not as directly as taxes based on consumption. Dead-weight loss from income tax comes from avoidance of wage income or underreporting of wage income, or capital/talent leaving due to high costs of employment. Dead-weight loss from sales tax would come from avoidance of taxed goods.
You would have extra savings which is just deferred consumption. Pretty much every economist agrees we need to save more.
In order for you to make the same amount of revenue from (%(income - savings)) than (%income), you're going to have some pricing bumper stick shock. The difference between one consumption level to another would be much more than a $50 charge for a marginal unit of consumption, just as an example. Or your implementation of the tax involves a much lower tax burden and leads to Laffer goodness with all boats of income, economic growth going up while tax goes down.
...except for the Fed board which has tried everything in its power to get post-recession America to spend money instead of hoarding it? the American consumption machine is what keeps half of the global economy afloat lol. as amusing as that might be, there are plenty of economists who want American corporations and individuals to do anything BUT save.
It absolutely is more complex - you're having to do everything you do now, plus more. This is only true because you have exemptions to the income tax. But you already proposed something similar with the consumption tax when you suggested they would come up with a workaround to handle charitable deductions - that's again promoting specific economic behavior. Generally, a big part of the argument for consumption taxes is the simplicity of processing it - similar to what people argue with the flat income tax. If you lose this key element, a consumption tax becomes a terrible idea. The article you posted basically makes the key argument against it: With the unemployment rate still near 9 percent, now would be an inopportune moment to implement a progressive consumption tax. But if we passed the tax into law and scheduled it for gradual phase-in only after the economy had again reached full employment, we’d achieve three goals at once. First, by committing ourselves to a larger revenue stream in the future, we’d reassure those who worry, justifiably, that the government cannot forever spend more than it takes in. Second, by encouraging additional investment, we’d foster more rapid growth in productivity and income. Third, and most important, knowledge that the tax was coming would stimulate a burst of private spending that would help get the economy back on its feet. Anyone who was thinking about buying a bigger yacht or building a bigger mansion would rush to do so before the tax took effect. Of course, that’s hardly the best way to stimulate a depressed economy. Far better would be for the government to spend hundreds of billions of dollars on desperately overdue infrastructure repairs. But conservatives in Congress have consistently demonstrated their ability and willingness to block such measures. This is basically the worst economic argument for it ever. First off, we shouldn't do it now because it would be bad for the economy - so what happens next time we're in a recession? And then we should announce it for the future so people go on a spending spree now to stimulate the economy? I thought the whole idea was to discourage spending? None of it makes sense - it makes a big deal of how it would stop the millionaire from expanding their mansion. Why do we want to do that? A progressive consumption tax encourages poor people to spend and rich people to save. That's the exact opposite of what we want - poor and middle class people saving money for retirement, and wealthy people spending as much as possible. That $2 million mansion expansion is what creates demand for materials and labor. Ideally, we want money cycling out of rich people's hands to everyone else rather than just being hoarded.
Just adding how much you saved isn't going to make it much more complex considering that most exemptions and deductions will be done away with. And no, my argument isn't just based on less paperwork. That's just an extra benefit. The biggest issue is temporal neutrality: https://en.m.wikipedia.org/wiki/Consumption_tax Former senior editor of Fortune Al Ehrbar notes that proponents of a consumption tax argue its superiority to the income tax based on an economic principle called "temporal neutrality".[25] He observes that a tax is "neutral" if it does not "alter spending habits or behavior patterns and thus does not distort the allocation of resources." In other words, taxing apples but not oranges will cause apple consumption to decrease and orange consumption to increase. The temporal neutrality of a consumption tax, however, is that consumption itself is taxed, so it is irrelevant what good or service is being consumed in terms of allocation of resources. The only possible effect on neutrality is between consumption and savings. Taxing only consumption should, in theory, cause an increase in savings.[3] William Gale, Co-director of the Urban-Brookings Tax Policy Center, offers a simplified way to understand a consumption tax: Assume that our current tax system remains the same but remove limitations to contributing to and removing funds from a traditional Individual Retirement Account (IRA). Thus, a person would essentially have a bank account where they could place tax-free earnings at any time, but unsaved (or consumed) withdrawals would be subject to taxation. Having an unrestricted IRA under the current system would approximate a consumption tax at the federal level. Many economists and tax experts favor consumption taxes over income taxes for economic growth.[26][27][28]
If you could avoid rich people spending on mansions and have poor people save more...yeah that's a good thing. Using a crude version of the marginal propensity to spend here is not the answer. It's pretty much consensus among economists that the US needs to say more. Explain why they are wrong. In any case, that's not what this is about. Spending isn't the major effect. The major effect is it's less distortionary and provides better incentives. Also a consensus among economists.
I thought it was the "Fair Tax"? Surely by changing the name Republicans can entice poor and middle class conservatives to support it against their own economic interests well, like every other Republican economic idea.
Yes, and how it does that is by targeting the interest rate so that it is easier to finance current spending and so asset prices increase from housing to stocks meaning that if you're holding money in a bank, you're getting hosed--and that's exactly the point.
The first statement is false and a bogeyman. http://esoltas.blogspot.ca/2013/12/save-your-worry.html I'd also like to note that the factor that has caused US personal savings rates to increase has typically been the contraction of favorable credit and the effects of a recession on consumer confidence. http://research.stlouisfed.org/fred2/series/PSAVERT -------------------- Are you trying to say that US households should save more? If so, I'd like to see sources other than Greenspan and your take on why the distribution of savings matters so much. -------------------- Second, I'd like your sources on the contention that a massive consumption tax increase would have "much less" DWL than income taxing. In theory, among goods with elastic demand (which your consumption tax does not differentiate on at all), the DWL would be catastrophic. You'd essentially distort the economy by discouraging current consumption, and shifting consumer choice from elastic to inelastic goods. i've personally given up the boat on conventional economics but if you're debating within those fine halls, you may as well stick to the terms.
We already have instruments to incentivize savings. If we want people to save more just increase the size you can allocate to an IRA or give everyone an income tax break for buying 5 year or more savings bonds.
Most bonds pay about 1%. I'd just as soon stuff the money in my mattress (besides, money and luck increase when you sleep on cash :grin. A graduated flat tax with a floor starting at $50K helps the poor (wow, I can't believe I now think $50K is being poor -- just out of college I was making $150 a week and was on top of the world). Be that as it may, the graduations can be made so that we don't lose real wealth and yet retain federal revenues to get the essentials done. Wasteful spending would get much closer scrutiny if government managers weren't awash in cash.
You do understand that making the consumption tax progressive completely neutralizes this, yes? By making it progressive, you are specifically altering spending and behavior patterns. That's given in the example from your previous article that a millionaire is less likely to expand their mansion due to the high level of tax they'd face.
I'm not a proponent of the "flat" tax, but I would be somewhat okay with it if it was truly a flat tax meaning it taxes everything with no caps. For example: No cap on the payroll tax so employees and corporations have to pay the 15 percent on all income including capital gains. Pay the flat tax on all capital gains. Flat tax on all inheritance, ie death tax.
Sure but it would be much better to just not tax savings at all. IRAs are generally much more used by the well off. It's a very regressive tax benefit
My point of posting that article was to show this isn't a left right issue. I don't agree with all the arguments therein. Intertemporal neutrality is about achieving neutrality between savings and investment, so there's no reason a progressive consumption tax would violate that
A lower income tax offsets the higher consumption tax. Ultimately people make spending decisions based on income and wealth. In a Keynesian model spending is based on current income. My point on savings is basically just based on the fact that most people don't have enough retirement. As long as people are simply deferring consumption and not hoarding (as in depressions) then it is good for the economy. A consumption tax would incentivise saving based on tax treatment, but since consumers will make spending decisions based on income and wealth, there won't be a change in demand. China has a high savings rate and a high rate of growth. There isn't a simple relationship as you seem to assume.
And that's the point - and why a consumption tax doesn't work. You are proposing with a consumption tax is to basically make all savings tax free. People wouldn't have to put in an IRA, they could just put it in a savings account. Considering the middle class and lower class don't save much because they are often just trying to make ends meet. There are already tax incentivized instruments for them to save but they don't take advantage of it now. They are essentially paying a consumption tax. I put the max into my 401K for instance - thus lowering my income. I don't need a consumption tax, just need more tax free savings opportunities and I will put more in them. Why? Because I make more than I spend anyway. Think about it, I pay more in income tax than I would in consumption tax under your model. With a consumption tax, my tax rate would be reduced substantially. But then who is going to make up those tax dollars? The wealth will pay LESS in taxes, and the poor and middle class will pay MORE. It's just putting the vice on the middle class.
