August 30, 2004

Could This Be the "Boldness"?
— Ace

Dummocrats.com suggests that Bush's "boldness" may come from his endorsement of the (minor) push to eliminate the IRS.

I don't know. That to me qualifies as "likely to be expensive." Furthermore, any regime which attempted to tax only consumption would require some big bureaucracy to calculate tax credits for the poor (as consumption-only taxes are very regressive without some adjustment/credit/refund) that would end up looking a lot like the current IRS.

In fact, since the plan would be revenue-neutral, I wonder how much different it would be from the standing regime for most taxpayers. If the IRS is "gone" but we install a consumption-based regime with a big bureaucracy that ends up taking in just as many tax dollars as the current system, what have we actually gained? Seems like a lot of costly bureaucratic shaking-up to come up with a system based on an alternative theory of taxation but which broadly mimics the current one.

OTOH, it would be "bold."

I don't know. It's possible, but it smells like a desperate political stunt to me.

Posted by: Ace at 02:55 PM | Comments (36)
Post contains 186 words, total size 1 kb.

1 But think of the money we all save from not paying accountants to interpret the code?

Posted by: David at August 30, 2004 03:16 PM (evoDd)

2 I would disagree. Most economists (that I've read, anyway) agree that if all taxes were replaced with one 30% sales tax, prices would end up being about the same. You are paying all of the corporate income taxes, etc., right now. They bury it in the price.

Furthermore, the FairTax (www.fairtax.org) would place the burden of tax collection on state governments. Actually, even the state governments don't collect it... retailers do. And they get a small "cut" of everything they collect, if I recall correctly.

FairTax does make allowances for a monthly stipend to those who fall below the poverty line. It doesn't require a large department to track it though.

I think it's an awesome idea.

Posted by: Dave at August 30, 2004 03:47 PM (R0Fps)

3 The income tax is as Marxist a policy as it gets. It was Plank No. 2 of the Communist Manifesto for a reason.

There are two reasons that Leftists love the income tax:

1. It enables massive deficit spending, and
2. far more importantly, it gives the government the POWER to select who pays.

It enables massive deficit spending because, unlike a transaction tax, the rate of taxation is not self-limiting. A transactional tax is self-limiting since the gov't cannot, by the laws of economics, hike the rate up to 90 or 100% on any given transaction. To do so would kill the transaction altogether, like a parasite killing its host. The effect of an excessive rate of taxation is therefore disastrous and immediate.

WIth an income tax, on the other hand, the gov't can collect 90-100% on the highest rates of income, as it has in the past in the U.S., and as it does in socialist countries today. Doing so causes economic damage, of course, but the damage is more remote and harder to trace. As a result, the income tax allows the government to go after pockets of accumulated wealth. It is this power to collect an almost unlimited amount of money in any given year (by theft) that enables the gov't to finance itself through borrowing. It can only borrow money from investors because it has the power to seize whatever cash it needs via the income tax. If it were limited to only being able to raise taxes based on how well the economy was performing in any given year (based on actual economic activity, i.e., sales), the gov't would find it much harder to borrow excessive amounts of money for its worthless spending programs.

Second, the income tax is a gross invasion of privacy. Because the taxable event (or the taxable unit) is the individual, the income tax empowers the gov't to collect a massive amount of economic information about people. A transactional tax, on the other hand, is anonymous. As such, it does not permit the government to gather enough information about the wealth resources of the persons involved in a transaction. It is this accumulation of information that enables politicians to buy votes (since people vote, not transactions). Transactions tend to cut across income lines. That is why the two wealthiest candidates in history can walk into a Wendy's for a failed photo-op and pay the same tax as everyone else.

It sickens me that our government has reduced us all to beggars, pleading with them to allow the privilege of keeping the fruits of our labors. There were a great many slaves prior to 1865 who did not work in the fields. They were sent to the towns and cities to work, but their masters kept a percentage of their incomes, since the masters had prior claim to anything the slave earned. The income tax is just slavery revisited.

Incidentally, the bureaucracy involved in collection and distribution of a per capita refund would be miniscule compared to the present IRS. For one, collection would largely piggy-back onto the existing collection system already in place at the state level. Distributing a fixed per capita sum to everybody as a refund for the base, poverty-line exemption would be extremely simple.

And a transaction tax is NOT regressive in terms of expenditures. Because a base level of expenses and/or goods are exempt, the closer you are to confining your expenses to those exemptions, the less of a percentage of expenditure you pay in taxes every year.

Please reconsider, Ace.

Posted by: george gaskell at August 30, 2004 04:04 PM (JQeMB)

4 I wrote the Fair Tax people, but got no answer. I do not think that this is a good sign for a group that expects to get their agenda through the political system. I asked about Roth IRA's. I paid extra taxes to get the government away from my money which I am trying to save to care for me when I am old and lame (unfortunately some health crises are already plaguing me). It appears to me that many details remain that these people refuse to discuss. The devil is always in the details. I do not consider the fairtax.com people serious.

P.S. A federal sales tax of 30% will never fly.

P.P.S. I hope that it is obvious to whom I am replying.

Posted by: Mike at August 30, 2004 04:15 PM (4e0Jk)

5 Modified flat tax, and not a complex fair trade tax, is the way to go.

-- Poor people (i.e., below a certain level of income) don't pay.
-- The rest pay.
-- The end.

It's easy to understand, it eliminates the regressiveness of a sales tax, and it pays the bills. The biggest problem is having people trust that they're paying less in taxes-- obviously, the greatest hurdle is eliminating property tax refunds (not to mention child tax credits). Some people in the margins are going to feel they're getting screwed.

HOWEVER, a flat tax universally applied to all income levels (i.e., no John Edwards "off shore accounts" shenanigans), and you will actually probably end up getting *more* money than you do today, with the complex (and easily gamed, for the wealthy) tax code.

I hate the income tax as much as the next guy, but we're well beyond the days of the family farm and the country store-- national sales taxes would really freak people out. Simplify the code, don't eliminate it.

My two cents.

Cheers,
Dave

Posted by: Dave at August 30, 2004 04:26 PM (mrpxK)

6 Mike,

If prices do generally stay the same, and your Roth IRA withdrawals would not be taxed under either the existing system or under a transactional tax, then why would it harm you?

As I understand, you already paid your income taxes on the dollars you deposited into your Roth IRA, and they would not be taxed if you withdraw them after age 59.5. Under a transactional tax system, you would still pay no taxes on that money by withdrawing it (at any age, actually). Taking money that is already your is not a taxable event in a transactional tax system.

Prices would largely stay the same (even including the sales tax), and some would even fall. Without massive borrowing on the part of our federal gov't, the inflation they have caused over the last 80 years would come to an end. They would be forced to halt this constant devaluation of our currency (which is itself a form of a tax, make no mistake, just a sneaky, hidden tax).

Posted by: george gaskell at August 30, 2004 04:29 PM (JQeMB)

7 A federal VAT tax of not more than 17% could be workable, and would be much more efficient than the income tax. What more, it could be lowered or completely waived for very basic foodstuffs and other basic goods to alleviate the burden on the poor.

The problem with the income tax is that it allows Congress to decide who's "rich" enough to get boned. The beauty of transactional taxes is that you can pay less tax if you consume less, and more tax if you consume more. In that sense, consumption taxes would be much more "progressive" than the income tax.

Posted by: SWLiP at August 30, 2004 04:58 PM (XKN2H)

8 If I remember correctly, Forbes while running under his flat tax platform, spoke quite a bit about spiking the IRS..

In his mind and in mine as well, a modest flat tax would at the very least gut if not destroy the IRS as we know it.

I don't think he was advocating we switch to consumption tax models.

Posted by: Arvin Wallace at August 30, 2004 05:00 PM (C3nhD)

9 Consumption tax = Massive immediate black market for goods. The IRS will become a warehouse-inspector. No thanks.

Plus, our economy thrives on consumption. Consumption good.

I'm with Dave on the flat tax. If somebody makes twice as much as you, they pay twice as much.

Exemption under some amount of income too piddly to actually live on, like 20K, above that everybody pays.

Posted by: lauraw at August 30, 2004 05:37 PM (AaBEz)

10 Hi George,

I suppose that if I never cared to spend my money (which is paltry--do not assume that I have real money), then your argument might make sense. Your argument assumes that a sales tax (I live in Oregon--we have no state sales tax, just a hefty income tax) is not a tax somehow, or somehow I should look at that tax differently. How is it possible that this federal transactional tax would not be applied to me? You have either confused me, or you are very confused. I took money that I otherwise could have invested (or enjoyed), and put it towards making my Roth really my money (untouchable by the feds). Do you assume that I can flee the country upon retirement? How else do I avoid the tax on my money which I supposedly put in a lock box (borrowing from Democrat terminology--I am an independent for life)? If the deal is changed, I feel that the government who took my money under false pretenses needs to compensate me. I am sure that I will still be screwed, but it would make me feel a bit better about things if I was not totally screwed. I find it hard to believe that most people can't understand this.

I will not deem myself competent to discuss monetary policy, but the worst time in our country was a period of massive deflation (Great Depression), not inflation. I lived through the Carter years. Prices would change every damn week. It was a scary time. We have not had such problems since then. Normal inflation is the goal (as opposed to the hyper-inflation during the Carter years); ask any economist. Borrowing by the government is driven by growth of the government bureaucracy and its mostly failed programs. If the government cut back spending, deficits would vanish. Again this is common sense which I can't understand why most people refuse to see.

I have even less desire to predict prices based upon government action. The beauty of a market system is that it adapts (the invisible hand). I think it totally fallacious to sell any change in tax policy by claiming that it might lower prices. Crystal balls are probably plentiful, but they do not work.

Posted by: Mike at August 30, 2004 05:56 PM (fHbO0)

11 I don't really see switching to a sales tax helping much. It sounds so simple, like x% tax on all goods. But then the questions start. Is it for goods *and* services? What about things that are both, like delivery pizza? Are all sales taxed, including manufacturers buying raw material from suppliers? If so, everything would be taxed several times. And how about international sales? Who pays what when Wal-Mart buys a bazillion widgets from China? Will they even try to enforce the tax for private sales? Then the "help the poor" crowd will want to make exemptions for a bunch of "basic" items. All sorts of industries will lobby for all sorts of exemptions and special rules for various reasons, and some of them will get them. The "soak the rich" crowd will want extra taxes on "luxury" items. God only knows what other kinds of special rules and formulas will apply before long.

It may start out simple, just like the income tax probably did, but give it 50 years or so, and we'll have just as big of a mess. You might need to fill out a mini-1040 for every purchase you make. Why bother?

Posted by: Mason at August 30, 2004 06:30 PM (C08Rf)

12 Mason is dead on: no matter what, people will start wanting all manner of exceptions and special rules. I understand the philosophical problem with income taxes and I agree. And a flat tax would be somewhat better than the progressive tax we have now. But there's still something to argue about: what is the poverty cutoff? As long as there is some kind exception to be sold to the voting public, there will be B.S. in the tax code.

I honestly think the best way to accomplish what we want is to clamp down on spending. And the best way to do that might be legal action against members of the legislature who violate Article I, Section 8 of the Constitution. All of this social spending is, in my reading of the text, a violation of the oath to uphold the Constitution. I don't know what kind of legal action could be taken, but I'm sure something could be done.

Posted by: Smack at August 30, 2004 07:08 PM (CBDWx)

13 Consumption tax yes!

1) Our economy wastes 500 billion (yes, with a b) every year complying with the complexities of the tax code. People's solutions of "just make the income tax code simpler" won't alleviate this problem, because most of that money comes from complying with corporate taxes. I dare you to simplify those. Also, a flat tax would be burdensome unduly burdensome on families.

2) Re: the "black market" issue. Simply put: no dice. Even if such a thing happened, you have to realize that there is already a HUGE "black market" that exists now because of the income tax, namely, every bit of income generated that is not reported (from crime, under the table jobs, people who simply don't file tax returns, etc). A consumption tax is a simple, self-regulating means of making sure everyone gets taxed fairly, because drug dealers, illegal aliens, theives, etc buy shit just like everyone else. I would be amazed if the black market that could arise from a consumption tax even came within a tenth of the revenue that currently escapes the tax system.

3) The tax credit scheme is beautifully simple. Every year, the government computes a cost-of-living index, such as the combined value of daily essentials for a household, depending on the number of children, ages, etc. Then, every family gets a check from the govt at the end of the year for that amount. Where's the complexity in that?

4) Mason: it's much simpler than you make it. It's only for goods. If a pizza place wants to factor in the cost of it's delivery boy into the retail price of a pizza (the good), then they do that. No problem. Moreover, not only is it restricted to goods, but only to NEW, CONSUMER goods (hence, "consumption tax"). So, a resold car wouldn't count and neither would the steel that the manufacturer buys in order to make it in the first place.

I LOVE the idea of a consumption tax. If a politician's only two positions were implementing a consumption tax and creating a national bureau for the stabbing of puppies, I would vote for that man every day of the week and twice on Sunday.

Posted by: Russell Wardlow at August 30, 2004 07:17 PM (CcGTn)

14 Good comments, all (not that I'm the comment moderator here or anything, mind you)

What I don't think I've seen mentioned is the problem with taxes in general: They're implemented, and tweaked (and tweaked and tweaked) in order to incent and disincent activity, sometimes far more so than to provide a revenue stream with which to run the government. And I have a massive problem with some of the things my more socialistic fellow citizens feel should be done with taxation policy.

From the simplest standpoint possible, taxing productive activity is ludicrous. Taxing consumption is not. Laura's comment about making twice as much should involve paying twice as much is reasonable, but could still occur under a flat tax - people who make more tend to spend more. And if they don't, so what? It's not production that we want to disincent, is it? As for the regressive nature of a flat tax, there's a way to ensure a level floor below which tax is rebated; in fact it's one of the few really simple things about the entire prospect of such a new tax regime. Nobody will starve as a result, and concerns about the rich getting richer, solely because they don't spend all their money, are more sour grapes than good government policy.

The "devil in the details" mentioned by Mike cannot be easily dismissed - of course his Roth withdrawals wouldn't be taxed. Just his use of those withdrawals for anything meaningful. And all the lazy SOBs (like me) who've never had a chance to convert to Roth would get off just the same as the Roth folk who'd already paid taxes on their IRA's, so that's a problem. Transitions such as that, and the massive transition which is going to be required to fix Social Security, are just part of the calculus.

They're not a reason to just do nothing.

Posted by: Patton at August 30, 2004 07:23 PM (cLlFA)

15 Ace, PLEASE check out FairTax.org! The FairTax proposal is dramatically elegant in its simplicity, which includes (1) repealing the 16th amendment, (2) replacing payroll as well as income and other federal taxes, (3) a simple universal advance rebate for basic necessities. (4) using a collection structure already in place.

It's so simple, any efforts to make exceptions for special interests become too obvious to win approval.

I'm hoping against all hope that HR25 will be the President's surprise election weapon this Thursday night.

Posted by: Clyde at August 30, 2004 07:33 PM (q3DrC)

16 The tax credit scheme is beautifully simple. Every year, the government computes a cost-of-living index, such as the combined value of daily essentials for a household, depending on the number of children, ages, etc. Then, every family gets a check from the govt at the end of the year for that amount. Where's the complexity in that?

The complexity comes in politicians vying for votes by arguing over the formula and a whole lot of riders and exceptions and special rules. It also comes from government unions arguing over who gets to be the agency that controls the technical details of calculating the indices. Then, they'll call each other "Communists" and "Nazis" for disagreeing about it all.

It's hopeless to really reform the system because of the political wrangling and vote-buying that will go on. The only way we're going to deal with this is to strangle the un-Constitutional spending. And that won't happen until the entire system completely collapses, perhaps taking the entire nation (and the global economy) with it.

Posted by: Smack at August 30, 2004 07:42 PM (CBDWx)

17 Consumption tax: no! ;-)

I love conservative arguments-- they're of the same ilk as "how many angels can dance on the head of a pin?" All very interesting exercises in logic, but usually disconnected from reality (and I say this as a "logical conservative.")

Anyways-- back to the REAL world.

1. Yes, I agree-- our economy wastes billions on a tax code. A consumption tax and a flat tax with no exemptions except for poverty are equally capable of defeating said complex tax code.

As for a flat tax being burdensome on families-- how? You write it as if it's as self-evident as the sun rising in the East. I'm assuming that you're arguing that because a flat tax eliminates such things as child care tax credits and marriage penalties/bonuses, you get to be "hard on families," if you conceive of the tax code as social engineering by other means. How does a consumption tax differ in this regard?

2. Agreed. There is a black market today by people avoiding paying taxes. But how much is lost due to those who don't pay any taxes versus those who don't pay *all* their taxes? I'd say the latter is much more costly, just because there is not a nation filled with lawbreakers. Confusion over taxes-- and willful bending of rules for your favor-- contribute more towards waste than outright ignorance of taxation. Thus, a flat tax can solve that problem by eliminating the loopholes that allow said waste.

As for the "black market" effect, I don't know how big it would be, but it would certainly not be negligible. Again, people will try their best to avoid paying taxes-- whether they're sales/consumption taxes, or income taxes. At best, this argument is a wash.

3. Beautifully simple, eh? Sounds a lot like how the BCS calculates college football bowls. What's simpler than a flat tax? Remember, you're arguing from a position that the income tax is too complex and intrusive and unfair, and then you argue that the Government will in our best interests calculate a fair consumption tax? I sense a lot of opportunities to game the system, and not in favor of the citizenry.

4. Understood.

Anyways-- my main argument isn't really in favor of a flat tax, as much as I think that's the best of all alternatives. It's for tax *realism*. A consumption tax, or VAT, or however you style it, will simply do one thing very well: depress market demand. Why? Because, again, people don't want to pay taxes. I'm not going to be Mister Smart Elitist and say I'd be immune to the effects of sticker shock-- but I can imagine Joe Public, ignorant of all the calculations that go into the sales tax, would feel at seeing 10%, 20, 30% sales taxes on items (above state and local sales taxes, which wouldn't go away). Joe Public will buy *less* of said goods, or defer them, or whatever. It's not that he'll save money-- he'll just use it less efficiently. Not a good thing in a consumer-driven economy.

No, it's much easier to reform an income tax than eliminate it, and the best reform is to flatten the rates and elimnate the loopholes. Problem is, the only way to eliminate the loopholes is to get rid of ALL of them at once-- politically, you can't survive playing favorites. In the end, however, you get the two benefits of an income tax system: ease of collection, and *invisibility* to the taxed. Sure, we all joke about how taxes would go away if we paid all our taxes at once on April 15th. But imagine such a system, and you realize that tax collection would collapse. A VAT/Consumption tax simply makes that all happen in a hundred consumer choices each day-- hurting the market dynamics surrounding those choices. Income tax is easy, however, because people can *ignore* it, allowing for market forces to work unimpeded (or, at least as unimpeded as state & local taxes allow).

Oh well. . . it's late, and I've got to be at work in six hours (to pay my taxes ;-). Great discussion guys!

Cheers,
Dave

Posted by: Dave at August 30, 2004 07:44 PM (mrpxK)

18 DAVE:

1) A true flat tax would be simple, yes. But like lots of other simple things, it would also be unfair. The example I used to illustrate that unfairness was families, and yes, I didn't provide evidence because it's not a disputed point in any general sense. Part of that is the fact that children aren't accounted for. I'm not a huge social engineering fan, but I'm also not in favor of things that create specific economic hardships for getting married and having children.

2) Firstly, you leave out a huge number of people by the way you phrase your point: you act as if the only ones currently evading the income tax are people who don't file returns. But that ignores the truly huge amount of wealth from ALL illegal activity that garners income for someone, which does not get reported and thus not taxed.

The difference between some true black market in goods that might exist under a consumption tax and the current figurative income "black market" that I mentioned is that the latter exists as a result of ALL criminal activity already (at least all criminal behavior that garners wealth for the crook), whereas the consumption tax black market would be a completely new thing that would have to be created by individuals avoiding the sales tax. And if it's going to be something that is even one tenth as signicant as the current income tax drain, it would have to be a truly huge entity, involving tens of millions of private actors willing to break the law frequently. I find that scenario very doubtful.

But, putting all of that aside, for the sake of argument I'll grant it won't be "negligible." How exactly does this make my comparison a "wash"? That's simply a non-sequitur. Being non-negligible doesn't mean anything when you're comparing the relative value of two systems. You have to argue that one would create MORE lost revenue than the other. I think you're on that point.

3) Yes, it is beautifully simple. I still don't see why it isn't. Frankly, I DON'T sense a lot of opportunities to game the system. Maybe I'm wrong, but it seems to me that every supposed complexity that people have mentioned so far is just a misunderstanding of what the Fair Tax initiative is or does.

It wouldn't be about the govt creating a "fair" consumption tax. Fairness isn't even the issue in setting the rate. The rate of taxation would be set according to generally estimated revenue needs of the govt. The Fairtax people think that we can match current budgetary needs with a end-user consumer tax of about 18-20% (I think). The only place in which govt discretion regarding "fairness" comes is how they evaluate the end-of-the-year credit, which would hopefully aim to add up the value of a person's basic consumption essentials: food, clothing, utilities, etc. Everything else is discretionary consumption, and therefore taxable. Show me where the opportunity for finagling is in this.

4) I don't buy it. Yeah, consumer goods will seem to cost more, but people will also soon get used to the fact that they have 30-60% more money at the end of the year as well. Moreover: no, people don't like paying taxes. So, granting that, what do you do? Do you bundle the entire tax-paying act into an almost singular, discreet action once a year, or do you spread it out over thousands of little purchases throughout the year? Which makes it easier to cheat? Cheating on the consumption tax in any significant way would require a myriad of criminal acts with thousands of different people/entities. Cheating on your income tax returns seems simple by comparison.

One other point that no one has brought up yet (I think): currently there's about 6 trillion dollars in wealth from US companies that is held offshore because of tax reasons. You can expect all that money to come home in a few years were a consumption tax. On top of that, think of all the foreign businesses, etc, that would find it much more profitable to base operations in the US where suddenly they wouldn't have to worry about dealing with all the complex and expensive corporate tax systems of other industrialized countries.

I'll shout this to the stars till the day I die: Consumption tax YES!

Posted by: Russell Wardlow at August 30, 2004 08:34 PM (CcGTn)

19
This is an argument I'm not especially keen on getting in on, but what the heck. I should also say I'm less informed on this issue than most (and I'm not very informed on them, either).

But three big points:

1. Would a consumption or flat tax lead to savings as regards the collection of taxation-- i.e., no lobbyists, no shelters, no tax attorneys, no aggressive tax positions, etc.?

Answer: No. Reagan's 1986 tax reforms eliminated most shelters and dodges and loopholes and within two or three years half of them were back. Within five years, 75% of them were back.

The problem isn't with any particular type of taxation. The problem is with human nature. It's the Tragedy of the Commons. We might all agree that we would be best served by a tax system perfectly neutral about investiments in agriculture, race-horses, etc., but within months people start agitating for special tax breaks for their own preferred industries again. Connecticut wants breaks for insurance, NJ for pharmaceuticals, Texas for oil and high-tech, etc. Everybody wants extra money flowing towards their industry or their locality, and everyone uses the tax system to achieve this.

Ultimately, everyone gets a little bit of the action, and the net result is a mess of a code with pockets of unfairness and preferential treatment, but no one wants to be the only one not cheating or agitating for special breaks, so everyone does it. We might all say that we all agree we won't do this, just as we all might say we all agree we won't use a community-owned car more than our "fair share," but just like with the car, within a few months people are taking it for entire weeks and then others are scheduling to have it for a whole month because, hey, you don't want to lose out on the car bonanza.

I see no reason to believe that some new tax -- be it flat, fair, or consumption-based -- would be magically immune to the human nature and the tragedy of the commons unlike all other tax systems preceeding it.

2. I see no reason why taxing income is Marxist or socialist but taxing consumption is somehow fair and freedom-loving. Yes, when the state taxes income, it is exerting its power, through coercion, to extract money from a citizen. And the state taxing my spending of money is different, how?

Either way, the state is coercively taking money from me I wouldn't give them of my own free will. I don't see how taxing dollars that I spend is American and freedom-promoting whereas taxing dollars coming to me is socialist and oppressive.

If the state tells me it's going to kick me in either the shin or the gut, I might have some preference between the two targets, but either way, I'm conceding the state has the right to kick me.

I could be persuaded on this count by real pragmatic economic evidence (such as a small state like NH moving to a consumption system and seeing its economy grow), but I'm not moved by abstract philosophies about whether it's more constitutional to be kicked in the shins than the gut.

3. As LauraW points out, consumption is not really something we want to "punish" through taxation than income or savings. Income and savings are of course good; they drive the economy. We don't want to punish those things.

But we also don't want to punish consumption, which is, of course, the engine of actual commerce. It's all well and good to speak of all the additional capital we'll have if we stop taxing investments and savings, but if people cut back on buying, it's going to make it a hard go for the new businesses started with that extra capital.

4. Synthesizing points 2 and 3...

We all know that the tax code has real effect on human behavior. As conservatives, this is a core assumption common to us all; it's the liberals who claim you can tax a man at a 90% rate and that will have no effect on the choices he makes about working.

A consumption based tax system could create all sorts of wonderful effects that drive the economy and make everyone a little richer. It could also arrest the economy by killing commerce. It could also choke off necessary government revenues by instantly creating a large black market.

This seems to be an awfully radical and untested change to make on the national level before seeing the actual empirical effects of such a regime in a smaller system.

5. And building on that-- yes, you can "control," to some extent, how much you're taxed by controlling how much you spend. But most of our income is not discretionary. We have certain overhead that's hard to reduce. Sure, I can forgo a trip to Disney this year, but that's just a small part of my income; I can't really reduce my food/heat/rent/transportation/clothing expenditures very much, and for most people that's the bulk of their income, right there.

So, again, assuming a revenue-neutral system, we'd be taxing most people pretty much the same as we're taxing them under an income-based regime, only now we're calling it "consumption taxes." Well-- I don't see the progress.

Posted by: ace at August 30, 2004 09:22 PM (RGQgo)

20 Oh, and when I say we should first experiment with a small state like NH, I'm not talking about state sales taxes. NH already has that (no income tax, I believe).

But state taxes are fairly small compared to the federal bite. I'm talking about a special state exemption to all federal taxes, with some federally-approved consumption tax regime put in its place, with NH/federalies working in NH collecting all state and federal taxes through the consumption system. And no federal dollars flowing in, except what are raised through NH consumption taxes (plus whatever small amount NH may extract from the rest of the country; if they're getting a subsidy from the government, they shouldn't have to give that up just to demonstrate that the model works).

I have to say I don't get the whole consumption tax thing anyway.

Okay, if you work for your boss, your income doesn't get taxed, right?

And what if you hire a contractor to put up cabinets in your kitchen? Does the price he charges you get taxed as being "consumption"? If it does, note that you're now actually taxing his income (since you are, at least for the period he works for you, his boss and his source of income). Why is it okay to slap a tax on his income but not yours?

Alternatively, if you say his labor and profit doesn't get taxed, the system makes no sense. I can either buy pre-built cabinets or I can have a craftsman make them for me from scratch for my kitchen. Either way, someone has done labor to create those cabinets, and it makes little sense to me that pre-built cabinets would be taxed because they're "goods" being consumed but spot-built cabinets aren't taxed as far as labor or profit because that cuts into the contractor's income. Taxing the pre-built cabinets cuts into the factory workers' incomes, too.

Whenever you tax something in the stream of commerce, you're taxing someone's income, and there's just no way of getting around that.

Most people sell their labor-- their time-- as their chief commercial commodity. Labor, or the amount of man-hours spent working to build or create a good, is usually the biggest part of that good's price. It's an illusion that a consumption tax isn't taxing income. And I don't see how it's fair or neutral to tax man's sale of his time and labor to you (when he produces a good deemed "consumption") but then some other man's time and labor isn't taxed at all because it's deemed purely "service."

Right there, you're picking favorites, which is one of the evils you're seeking to avoid.

Posted by: ace at August 30, 2004 09:45 PM (RGQgo)

21 "I'm also not in favor of things that create specific economic hardships for getting married and having children."

And I don't mean to sound priggish, but I'm getting sick of people getting CREDITS merely for having children.

Posted by: lauraw at August 31, 2004 06:15 AM (V5Idd)

22 Ok, I have to add to that;

My husband and I have no kids. We own and run our own business, a 'chain' of two retail stores. We get reamed six ways to Sunday between property taxes on home and business and autos, paying both sides of social security, and paying two sides of fucking UNEMPLOYMENT insurance which we will never, ever, ever be able to collect on.

We need a roof on our house desperately, and last year I paid the federal government enough to put two roofs on my house. But with what is left, we can't afford to do it.

I'm sorry, but when I hear about people getting money back for their kids- when I know damn well they already have exemptions that meant they barely paid any taxes to begin with, I could fucking chew nails.

If more people had to pay taxes quarterly instead of through the anesthetic 'withholding' method, there would be a revolution in this country.

Posted by: lauraw at August 31, 2004 06:24 AM (V5Idd)

23 I hear ya talkin, Laura. I keep thinking I'd like to go into business for myself. But the hassle I'd have to go through just to do my taxes drives me away.

Posted by: Smack at August 31, 2004 06:46 AM (lpGKc)

24 Don't let me badmouth it too much- even with the tax situation, I couldnt work for somebody else again.

Posted by: lauraw at August 31, 2004 06:54 AM (V5Idd)

25 Plus, our economy thrives on consumption. Consumption good.

That is true, but doesn't tell the whole story. The most advanced aspects of our economy are not "driven" by consumption.

There is a whole infrastructure to the economy that the ordinary consumer never sees. There are layers upon layers of economic activity that precede consumption. On one end of the economy, there is immediate consumption. On the other end, there is long-term investment in capital improvements that increase productive capacity.

For example, think of a man living on an island. He has immediate needs -- food, for starters. He must spend his time, which is a limited resource, by gathering food (e.g., fishing). If he had all the time in the world, he could build a fishing boat, which would take one guy about 4 years to build. Then, he could catch a tremendous amount of fish. But, because his consumption needs are so great (being alone), he must fish immediately, and never get around to building that boat.

Now, when two people cooperate via commerce, the economy as a whole improves. One guy can fish for both of them (getting the benefit of the efficiency, since he is already fishing for one). He feeds them both, and the other guy works on the boat.

Once the boat is built, the economy has grown tremendously. Why? Because these people were able to act for the long-term. They were able to make a capital investment, beyond the needs of immediate consupmtion.

Apply this principle over thousands or millions of people, cooperating via commerce, and you get a massive, technologically advanced economy and a standard of living that so vastly exceeds basic subsistence that it is mind-boggling.

So, no, consumption is not the driving force of our economy. It is, of course, always terribly important. But all of the modern, advanced aspects of our economy are based on everything that is NOT consumption -- the investment in capital goods, manufacturing capacity, etc. All the things that are the FARTHEST removed from actual consumption are what improves our quality of life.

In fact, once could say that civilization itself grows the further you get away from the demands of immediate consumption. Civilization literally IS long-term investment.

The income tax taxes the most important sector of the economy -- the part that would have been used for capital investment. What so you think people with large incomes do with all the extra money? They consume a lot more, sure. But more importantly, the excess wealth is invested. That means more capital improvements in the economy. So, the income tax takes the dollars that, by their very nature of being unnecessary for subsistence, would have been used for these kinds of improvements.

To get back to my island fishermen analogy, a consumption tax is like taking one fish out of the day's catch. Inconvenient, yes, but not life-threatening. In contrast, the income tax is like taking away the boat-builder's hammer. It will mean that the boat may never get built, or built at a snail's pace. As a result, the overall wealth for the whole community is depressed tremendously.

All sorts of industries will lobby for all sorts of exemptions and special rules for various reasons, and some of them will get them. The "soak the rich" crowd will want extra taxes on "luxury" items. God only knows what other kinds of special rules and formulas will apply before long.

That is exactly how we got the income tax system we have today. And exactly why a "flat tax" is a pipe dream. It will last about as long as Reagan's tax reform.

I would be amazed if the black market that could arise from a consumption tax even came within a tenth of the revenue that currently escapes the tax system.

The IRS estimates that as much as 20% of our annual economic activity goes unreported as income. They know this because the federal government (via the Federal Reserve) has total control over the money supply. They count the money going out. They count it on the Form 1040's. It never adds up.

The complexity comes in politicians vying for votes by arguing over the formula and a whole lot of riders and exceptions and special rules. It also comes from government unions arguing over who gets to be the agency that controls the technical details of calculating the indices.

The reason that there is so much pressure on Congress to grant special privileges is because the income tax system treats individuals (or individual businesses) as the "taxable unit." The tax is assessed on a personal level. It is therefore natural to examine one's own tax burden with great care. Each individual has the burden of taxation concentrated directly upon him (or upon her, or for corporations, upon it).

It is that concentration of interests that drives the pressure for privileges from the gov't.

Under a consumption tax system, the interest that any individual has in obtaining special treatment is much less concentrated. That is because consumption is much more diverse. Most industries sell to a wide variety of customers. Think of gasoline. Every business uses it to some degree, so everyone pays, and everybody has an interest in keeping the taxes equal. This is true in every state's sales tax. There are some exceptions, but nothing like what we see in the federal income tax.

The only way we're going to deal with this is to strangle the un-Constitutional spending.

I submit that this reasoning is backwards. The reason we have unconstitutional spending is because the govt has access to wealth via the income tax that it would not have under a consumption tax. Expenditures tend to rise proportional to income. For the gov't, its expenditures rise proportionally to the amount of cash to which it has access.

By forcing the gov't to limit its taxes to the point where it does NOT destroy the transaction due to excessive taxation, spending will be forced to decrease as well. An income tax enables deficit spending.

Income and savings are of course good; they drive the economy. We don't want to punish those things. But we also don't want to punish consumption, which is, of course, the engine of actual commerce. Whenever you tax something in the stream of commerce, you're taxing someone's income, and there's just no way of getting around that.

A consumption tax is, of course, not invisible. It is a real tax. The question is: what is the taxable unit, or the taxable event?

Should it be:

(a) the individual, thereby maximizing that person's incentive to petition for special privileges, maximizing his incentive to commit fraud, requiring him to report his economic life to the gov't every year (when one's life is supposed to be private), requiring a collection apparatus that is insanely expensive, and removing dollars from the economy that are the MOST useful for increasing our productive capacity precisely because they are not the dollars that tend to be consumed; or

(b) the transaction, thereby decreasing the incentive for any one person to obtain special privileges; making it more diffcult and less likely to commit fraud; requiring reporting of economic activity that is already public (since businesses have to be public to survive); requires a collection apparatus that is miniscule in comparison and can piggy-back on the state systems already in place; and does not tax the dollars that are most useful for making capital improvements and increasing our productive capacity (which improves everyone's quality of life)?

I think the choice is clear.

Posted by: george at August 31, 2004 08:10 AM (DiZv6)

26 Ace - This discussion is an excellent example of why your comments should link to TPW. I'd love to read/participate in this discussion, but this interface makes it difficult. Plus we are missing comments from people like PE who would be quite valuable.

Posted by: Dave Pasquino at August 31, 2004 08:16 AM (eKeht)

27 Dave, I just requested a thread for this topic at TPW. At some point in the day it will get approved, and I'll link the thread in the main body of the post and suggest that people discuss more there.

Posted by: ace at August 31, 2004 08:51 AM (RGQgo)

28 George,

You have done a great job of explaining what's going on and, as someone not terribly qualified to swim in the deep end of the economic pool, I appreciate that. But I'm still somewhat confused about a couple of things:

1. What is to keep whole industries from obtaining exemptions? If the food, clothing, and medical industries are granted exceptions because of their critical nature, will that be a problem? Or will it be a less serious problem than what we have now? Will it be possible to restrain the exceptions from extending to other industries?

2. Will individuals be required to deal with this in private transactions? For instance, if I sell my car, will I need to fill out forms and send some cash to the feds? If I make my living from teaching piano privately, will I need to charge a consumption tax on my students?

Posted by: Smack at August 31, 2004 09:07 AM (lpGKc)

29 BTW, what is TPW and PE?

Posted by: Smack at August 31, 2004 09:22 AM (lpGKc)

30 TPW is The Perfect World, a good forum I belong to. The moderators do a pretty good job of keeping the site fair and balanced, i.e., no punitive banning of people just because they're conservatives.

PE is a dope who posts there. He's fairly well trained in economics, but he's something of a European Marxist.

Posted by: ace at August 31, 2004 09:28 AM (RGQgo)

31 Smack:

What is to keep whole industries from obtaining exemptions? If the food, clothing, and medical industries are granted exceptions because of their critical nature, will that be a problem? Or will it be a less serious problem than what we have now? Will it be possible to restrain the exceptions from extending to other industries?

There is nothing that can legally be done, short of a constitutional amendment, so I can only answer in terms of the economic and policitcal forces that would discourage this sort of practice.

The answer can be seen in the forces that affect state sales taxes today. There are far fewer exceptions for each industry (although some States sometimes provide certain temporary exceptions for clothing around the beginning of school, a month off of gas taxes, etc.). Transactional taxes tend to be less riddled with special privileges than income taxes since they are paid by people and businesses that cut across a wide range of industries. The product that is taxed tends to be purchased by a wide range of customers. So, it is very hard for the State to give any one business a special privilege. And when the privilege isn't all that special (i.e., concentrated), the business that would be benefited by the privilege is far less anxious to obtain it. Also, the state is far less inclined to grant it, since it means a serious decline in revenue.

In contrast, the income tax is focused on the individual (person or business). It is therefore far easier to give "targeted tax cuts" to specific contributors ... er, businesss.

2. Will individuals be required to deal with this in private transactions? For instance, if I sell my car, will I need to fill out forms and send some cash to the feds? If I make my living from teaching piano privately, will I need to charge a consumption tax on my students?

I really don't know. It would depend on how it is drafted. With regard to cars, even the used ones I have sold, I had to give an affidavit along with the title so that the buyer could take it to the tax authority and pay the appropriate tax. That is only possible because cars are especially public (with special identifying numbers all over them, making street-level enforcement practical). Typically, however, used goods are not taxed because the cost of enforcement is too high and the tax has already been paid (by the first user).

With regard to services, even home-based ones, that too would depend. Some states and municipalities require that an occupation tax be paid. As a lawyer (forgive me), I pay occupational taxes of a fixed amount annually. Photographers in New York City pay an occupational tax.

Typically, however, simple fee-for-service transactions are not taxed, even by the states. Again, the cost of enforcement is too high.

There is a reason, though, that most of these issues are not something that people get very excited about at the state level, even though there may be hefty taxes associated with them, and they have been in place forever. The reason is that transactional taxes are generally more evenly distributed, they have fewer exceptions, and they are collected with a minimum of cost and difficulty. The fact that transactional taxes raise billions of dollars every year for the states is proof of their efficiency and practicality.

Posted by: George at August 31, 2004 10:41 AM (DiZv6)

32 PE is a dope who posts there. He's fairly well trained in economics, but he's something of a European Marxist.

Oh Man, if PE sees this he will go ballistic on your ass. Given his position on the absolutely rightness of the Chilean overthrow of Allende and other remarks I've seen him make I doubt very very much that he would take kindly to being called a Marxist of any kind. And when he is peeved... oooh boy look out.

Posted by: Dave Pasquino at August 31, 2004 11:02 AM (eKeht)

33 This is off-topic, but what kind of lawyer are you? You seem to be pretty knowledgable about economics.

Posted by: Smack at August 31, 2004 01:22 PM (CBDWx)

34 Smack:

I am in business litigation, but economics has become a part-time, late-in-life hobby for me.

For an excellent introduction to free-market (i.e., Austrian School) economics, I heartily recommend Economics for Real People by Gene Callaghan.

Also, over at the Mises Institute, they have a ton of free books and essays that you can download. An excellent introduction to monetary policy is Rothbard's What Government Has Done to our Money.

Be warned: reading these texts (although they are not alarmist in the least) may cause you to become outraged at the deplorable state of our country's current economic policies.

Posted by: George at September 01, 2004 12:14 PM (DiZv6)

35 Thanks! I'll go get my edgy kayshun now...

Posted by: Smack at September 01, 2004 02:59 PM (lpGKc)

36 cgozyvtex exfi jbsket gefzco ijkwe oymdufv nxgkzowlv

Posted by: dtly dlbxfwtka at July 27, 2008 03:41 AM (OJSOe)

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