How To Design A Consumption Tax That Isn’t Stupid

~by Ryan B

Every presidential campaign, there is inevitably a candidate or two (usually Republicans, although maybe Mike Gravel too) who advocate the Fair Tax. They would replace the income tax with a national retail sales tax of 30 percent. They call it 23 percent, but that relies on doing math in a way no one actually does math. Either way, the whole idea is basically silly.

First, retail sales taxes are a mess because compliance is really hard to enforce. At a level like 30 percent, there is a lot of incentive to dodge the tax. Under the table deals are relatively common. Europe and a lot of other places use a value-added tax (VAT) precisely because it’s a cumulative sales tax that can be enforced several times over the lifecycle of a product. The government may not get 30 percent of the cost of the coffee table or whatever, but they can fairly easily require the manufacturer of the coffee table to pay 30 percent of the cost of the lumber. Generally speaking, taxing businesses is easier than taxing individuals from a compliance standpoint.

Second, and related, lots of consumption doesn’t really involve buying a thing. People pay for rent or a doctor’s visit or a fortune teller. How do you collect sales tax on something like that? If I were renting out my house to a tenant, you can bet I would be working hard not to have to figure out the tax paperwork involved with the Fair Tax.

Third, the Fair Tax is hugely regressive (the lower the income, the more you spend on stuff, generally speaking). Fourth, 30 percent is probably not enough money to cover all the taxes it is intended to replace. And so on.

Now, the cynic in me realizes that a lot of this is kind of the point. Fair Tax advocates are usually pretty conservative. They are exactly the kind of people who look at this list of problems and think, “Won’t raise enough money? Easy to dodge? Regressive? Check, check, and check.” But that doesn’t mean that the whole thing is a bad idea. Taxing consumption instead of income is probably the right way to go. What we want to do, from a long-term perspective, is encourage both work and investment. To the extent that an income tax – or a general labor tax, like FICA – discourages work, it discourages economic growth. Even if you think that effect is small, it’s probably not zero.

The key to saving this whole thing is realizing that you can basically just turn the income tax into a consumption tax. Add an unlimited deduction for savings and voila. The trick, of course, is that income = consumption + savings. A little algebra, and that becomes consumption = income – savings. You can make one minor change, turn the current system into a consumption tax, and pretty much call it a day. No one has to know what you spend your money on (rent or pizza or hookers, it’s all up to you!), just that, because you didn’t save it you must have spent it.

You can use this trick to preserve anything you like about the current tax system, like its progressivity. A consumption tax doesn’t have to be regressive if you levy it right (i.e., not as a retail sales tax). Just keep the tax brackets as they currently exist, although you might have to raise the rates to keep revenue constant. You can keep any deductions you want, although you probably shouldn’t keep very many anyway. You can even institute Milton Friedman’s negative income tax if you want. My personal favorite small-bore change is a continuous tax bracket (or continuous infinite tax brackets – not sure what the lingo is); we have computers do our taxes anyway, so there’s no reason they can’t do a little calculus and help rid us of the weird incentive effects we get from our current system of discrete tax brackets.

Anyway, that’s my attempt to save the Fair Tax from its own advocates. Thoughts?

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62 thoughts on “How To Design A Consumption Tax That Isn’t Stupid

  1. “Second, and related, lots of consumption doesn’t really involve buying a thing. People pay for rent or a doctor’s visit or a fortune teller. How do you collect sales tax on something like that”

    Without asserting a position either way on the Fair Tax, Canada and her provinces have had a “Goods and Services Tax” (in some provinces now called “HST” for harmonized* I think) for decades.

    Which does, on the margin, esp in the country, make it more worthwhile to get your relatives and/or neighbors to help you fix something in your house for a case of Keiths than to hire a professional.

    *harmonized between federal and provincial, (again) I think

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    • Two decades now, roughly. The GST/HST which is in essence a value added tax, was instituted during the Canadian fiscal chrisis of the early 90’s by a conservative government as a means of collecting significant revenue. They were consequently blown out of the water by the voters and the liberal government that replaced them then cut spending sharply all over the place.
      This happily coincided with the mid and late 90’s boom and the Canadians by pretty much sheer good fortune essentially shot their government fiscal policy dart right into the red Keynesian bullseye and the country’s been booming pretty much ever since.

      All it took was for conservatives to raise taxes and liberals to cut spending… … actually now I think I need a drink.

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  2. I don’t know that this would simplify the tax system at all.

    Instead of sifting through a pile of W2’s in April, you’d have a pile of 5498’s and 1099INT’s.

    Also, if you define “savings” as anything you don’t spend, that includes most of the income of the super wealthy.

    I agree we need something besides the income tax, however.

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    • I endorse this proposal.

      Also, if you define “savings” as anything you don’t spend, that includes most of the income of the super wealthy.

      So what? The money doesn’t do them a bit of good until they pull it out and spend it. Until then it’s just a number on a balance sheet. And if it’s invested productively, then it’s producing positive externalities. Why would you want to interfere with that?

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        • Only in the context of a recession. Normally, the limiting factor in the long-run growth of per-capita GDP and standard of living is the ratio of capital to labor.

          For example, a person digging holes is more productive if he has a tractor (high capital-to-labor ratio) than if he has a shovel (low capital-to-labor ratio). To buy tractors, hole-digging firms need investors.

          This is the single most important thing to understand about macroeconomics.

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    • I didn’t really put this forward as a way to simplify the tax system, to be fair. I think the extra stuff in the last paragraph (like eliminating deductions) is the way to go there. But that’s an orthogonal issue.

      Savings just is anything you don’t spend. If you didn’t spend it, you saved it. Right?

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      • Nice post, though I do have a few points of contention. . .

        How are spent savings taxed in your system? If they’re not, how does this not end up being a massively regressive tax? Even if you ask people to disclose their withdrawals and tax that (I assume you mean that would have to be done), you’ve got the issue of huge tax savings for high income earners vs. low.

        U.S. tax brackets are marginal and therefore there are infinite rates already. The only incentive affects are psychological or, of the Laffer variety, unless you’re only talking about people that have control over what year they realize wage income.
        Conservatives love to pretend that rates aren’t marginal so they can tell stories about incentive effects that don’t actually exist, don’t also fall into this trap.

        Also, not that you’re specifically posting this to resolve major libertarian objections to the income tax, but forcing (incentivizing!) people to disclose/prove their savings to the federal government will raise exactly the same objections, especially if you require them to disclose all their withdrawals for tax purposes.

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        • Savings are taxed at the back end, when they come out and turn into income. Maintaining the progressivity by using the income tax as the basis (rather than something like a national sales tax) is one way to try to counterbalance the otherwise very large tax savings for high income people.

          One other nice feature of this is that it does sort of eliminate the insane notion that capital gains should be taxed at a lower rate than other kinds of income.

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        • “Dodging” isn’t quite the right word, but the notion that the government is going to take more over $x,000 per year does provide a disincentive to try to pull in that extra income.

          The brackets can actually be distortionary. I now that the first $x I make are in one tax bracket, but after that it’s in the next. I look at the top tax bracket and find myself thinking that everything I make goes towards that next tax bracket, when really only the income over x does.

          (This isn’t to say that I oppose the progressive taxation. On the whole, I think it’s better than the alternative. But marginal rates do matter.)

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          • But Trumwill, that IS a marginal rate.

            Let’s assume 3 tax brackets:
            10% for the first 50K
            20% for 50K-100K
            30% for everything over 100K

            If you make 50K, you pay 5K in taxes and your marginal tax rate is 10%
            If you make 75K, you pay 5K for the first 50K plus 5K for the next 25K, for a total of 10K and a marginal tax rate of 13.3%
            If you make 100K (you are still in the same tax brackets as the second guy), you pay 5K for the first 50K plus 10K for the next 50K, for a total of 15K and a marginal tax rate of 15%.

            The problem is a lot of people assume that if they go from making 50K to 50K + 1, suddenly ALL their income is taxed at the second level, when really only the +1 is. Such a fundamental ignorance is actually a HUGE problem.

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            • I know what a marginal tax rate is. I must not have been clear?

              I agree that people not knowing what a marginal rate means are a problem (which is what I meant by “distortion”). But it’s not the only problem.

              Take the hypothetical cases of John and Jane. If John makes $160,000, his top income is in the fourth tax bracket. If they file jointly, that means that anything Jane makes will will be directly applied to that tax bracket. Even though it won’t affect the amount taken out of John’s salary, her entire income will be taxed in that bracket (or a higher one). That will factor into her decision.

              The same applies if John considers taking another job that pays more. Say $200,000. Now, all things being equal, it’s free money. But if all things are not equal, he has to consider that his extra income will be taxed in that fourth marginal rate (though, unlike with Jane taking a job, he will see a break as far as FICA goes).

              (I should add that neither of the above are entirely hypothetical in my case. Any job I take will come out of the highest bracket, and if my wife considers a higher-paying job elsewhere, only to post-tax income will be considered in the pros/cons ledger.)

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              • Fine. Take out the taxes. OK, it’s only a raise to $185,000.

                I think most people would think it’s fairly crazy to complain about “only” getting a 25k raise because it means you have to pay a couple thousand more in taxes on a raise equivalent to the yearly income of many, many people.

                As for the married/single thing, if it’s that big a deal, file separately. Problem solved. Unless that’ll hurt other tax deductions you get for being married.

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                  • I’m going to be perfectly frank and says that if you’re worrying about the fact you’re only going to be making $25k more instead of $30k more due to taxes after a raise, you should probably go work a job paying only 30k a year for a while, then rethink that raise.

                    Obviously, yes, there’s a point where going up to the next bracket would be pointless. No sane person thinks we’re close to that point.

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                    • When I was making $10/hr, I would have left my employer for the same job making $11, but not $10.75. Why should a quarter an hour make all the difference? Because everybody draws the line somewhere. That 5k could be the line for somebody, when balancing all kinds of other factors (relocation, more stressful job, longer workweeks, etc.).

                      That, in itself, doesn’t mean that we shouldn’t have a progressive tax system or that we shouldn’t raise taxes on the wealthy. Like you, I think we have room to raise taxes. My main point is only really that top marginal rates do matter, even if they don’t retroactively affect earlier income.

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                    • The $11 vs $10.75 wasn’t meant to be on account of taxes. I was just illustrating a line being drawn between what I would and would not leave for. Regardless of whether the difference was due to taxes or simple wager offerings. Honestly, when I was making that kind of money, taxes didn’t factor in much to my decision-making at all.

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                    • Jesse: I’m going to be perfectly frank and says that if you’re worrying about the fact you’re only going to be making $25k more instead of $30k more due to taxes after a raise,

                      It does matter, for two reasons. One is that the marginal benefit of the new job has to be compared to the marginal cost of the new job. If the new job requires more effort from me, or perhaps has less security for me, than my current job, then the distinction between an extra $30k or just an extra $25k may indeed be the determining factor of whether I take the job.

                      If the extra $30k would be enough to entice me to take the job but $25k wouldn’t, or if I just selfishly insist upon having that extra $5k, then the firm can probably find ways to give me non-taxable compensation, depriving the gov’t of the share it demands. If it demanded a lower proportion of my increased income I have less incentive to look for ways to avoid paying.

                      You appear perhaps to be making a normative argument, but normative arguments aren’t really relevant. It’s not about what people ought to do in that situation; it’s about what people in fact will do. Nothing is a surer path to failed public policies than focusing on the desired outcome rather than the probable outcome.

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                    • Many of these comments seem to be mistaking arguments about the incentives of income taxes in general for arguments about the incentives of progressive marginal rates.
                      Ryan’s post specifically brought up problems with the marginal rate increases, an issue I am sure exists on some level but does not exist in the way he characterized it in the post. No one faces a situation where their total income is reduced by moving into a higher tax bracket, only one where their net of additional marginal income will be slightly less as a percentage than their income prior to the change.
                      To put it more simply, income taxes at all are what cause the decision structure that some of you are talking about, they would be true regardless if there was a jump in marginal rates between 199,999.99 and 200,000.00 or not.

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                    • Plinko,

                      The size of the increase at the margin does shape the decisions we face.

                      Consider a marginal increase of 90%–how much harder would you work to get a pay raise that you would only see 10% of? If my boss asked for an extra hour a week it would be worth it. If he asked me to regularly work 60 hour weeks and do a lot of traveling so that I wouldn’t be home for my kids on a regular basis, hell, no, I wouldn’t!

                      So while the existence of the tax itself is the initial rule that creates the decision structure, the marginal rates also play a role. To say they don’t is to say that the most fundamental principles of economics–the weighing of costs and benefits–doesn’t happen.

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                    • No one faces a situation where their total income is reduced by moving into a higher tax bracket, only one where their net of additional marginal income will be slightly less as a percentage than their income prior to the change.

                      This is true, but that last part is relevant. There comes a point where the extra (non-monetary costs) of higher pay is not worth the percentage that you’re taking home. It reaches a point where the sacrifices (such as longer hours, increased stress, relocation) aren’t worth it. Where that point is varies from person to person. Once our tax burden went over 33%, it had a psychological effect. If they ever reach over 50%, there’ll be a psychological effect there, too. Even though I know it doesn’t touch earlier income.

                      The marginal increase in tax rate is important when we’re also talking about a marginal increase in income. When deciding whether or not to take on extra work, I don’t look at our overall tax burden. I look at the tax rate for the extra income we’re looking at bringing it. In my case, for taking a job at all. In my wife’s case, taking more than 14 on-call days a month in order to get the bonus associated with that.

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                  • Again, you guys are talking about a different point than I am. I fully understand how income taxes affect income calculus.
                    The point is the marginal rates don’t create the need for a calculus, they change the calculation slightly vs. a flat rate income tax.
                    This is an extremely narrow point but it’s the crux of the disagreement here.

                    Further, you guys are muddying the discussion by bringing in other factors. The narrow point is whether or not one would ever turn down extra income that comes without any additional input (ie an annual raise or bonus) is not disputable under the U.S income tax system, is it? You could argue that one might request payment via a tax-advantaged medium, but one would not turn it down due to tax-disadvantage.
                    When one is making a calculus about accepting extra work or taking a new job, one has to do the cost/benefit calculus – with or without income taxes! The tax structure is a necessary part of the calculus but, again, it doesn’t cause the need for the calculus, it’s just another variable in it.

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              • Well, the issue with married couples filing jointly is a different issue entirely, an aspect of the tax system I oppose but won’t get into here.

                Saying someone taking a new job or getting a raise from $160K to $200K isn’t really getting the full benefit of that raise is the same as saying someone accepting a $50K job isn’t really going to get $50K that year. We all know that the salary quoted in our contract or offer letter is not what we will take home. If people don’t immediately make that rough calculation in their head, accounting for the higher marginal tax rate (or go to paycheckcalculator.com for free), I don’t have much sympathy. And I don’t consider that to be any more a discouragement from pursuing a higher paying job than from pursuing a job in the first place.

                Note: I didn’t mean to come of as condescending as I did. For that, I apologize. I just get up in arms when people not only demonstrate a fundamental misunderstanding of how tax brackets work, but then rant and rave based on their faulty understanding. Pet peeve of mine. You didn’t do that though, but I flipped the switch anyway.

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                • BSK,

                  Don’t sweat it, I know what it’s like when a switch is flipped.

                  Anyway, it’s not about sympathy. It’s about people actually making that calculation and the difference in tax rates affecting their decision. There are all kinds of factors that go into making a decision. Just as $5k could be difference if it were what the employer was offering, it could be the difference if it were the additional amount being taken out in taxes. As I said to Jesse, everybody draws the line somewhere.

                  This all assumes that people approach these decisions with a spreadsheet in hand. The additional taxes aren’t going to occur to a lot of people. Other people are going to mistake marginal tax rates for overall tax rates.

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          • Insofar as this is a significant issue, it’s applies to any progressive income tax, not specifically to one with discrete brackets.

            Now that I think about it, I suspect that Ryan was under the misapprehension that going from the 25% bracket to the 28% brackets results in your entire taxable income being subjected to the 28% rate, so that it’s possible that an increase in pre-tax income can actually result in lower after-tax income. I used to think it worked that way.

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  3. As I’ve pointed out elsewhere, it’s not like the modern American system is all that complicated either. It’s just that everything is a special case. And you’ll have a long road to go to convince me there wouldn’t be just as many “special cases” in the Fair Tax system.

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  4. Good piece. I agree that a lot less utility is lost when you tax consumption, rather than income or capital gains or payrolls. I mean, consumer spending has been making up a larger and larger part of the U.S.’s GDP (about 70% now), which can lead to serious household indebtedness and a loss of quality investment (see: housing bubble and ensuing financial crisis.) More exports and capital investment is preferable.

    My only problem would be that I have hard believing the national government could find revenues equaling the 22% of GDP or so that will most likely be needed over the next several decades through a VAT. It could only be a part of the equation, which would mean lowering other taxes, but certainly not eliminating them. Plus, a pure national VAT has the potential to take away a ton of state and local funding sources…what then? In reality, we all wish we could fund the government off cigarette and alcohol taxes (not that you’re saying that at all), amongst other minimal-economic-harm taxes, but that would lead to a radically different kind of society. Sometimes you have to go where the money is.

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  5. If this tax truly is “progressive”, you are going to encourage people to take out loans.

    If more spending is taxed at a higher rate, it is in people’s best interests to participate in credit programs that allow them to spread out their spending over several years.

    Why pay $10,000 for X now when I can pay $1,000 a year, plus some interest, for 10 years but save big on taxes? This is risky behavior to encourage.

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    • I don’t think the idea is workable as a policy proposal, and the numbers would appear to crunch out at a level significantly less adequate than the “FairTax” 30% proposal, but it’s an interesting thought experiment.

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    • Over the long term, all accounts go to 0. But over the short-term, someone who makes less money is going to spend (and be taxed on) a greater percentage of their income than someone who makes more money. Someone who makes more money is also likely to spend more of their money overseas, although I don’t know how statistically significant that is.

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    • Yeah, that sentence was kind of unclear as written. But people who make less money tend to spend a larger portion of their income on consumption. If you spend 50% of your income on stuff and I spend 30%, our effective tax rates end up being .3*.5 = 15% and .3*.3 = 9%, respectively.

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        • Sort of. Unlike economists, the US doesn’t really have an infinite time horizon to work with. A lot of savings simply don’t ever get spent.

          Or they get spent intergenerationally, which really messes up the story. It may be true that the long run effective tax rate on one poor guy is the same as the long run effective tax rate on an entire rich family, but that’s not exactly a stirring tale of tax justice right there.

          That said, I have long favored an estate tax that’s pretty close to 100%, so we could probably strike a deal here.

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          • I repeat my question above: What’s the problem? If a person makes a lot of money, invests it, and never pulls it out to spend on himself, this is a Very Good Thing for all of us. What possible objection could there be to allowing his investments to continue to grow tax-free until such time as he or his heirs choose to spend them?

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              • You seemed to be suggesting that the fact that a person could accumulate wealth tax-free as long as he doesn’t spend it is somehow problematic, both immediately above, and also in your criticism of a flat consumption tax as being regressive (which it isn’t at all, if consumption rather than income is the appropriate denominator).

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                • A) Wealth-accumulation *is* problematic, but that’s not really what this post is about.

                  B) I’m mystified as to why people are arguing that a flat consumption tax isn’t regressive. If you make $10,000 a year, I make $46 billion, and we both spend $10,000, your contention is that you are not disproportionately affected by a flat consumption tax? You can pick whatever denominator you like, but you’re both wrong and insane.

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                  • A) You just said that we were in agreement when I said it wasn’t.

                    B) As commonly used, the terms “progressive,” “flat,” and “regressive” are normative. There’s an implied assumption that taxes should be levied roughly in proportion to income.

                    But a tax can also be “progressive,” “flat,” or “regressive” with respect to consumption. A flat consumption tax is just that: a tax which is neither progressive nor regressive with respect to consumption. To object to a flat consumption tax on the grounds that it’s regressive with respect to income is to miss the point entirely. The point being that taxes should not be levied in proportion to income, but rather in proportion to consumption.

                    Also, any consumption tax, flat or otherwise, is likely to be regressive with respect to income on average. If someone is making a million a year and saving $850,000, you’re not going to get much more than 5% of his income with any sane rate schedule.

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          • Of course the US has an infinite time horizon to work with – that’s what debt markets are for. The existence of those savings creates a future revenue source of the government, which you can just borrow against.

            Seriously, this is a well understood point in tax policy circles about clean consumption taxes – they are not regressive, they are flat.

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    • The Fair Tax is a specific policy tax proposal that is a sort of consumption tax to replace the U.S. Federal Income and payroll taxes advocated mainly by a few very conservative Republicans and talk show host Neal Boortz. I believe Herman Cain is a major advocate as well.
      Under it, transactions that would be taxed at a rate of about 30%.
      Bruce Bartlett wrote a good explanation of it and the appropriate takedown of why it would be vastly inferior to a VAT (mostly due to the gaping holes in enforcement created that undermine the way the estimated receipts are accounted), you can read it here:
      http://taxprof.typepad.com/taxprof_blog/files/bartlett_fair_tax.pdf

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  6. The key to saving this whole thing is realizing that you can basically just turn the income tax into a consumption tax. Add an unlimited deduction for savings and voila. The trick, of course, is that income = consumption + savings

    Problem, this already exists. It’s called 401K, Roth IRA, Health Savings Accounts, Educational savings accounts and even capital gains taxes (you don’t pay taxes on the increase in value of your stock portfolio, only if you switch from saver to non-saver and sell your stocks to *realize* those gains). Many of these vehicles have an added bonus in that they let you use the savings to consume in the future without any taxes at all. For example, a health savings account can be used to buy health care consumption without any taxes.

    While none of these tax vehciles are unlimited, the fact is most people come nowhere close to maxing out on all their potential tax free savings. This being the case, what problem is a consumption tax trying to solve? Are the rich consuming too much? I don’t think so, the rich like Paris Hilton who are living large are still in little danger of going broke. The super duper mega rich (Warren Buffet, for example) have so much money that they have effectively a savings rate of nearly 100% already….when you have billions of dollars it becomes literally impossible not to save nearly all of it. The human body simply cannot handle consuming more than a tiny fraction of such a load.

    If the problem is the middle and lower class saves too little, this idea doesn’t really address the problem since tax free savings is amply available to many of them and they don’t take full advantage of it. Also when you’re talking about the middle and lower class you are talking about lower tax brackets to begin with so the advantage offered by not taxing savings is likewise lower.

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    • Buffett’s saving rate isn’t 100%. It’s 100% minus whatever he pays in taxes. The point of a consumption tax is that taxing people like Buffett is just plain bad policy.

      If Buffett were paying less money in taxes, he wouldn’t personally consume any more. He’d have more money to invest, and he’d have more money to donate to charity when he dies. On the margin, Buffett’s income is an unalloyed public good. It just doesn’t make economic sense to tax it.

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      • Let’s imagine we keep all other things equal. Let’s just abolish taxes for Buffett. Gov’t revenue will go down by a few hundred million a year. But that won’t make a difference because savings goes up by a few hundred billion a year (remember Buffett is very frugal and would opt to save all the tax cuts he gets). There’s no crowding out because the extra borrowing gov’t will do will be offset by Buffett’s savings (note I’m not saying that Buffett will be necessarily loaning his savings to the gov’t, but his addition to the savings market offsets the gov’ts additional borrowing from it).

        The question then is what is the interest rate the gov’t pays on its borrowing. If its very high, then its likely not a good deal for the gov’t, if its very low it likely is.

        If Buffett were paying less money in taxes, he wouldn’t personally consume any more. He’d have more money to invest, and he’d have more money to donate to charity when he dies.

        First, giving money to charity is consumption. Too often in these discussions consumption is given some type of negative spin when in reality its just a term. There’s nothing inherently wrong with consumption, in fact without consumption there’d be no point in worrying about an economy to begin with (if you never consume anything, why would you worry about your income?).

        Second, Buffett’s just a hypothetical here. Sure Buffett’s ability to allocate resources is probably much better than the gov’t. Much better than the average person in the market. That is why he is so much richer than almost everyone else. There’s no special reason to think, though, that rich people in general are better at future resource allocation. In fact, I suspect plenty of wealthy people are resting on their bums, milking past innovations.

        For example, let’s consider actresses’ income from Sept to Dec. Lindsey Lohan is probably going to earn income greater than the average actress in this time period. Why? Royalties on her past films, investment income etc. But out of the hundreds, thousands maybe, of paid actresses in that time period, she will probably not do a single movie or performance. Any great acting you see from Sept. to Dec. is likely to not be from Lohan. Yet the economy is paying Lohan and we are talking about giving her a tax cut? But there’s every reason to think that the next ‘innovative’ contribution to actressing is probably going to come from some woman who isn’t earning what Lohan will earn.

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          • Don’t mean to be anti-property, just realistic. Lohan has every right to collect her residuals from her previous films over the next year or so. This concept, though, is being sold on the premise that its going to provide an additional incentive for creative people to use their tax savings for productive and fruitful investments. But Lohan is likely not to do that, in fact the next great piece of acting is likely to be from someone who has no special incentive from lower tax rates on high earnings.

            If you want to argue that taxes are theft, then do so. But if that’s your argument why is it not theft then to tax Lohan or Paris Hilton for spending millions on flashy consumption while not taxing Warren Buffett for his supposedly noble investing and non-consumption? If property is your angle then the fact is you have no right to judge the consumption of one’s property as less within one’s rights than the investment of one’s property.

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    • “This being the case, what problem is a consumption tax trying to solve?”

      The assumption is that “the rich” have vast sources of assets which they can simply take distributions from in lieu of income, and that a consumption tax would derive revenue from this whereas an income tax would not.

      For example, let’s take Warren Buffet. He has forty-five billion dollars in assets. He could spend a million dollars of that every year for the next forty-five centuries and pay zero income tax because he hasn’t got “income”, only money from the bank. (Obviously there would be capital gains taxes involved, but it’s possible to offset those by selling assets that lost money.) A consumption tax would get some money out of that million-a-year, because presumably it would be getting spent on things.

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      • For example, let’s take Warren Buffet. He has forty-five billion dollars in assets. He could spend a million dollars of that every year for the next forty-five centuries and pay zero income tax because he hasn’t got “income”, only money from the bank. (Obviously there would be capital gains taxes involved, but it’s possible to offset those by selling assets that lost money.)

        1. Where those assets are the results of actual earnings, either salary, interest income, rental income or profits on businesses he owns, he ALREADY paid income taxes on that.

        2. In order for him to consume, say, some stock that he owns, he will have to sell that stock. At that time he will incur a capital gain if he sold it for a profit compared to what he paid for it. Or he may incur a loss.

        Suppose he incurs a loss? A year ago he brought some shares for $1000 but sells them today for $800 in order to throw a party. He already paid income tax on the $1000 he had to earn to originally buy those shares. Now he’s just taking back what he originally owned minus a loss of $200 which has probably become someone else’s capital gain. (Say the lucky duck who sold that stock to Buffett for $1000 before its market fell to only $800!).

        If he incurs a gain (say selling for $1200 making $200), he pays taxes on that.

        IMO I don’t think its clear that his gains should be treated any different than regular income. I don’t think him making $200 buying and selling some shares should be taxed less than a fellow who makes $200 by working some extra overtime hours. But let’s continue….

        You are right, Buffett could offset his realized gains with realized losses…carefully selling shares at a loss of $200 to offset his sale that produces a gain of $200. Great but then what does this mean?

        a. If Buffett happens to have equal amounts of gains and losses….well he hasn’t really earned any income has he?

        b. If Buffett happens to have more gains than losses, well every time he consumes he must choose to either pay tax on his realized gain or sell off some positions at a loss to offset that gain. Since gains outnumber losses, he will eventually exhaust his offset ability.

        c. If Buffett has more losses than gains….well we’re back to the point where he’s already paid income taxes on that.

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        • , if Buffet sold stock he owned less than 1 year he’d pay ordinary income tax on it at his bracket rate. Long term capital gains are treated differently, precisely because the gov’t felt it was in the best interest of the economy if people weren’t constantly flipping stocks. Take away the incentive/disincentive and that’s exactly what will happen.

          Now, let’s look at the case of an investor who loses $1Million in long term investments. The gov’t allows that investor to write off a whopping $3000 every year, until he dies in which case the rest goes bye bye. Pop quiz: How many years will it take that investor to recoup his loss at $3K per year?

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          • You’re saying we would be better off if we provided more incentives to people who invest to loose money?

            More importantly an investor can tap $3K per year against other income to offset a massive loss but there’s no limit against investment income. If Buffett loses $1M on one stock sale but gains $1.1M on another he can use the $1M loss to make his net gain $100K.

            Long term capital gains are treated differently, precisely because the gov’t felt it was in the best interest of the economy if people weren’t constantly flipping stocks.

            I’m not convinced the economy needs its ‘best interest’ looked out for in this manner. Rapid stock trading is hardly an easy road to riches at the expense of the rest of the economy. It’s quite easy to make pretty crappy returns doing in and out day trading. For the economy’s benefit, though, such rapid traders often provide liquidity to the market which is a good thing.

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