dark huddled masses to keep respecting your property rights. Does that make a welfare society more palatable?
“You are bribing Steve’s dark huddled masses to keep respecting your property rights.”
Rahul:
That’s a great analogy that cuts straight to the chase, although a little harsher and colder than mine.
I think of all safety net programs as the price a society has to pay to not have to deal with the consequences of a poverty class large enough to present significant costs and distractions and to its success. In other words it’s a relatively inexpensive solution to the alternative. In the big, long-term picture it’s an insurance policy premium for one potentially volatile aspect of social stability. A poverty class that has been raised to the standard of living of a working class by focusing the safety net financial and social assistance to raise the future prospects of the children, will produce far more positive net results for that society, and everyone will ostensibly be better off.
And it’s a lot kinder than Jonathan Swift’s social satire that you can eliminate the self-perpetuating poverty class plus starvation at the same time by eating the children of the poor.
Tom:
I’m missing which part of the safety nets I would not have to pay for if implemented. I think it’s in the best interest of us all be willing to pay for all of them while the price is low enough.
If it’s charities you’re referring to, I consider them part of the the safety net system, not an alternative to it. Charities are a far more personal, noble, generous and rewarding (plus deductible) way to support those needing the services than taxing, but the unfortunate real world reality is that charities alone do not reach everyone. As you say yourself, that has a lot to do with the directive choice of the donors’ biases. It ends up being a selective safety net with some pretty gaping holes in it. Another way is donate one’s time, which doesn’t cost any cash, and has its own rewards.
“a mixture of modestly progressive VAT and steeply progressive payroll taxes and carbon taxes and land taxes. That’s all you need.”
That’s all, huh? We just need to tax people every time they earn money, go somewhere, eat, stay warm, stay cool, see things at night, find shelter, and entertain themselves? As well as tax the Earth itself?
It’s such a relief that taking other people’s money is so simple! Thanks Matty!
It’s so enlightening/discouraging to hear affluent people talk about what’s best for poor people.
To hear poor people talk about how they are going to make everyone rich.
You canacieve a regressive consumption tax through the current tax code if you wanted to dose.
Just limit or cap the absolute amount of certain deductions for all income categories,
For example, cap the total amount of interest deduction for a residence, or limit the deduction to one residence. Give everyone a $50k housing interest deduction cap, getting fewer McMansions and second homes. Same goes for caps on t&e expenses, amount of write off on luxury cars, seminar vacations, etc..
There are already limits on the mortgage interest deduction. You are not allowed to deduct interest on more than $1M for example.
http://www.irs.gov/publications/p936/ar02.html
I’m not sure how your suggestion is very different from the current law.
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I don’t have strong feelings either way on a progressive VAT. But if that’s the way progressives want to go, why not tax luxury cars, yachts, and jewelry at a 30% rate, normal goods at 15% and food at 0%. Yes, it seems to violate KISS, but when I said that I was thinking more in terms of eliminating the personal and corporate income tax, where most of the complexity lies.
The difference in complexity between a flat sales tax, and the Massachusetts sales tax which excludes food, isn’t all that great, certainly compared to the various income tax regimes.
Most of the system’s progressivity would come from a steeply progressive payroll tax.
Response to ck, Isn’t there more tax evasion with a single high rate, as compared to multiple low rates?
Rahul, You said;
“But what about those rich people that have only a relatively small amount of consumption? The VAT, even if more on luxury goods, will mostly miss those rich people. If I am a rich Ebenezer Scrooge I can mostly avoid the luxury goods tax.”
This common misconception is the reason it will be so hard to move to a consumption tax. Yglesias would say that income taxes tax the same money twice. With a consumption tax, Scrooge is just taxed once. Current and future consumption are taxed at the same rate. Under an income tax future consumption is taxed at a higher rate than current consumption. I try to explain it here:
http://www.themoneyillusion.com/?p=7091
Scott, that was a very nice post, thanks! My question though is, why is it so important not to double tax Scrooge? Also, so what, if future consumption gets taxed at a higher rate? Is it fairness alone? Or are you arguing that things are inefficient this way.
My problem with VAT’s (including luxury goods VAT’s) are that they might be fair but are probably going to be hugely ineffective at redistribution. What fraction of a rich person’s wealth actually enters consumption in a year?
Initial conditions matter in your proposal. Start me off wealthy today, and I remain ahead of you in the future, as do my children remain ahead of yours, no matter what they do.
Not true. Most fortunes are created by one generation, maintained (if lucky) by the second, and pissed away by the third.
My reply is to sumner, not Rahul.
Rahul,
It’s an efficiency thing too. One way to see intuitively why you’d want to tax current & future consumption at the same rate is that the “deadweight loss” of taxation increases with the square of the tax, so it’s better to smooth the two rates
That’s a good reason. I didn’t know of the square law relation for dead-weight loss ( too bad I have no economic training!)
Intuitively, I just find it hard to believe that you could VAT consumption by the rich enough to make a big difference. But I lack numbers.
Enough to make a difference in what?
Deficits & Redistribution.
It seems most commenters don’t know much about the best consumption tax options. You should read the monograph from AEI titled “Toward Fundamental Tax Reform” to see what serious people thing about these things. It is free to download here: http://www.aei.org/docLib/20050428_book820text.pdf. The book contains contributions from pro- and anti-consumption tax advocates.
Doing research is better than randomly asserting your intuitions, but is probably less fun.
And, AEI is so fair and balanced too!
The book is a compilation of essays from leading economists and tax lawyers. Only one (full time) AEI person is involved and he merely co-wrote the introduction and conclusion. The book actually is rather fair and balanced. I would say on average, the authors are left of center.
Thanks.
I’m curious, how come no taxation debate in the American context ever mentions a wealth tax? One could typically tax consumption or incomes, but isn’t taxing “wealth” itself (above some fairly huge threshold) the third option? If the tagline is “tax the rich” why don’t we do just that , rather than debating if to go after their consumption or income as surrogates for their richness.
Is a “wealth tax” something grossly unpalatable to American philosophy; I can sense there being something “communist” about it? I can imagine this might have a disincentive on productivity but is it proven to be worse than a tax on either income or consumption? Maybe as an adjunct to the regular tax regime?
I don’t find many hits in the MR-canon. Funnily, the only time I remember “wealth tax” being mentioned was on a Monopoly board-game.
Well, other than last year, there is a wealth tax on general assets, and, of course, there are always property taxes at the state/local level which are mentioned all the time, just not for the federal government.
It should be up for discussion, particularly estate taxes, where the size of an estate is actually increased because of Medicare in effect sheltering assets from medical expenses.
A wealth estate tax could be based, for example, on the last six months of Medicare expenses, with estate tax spousal exclusion.
As the beneficiary of frugal but sick relatives, I am amazed why my gifts of wills and trusts were never taed, and the estates were from persons of modest means but prodigious savings.
Welfare for the middle class.
Besides the point that it’s not a great idea to tax savings, it’s politically not viable.
The democratic party has a lot of wealthy supporters at the end of their careers who have no problem significantly raising income tax rates because it largely doesn’t affect them. But, of course, a wealth tax would.
Public service announcement:
Income tax = tax on earnings and savings.
Consumption tax = tax on earnings only.
I’ll take “Statements that are false” for $200, Alex.
This is how the progressive consumption tax works… Set the marginal tax rates, calculate income and deduct all savings (no other deductions should be allowed) and tax through the current system. I don’t see necessarily why a VAT is even necessary beyond that.
The benefit of this is that it is the least distorting of most tax options.
I’ve wondered if it’d help if taxation had a small pseudorandom component to it? Determinism make tax-schedules easier to game. Randomness would less likely cause tax-induced-reallocation. Does this have a chance?
True, but nobody would allow that on the basis of it seeming unfair.
It would be microscopically unfair but fair on the aggregate. But you are right, doubt most people would buy that.
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