*Progressive Consumption Taxation*

by on May 31, 2012 at 1:30 pm in Books, Economics, Law | Permalink

The authors are Robert Carroll and Alan D. Viard and the subtitle is The X Tax Revisited, published by AEI.  Here is a summary excerpt:

…we propose an X tax, consisting of a flat-rate firm-level tax on business cash flow and a graduated-rate household tax on wages.  The tax would completely replace the individual and corporate income tax, the estate and gift taxes, and the Unearned Income Medicare Contribution tax slated to take effect in 2013.

Those interested in tax policy should read this book, which covers some of the tricky issues — such as the transition, or international income — more carefully than do most sources.

dearieme May 31, 2012 at 3:56 pm

If you’re going to replace income tax, why not a property tax? While you’re at it, replace social security taxes by a tax on gasoline.

Dave May 31, 2012 at 4:17 pm

Someone on EconTalk suggested a simple way to implement a “consumption” tax – just have the income tax apply to your income minus what you put into savings/investment. What you didn’t save, you spent on consumption. The rate on non-saved-income could have schedules like the current one to maintain progressiveness.

Yog Sothoth May 31, 2012 at 4:44 pm

So, same tax base as the Steve Forbes plan. Progressive rate schedule. A lot of people have proposed this. I think Sam Nunn had a reform proposal along these lines back in the day.

Scotty Weeks May 31, 2012 at 6:15 pm

Except that’s a regressive tax. Poor people can’t afford to save, therefore they’re taxed on their entire income, whereas the wealthier you are the less you’re taxed.

q May 31, 2012 at 7:04 pm

Except since it’s progressive, poor people aren’t going to be taxed.

Scotty Weeks May 31, 2012 at 9:41 pm

How is Dave’s suggestion progressive? I haven’t read the paper/book so I assume that is a progressive system, but a typical flat tax as proposed by Dave is terribly regressive.

Zachary May 31, 2012 at 10:51 pm

A flat tax is NOT regressive if it the Marginal rate and there is a minimum floor. Then it is still progressive.

Dave May 31, 2012 at 11:22 pm

Scotty,
I never said that there would be a flat tax rate on consumption. It’s a progressive consumption tax if the rate of taxation increases with consumption. Let’s say a family of 4 making $30,000 saves nothing, so they consumed all $30,000 of their income. The rate of taxation on $30,000 of consumption for this family of 4 would be much lower (perhaps 0) than it would be for a family 4 that consumed $60,000 (perhaps 15%). I’m just throwing in numbers, but it’s not hard to see how the tax rate on consumption could be progressive. This could be regressive compared to the current tax system, but it depends on how progressive the rates are.

Scotty Weeks June 1, 2012 at 9:30 am

Wow, I completely missed your last sentence in your first post. The one about the rate on non-taxed income — hence my confusion. I can certainly see how that would work. I think once you accounted for all of the nuance of current tax code (tax breaks for things that the government is trying to incentivize, etc. . . ) we’d end up with something just as complex, but I definitely see where you’re coming from now. Thanks for the clarification.

Alex Godofsky June 1, 2012 at 2:05 am

The wealth who are currently saving will be taxed on less than their income; the wealthy that are currently dissaving will be taxed on more. If a wealth person never dissaves then they have effectively donated that piece of their wealth to all mankind anyway, so why bother taxing it?

Marton June 6, 2012 at 11:19 am

They have not donated their wealth, they are concentrating untaxed wealth in their hands until they can make a deal with politicians to create a custom loophole in exchange for a small sliver of this wealth.

TGGP June 2, 2012 at 12:06 am

“Except that’s a regressive tax”
That’s begging the question.

Floccina May 31, 2012 at 4:19 pm

I had an idea for a progressive consumption tax. I believe that getting a progressive consumption should be a goal in reforming and simplifying of our tax system.

Jeremy May 31, 2012 at 4:52 pm

I’m going to pass on the $60 policy book. But, I’ve never understood the fascination with a consumption tax – granted I’ve never read too much into it. But it seems like it would be hard to make this progressive without huge rebates to poor households. Further, using Mitt Romney as (the token) example, I find it hard to believe that he would ever spend a large percentage of his income. So, is investment treated as consumption? On first glance, it seems like there is no way to make progressive and it seems like it would distort consumption choices (I’ll go buy my new LED in Canada, etc). I’m happy to hear more on this.

Cliff June 1, 2012 at 12:32 am

If he’s not spending it, then who cares. The only value of money is that is can be spent on goods and services. Good for him to invest in our businesses and not take any resources out of the system for himself. I have a feeling that one day someone is going to spend that money, though.

“is investment treated as consumption?”

No!! NO!!!!

Jeremy June 1, 2012 at 1:02 pm

I was referring to this more from the government’s point of view. It seems for this to work it would have to be approaching revenue neutral. If the rich aren’t spending their money, they the government is losing a lot of revenue. Furthermore, If I only spend $50K of my $1M income, then I’d be taxed at the same absolute amount as a family of four with a household income who needs to spend all of their income. This would be far from a progressive solution.

Secondly, while you present a convincing argument that investment should not be treated as consumption, investing in stocks is buying an ownership share – I could see that as being consumption.

Vagabundus May 31, 2012 at 5:50 pm

Why not a 100% tax on rent seekers?

Bill May 31, 2012 at 10:09 pm

One persons rent seeker is another persons military contractor.

MD June 1, 2012 at 6:43 pm

+1 winner winner chicken dinner

Bill May 31, 2012 at 7:54 pm

If you tax something,

You prevent people from acquiring, consuming or purchasing that good or service.

Less is produced.

This means, of course,

That the Death Tax

Will Stop Death and

Make Us Eternal.

JWatts June 1, 2012 at 11:11 am

You almost got that right. The Death Tax will incentivize less taxable assets at death. I.E. trust funds. A trust fund makes the Assets eternal, not the Asset holder.

Jeremy H. June 2, 2012 at 5:20 pm
Ben May 31, 2012 at 11:11 pm

Avid reader, first time commenter. I would like to make three points:
Zachary is correct in theory but not in practice. A progressive tax follows the principle that taxpayers pay based on their ability to pay. Further, you can have an individual tax that is progressive while the overall tax system is regressive. I’m not sure where this falls, don’t know off the top of my head how much we make on the death tax vs. lose on the cap gains tax when compared to income tax rates.

Second point: the proposal is moronic, only because it is virtually impossible to implement in terms of politics. Try getting this past, for starters, the life insurance lobby.

Thirdly, I don’t think that a property tax would cut it. While we’re looking at pie-in-the-sky proposals, how about a wealth tax? Tax a percentage of total assets. Partial example: VA’s car tax. Notoriously unpopular, but hell, let the guy with the Lexus pay to keep the DMV open.

Eric June 1, 2012 at 1:10 am

I have always thought it peculiar that a progressive tax is seen as fair. In an objective sense, a “fair” tax would be to divide the total tax bill by the population and each person pays the same amount. Progressive taxes are based on the marginal utility of income which is mostly psychological and charge taxes based on the likelihood of revolt. High earners with less marginal utility of income will fork over more dough without a revolt. But hey, it does work.

MD June 1, 2012 at 6:49 pm

I don’t understand the thinking that it would be more fair to divide it up evenly. I make 10x what I did 10 years ago. I think it would be very unfair to say that I should pay in taxes now what I paid then, or vice-versa. Paying a somewhat higher rate on the margin now seems pretty reasonable. Obvs there are limits to what would be a fair higher rate, but as a concept I think it is quite fair.

Jesus June 1, 2012 at 8:42 am

I’m always suspicious of books; if they had real ideas it’d be in papers. Similarly, we need a disclaimer on if this is real work being done by people who happen to work with AEI or just AEI banging the drum.

Is there a 1-para summary of how they treat housing? It’s always seemed gnarly since the rent delta on equivalent homes partially reflects enjoyable locations (consumption) and partially locations which increase the nominal and real value of the occupant’s wages (investment). Similarly education and health care (which are also sometimes just consumption). Ditto the complete cost of child-rearing (although it’s been pre-emptively passed to my estate). All the cost-of-living items which you’d treat as investment if they were for a robot with an office job should be treated the same for human capital.

Jesus June 1, 2012 at 11:54 am

Also, based on the description (and looking at one of the working papers) it seems like the subtraction-based approach is vulnerable to the same attempts at reclassification of top-level wages into investment earnings as any other income-tax approach to VAT. A sales-tax based approach to VAT plus low-income transfers avoid the accounting tricks. Although it has plenty of other problems, the increasing concentration of income in very high earners and people whose job it is to manipulate capital makes the distinction matter.

athEIst June 1, 2012 at 12:26 pm

Don’t do away with the inheritance tax(you called it estate tax–at least you didn’t use that “death tax” mime). It is a tax on heirs. What societal benefit is served by the passing down through generations of huge conglomerates of wealth?And what are the societal downsides?

athEIst June 1, 2012 at 12:30 pm

P.S. One of the reasons the inheritance tax was passed was the difficulty of calculating(and VERIFYING) the capital gains tax without it.

athEIst June 1, 2012 at 12:33 pm

Jeremy May 31, 2012 at 4:52 pm
Further, using Mitt Romney as (the token) example, I find it hard to believe that he would ever spend a large percentage of his income.
Except maybe to become President.

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