I have been asked to describe a consumption tax that I would implement if given the opportunity. Specifically, I was asked to describe how we could avoid the regressive nature of sales taxes so that the consumption tax could be effective without unduly burdening the poor. The consumption tax I would implement would be a tax on all new goods and services subject to certain exemptions. Used goods would be exempted from the tax (to encourage recycling) as would food and medicines as well as some services like child care. It is entirely possible that new homes could be exempted from the consumption tax as well to keep home ownership affordable for everyone. In addition, I would give each adult a personal exemption of (for example) $3000 and each child an exemption of $1500 so that a family of four would have an aggregated exemption of $9000. This would give a family of four about $40,000 of taxable spending that would be exempted. The actual exemption numbers may be different, but the personal exemption is how I would combat the regressive nature of the sales tax, combined with exemptions on specific products and services. I would set the tax rate to be adjustable, and would be based on the previous year's government expenditures plus 5-10%. In the first year of the plan, the interest on debt would be fixed and we would consider this starting number as our interest payment for every subsequent year until the debt is retired. All of the excess funds would be used to reduce the amount of the debt principal. Once the debt is paid off, I would set the tax at a level sufficient to cover the previous year's expenditures plus 2%. If there are excess funds every year, we use them to provide a "back to school" tax vacation like Texas does every year. This change in taxation would immediately begin a metamorphosis in our national culture. All of a sudden, we will take home our paycheck (for the time being, minus SS) and be taxed on the items we buy. This would encourage people to save more and would discourage the financing of purchases PLUS the taxes on them through credit cards. Combine this with government sponsored savings plans (interest rate hikes if the saver puts away a certain percentage of their check, the potential to opt out of SS and receive a chunk of their previous contributions in a future year) and it wouldn't be long before most Americans would not need SS. Over the course of time, we would wean people from SS and reduce the number of people dependant on it as their sole source of income. In addition, by deferring the "opt-out" provision and providing a long-term option, we would defer the costs of transferring people's SS funds out of SS and into their personal accounts. In addition, a consumption tax would also encourage recycling of products as used products would not be subject to the tax. This will also encourage companies to build products that last rather than the disposable crap they put out now. Resale price will be an important consideration when buying new products and manufacturers will respond with products that have a long life and can be resold on down the line. We could also engage in various social engineering efforts simply by playing with the tax rate on various products. For example, we could set the tax rate on cigarettes at 2.0 or 2.5 times the national tax rate to discourage their purchase. We could set the tax rate on hybrid cars to .25 or .5 times the national rate to encourage their adoption. The consumption tax would also be far easier and cheaper to manage than the income tax is as the infrastructure is already in place since most localities charge sales tax today. It would also encourage more transparency in taxation as we would immediately feel the effects of spending increases as the tax rate would rise the following year to offset the increased spending. In addition, with published rates for non-standard taxation, Americans will be able to see the tax rates and decide for themselves what they want to be taxed on. The consumption tax is the way to go.
To make your post anything more than a fantasy land style wishlist, you need to include the costs of this plan. You simply described the rosy benefits of it. There's no such thing as a free lunch. You need to quantify how much the tax would be on various items. By how much would this impact tax receipts? In addition, you will need to factor in the elasticity of supply and demand. Consumer spending makes up a huge chunk of GDP. A consumption tax will impact spending and hence the GDP. This will in turn alter the FOMC's decisions (among other things) and change the overall economic atmosphere. You didn't take any of that into account. I'll consider your analysis incomplete and worthless until you address these issues.
That plan would work quite well if everybody all of a sudden decided to buy goods only from well known department stores where they would play along and collect taxes due to the government. The more insidious developement to this plan is who's to decide what goods and services are considered evil and unnecessary and to tax it 100 percent and more. For example, some bureaucrat feels that only rich people play golf and tax a round of golf 200 percent. Drinking beer and wine is unnecessary and let's tax it 500 percent.
For some reason, I can't help but thing of the Talking Head's song "nothing but flowers" when I read your post. In some ways I like the concept of a consumption tax, and it certainly puts the majority of the tax burdon on those who can most afford it. The biggest problem with it....and the reason I kept thinking of those lyrics.....is the negative effect of many of the things you mentioned. We ARE a society of consumers--for better or for worse. We're grossly materialistic, but our economy motors on ahead because of our need for more and more. Incentivize people to stop buying and that economy comes to a grinding halt. Where do you get your tax dollars when people slow down their spending? Raise the consumption tax rate? They'll spend even less. What happens when demand goes down? Prices and margins follow. Companies start losing money.......they lay people off. People get laid off, they have less money to spend on taxable items. As our GDP plummets, there is less "new" money to spread amongst the growing population. We'll all be poor and bitter and mad at Andymoon.
Duh. It seems obvious that I was not providing a full analysis of my proposal, but I guess when you live in the bigtexxx fantasy land, the obvious just can't be grasped. $2.6 trillion plus 10% or 2.86 trillion is what the tax receipts would have to be. This is on a GDP of 12.46 trillion, so the tax rate would be very close to 25% or so once you put in the exemptions. Some things might be taxed higher (cigarettes) or lower (hybrids), but these would be exceptions, not the general rule. The beauty is that we don't have to know initially. We make our best guess the first year and adjust it yearly after that. The demand for products that would be taxable would be between somewhat and highly elastic depending on the product in question. However, the people who do the VAST majority of the spending have less elastic demand than the lower middle and lower classes. So, a sizeable majority of the spending will not be affected by elasticity, particularly when the people in question will not be paying capital gains tax, estate tax, income tax, and other forms of income taxes. Consumers are not going to STOP spending with a consumption tax. Food and medicines will not be taxed, and those items are a pretty good percentage of spending. In addition, everyone will have their exemption cards, so you are talking about $40k or so per family before you ever hit the tax limit. That is a LOT of spending. Spending may go down a bit, but not enough to stop the economy in its tracks. The people who pay the vast majority of taxes are not going to modify their spending habits that much, especially if they are not paying the various forms of the income tax. Obviously. Any significant change in the economic landscape is going to change the Committee's decisions. That is not in and of itself a bad thing. And I will just consider your "analysis" (in quotes since you never actually analyze anything) incomplete and worthless as usual and will celebrate the fact that you are one less post away from leaving, assuming your word is good.
Who exactly is going to go that far out of their way to avoid paying the tax? I am certain that there will be people who will try, just as there are tax evaders today, however they will be the minority as they are today. Actually, the beauty is in the transparancy. Most products would have a 1.0 RTR (relative tax rate) and would be taxed at the determined percentage. Some products would have a "sin tax" associated with them, as alcohol and tobacco already do, and would be taxed at a higher RTR, so a product with a 2.0 RTR would be taxed at double the standard rate. However, it would be easy to get and see a breakdown of the products with higher and lower RTR numbers, so it would be very transparant. I do agree that the RTR process could be abused and would probably suggest that non-standard RTRs be reevaluated every 2-4 years.
You seem to be assuming that consumers will stop spending completely under this system. Keep in mind that food and medicine, a sizeable chunk of GDP, will be untaxed. In addition, everyone will have some exemption money to spend, so there is all of that money as well. The people who pay the most taxes today, the rich, would not be modifying their spending drastically as a result of a consumption tax. They would see it as a change in taxing methodology, but would not see their iverall tax bill change unless government spending jumped dramatically. The people this would affect most would be the middle to lower classes. Even they would not STOP spending, they would just plan their spending more. Maybe they would buy a lot more used goods instead of buying something new. Jobs would shift to refurbishing goods, resale stores, and online auctions, but wouldn't necessarily be lost. A consumption tax would certainly change some dynamics, but would not wreck the system. Besides, we are the most indebted society on the face of the planet. We could do with a change in focus.
The complete tax burden of the entire United States would now be in the hands of private corporations to collect, track, and pay. Corporations from Mom and Pop to Wal-Mart would now be the primary tax collectors in the nation. Huge grey markets would open up for untaxed goods. The middle and upper middle classes, that consume, but are still extremely driven by price would hold back spending. A whole new breed of IRS would be in place, not to collect and maintain taxes, but to audit and track corporations in tax collecting. How do you audit the tax reciepts? Untrackable, pure cash transactions would skyrocket. People would be able to not pay tax on income, and for many, completely avoid many taxes on purchasing. Most of us have a W2 for work, so the gov't can track taxes owed and do withholding. If I can just spend cash in grey markets, I might be able to make it through a year completely untaxed.
Andy it seems like the primary purpose that you are arguing for this then is to raise the savings rate (by decreasing consumption) for middle classes & below. My concerns: 1. What are the economic benefits of this? Traditional thinking says that savings = investment which promotes future growth. However, among low and middle income earners, their share of the pie is shrinking rapidly, at an accelerating pace, and has been. Going forward I don't see how grabbbing a share of this diminishing income for future investment is of much import, and it only becoming less so as time goes forward as the "drop in the bucket" provided by this gets smaller and smaller; (especially because business and gov't savings can frequently compensate for this) 2. Regardless of the answer to 1., if our sole goal is to increase lower & middle class savings - we can do so by far less obtrusive means, such as tax incentives within the existing system, and not have to turn the whole system upside down.
If the goal is to increase savings for lower/middle class, I'd rather increase IRA contributions, maybe a federal matching program to IRAs for folks with less than 35K income. Something like that. Tax incentives to save more can be much less sweeping than changing the entire tax system.
Actually, my main purpose would be to get rid of the 5800 pages of tax code that have been so thoroughly written by lobbyists that it is just a big loophole waiting to happen. My desire is to scrap that tax code to reduce the time it takes for Americans to fulfil their tax burdens and to reduce or eliminate loopholes and ways for people to get out of paying taxes. Well, the single biggest economic benefit would be eliminating the debt over the course of the next 20 years or so. Once that happened, we would find ourselves with a budget that is 10% or more lighter on commitments, specifically the interest on the debt. In addition, 20 years of a tax rate directly tied to government spending might have the effect of reducing spending as people vote for people who reduce their taxes. With a consumption tax structured the way I describe, we would be able to reduce our taxes by reducing spending and politicians who were committed to doing that would get elected and hopefully reduce spending. That last is, IMO, wishful thinking without much more serious campaign finance reform than is likely in the current climate, but it is a potential benefit. It is my opinion that the current system of taxation is so fractured that it should be scrapped, not added to. IRS agents give wrong answers half the time and those are the people who are supposed to know the tax code best. Besides, as described above, increased savings is not my "sole" goal, nor even my most important one.
Less sweeping, yes. However, the tax system is broken as a result of the loopholes inserted in its 5800 pages and needs to be scrapped.
The Fair Tax Book Americans for Fair Taxation Pretty close to what you're proposing except completely flat-rate after the "pre-bate". The sin tax and encouragement multipliers would be added after Congress worked under this system for just a few years. The idea of food and services all being included is this. If a Hollywood celebrity or Oil Company exec wants to throw a party and orders Caviar for 500, he/she should pay taxes on this. The "pre-bate" takes care of the taxes on the food, medicine, etc. that is required to live. And no, I am not related to John Linder, nor do I have any financial interest in the sell of his book.
Yes...but you're already proposing a system with a number of loopholes and exceptions (used goods, food, etc) and you're discussing a number of other ones for hybrid vehicles, etc, as well. And doubtless, over time the number of loopholes would increase (i'm sure the first income tax was also very simple). If that is your goal then why not just argue for a flat income tax within the existing system, and abandon all the loopholes entirely? You are talking about the national debt/deficit? and not private debt? Eliminating debt is a matter of balancing revenues with expenses, I don't see how the form of revenue, be it consumption tax or an income tax or a flat tax, makes much difference. Again, the simple way to address this issue is to increase existing taxes and reduce existing spending (and you could index the rates however you want). I don't see how a consumption tax is any more appropriate in terms of fiscal policy. In fact, I'm particularly worried that the negative income effect from higher prices will offset the positive income effect from higher wages simply due to perception. It's a truisim that people value losses inequally (more highly) than they value gains that are identical in quantity. Intuitively then, I think if you pass the taxation decision on to consumers to make millions of times a day I think that revenues necessarily decline. What if we eliminated the current system in favor of a loop-hole free flat tax? That would be substantially less painful. Mind you I'm not in favor of it, but as I said, there seem to be better ways of addressing your aims with less risk.
The tax code is indeed much too complicated. But for me the better solution is the flat tax rate where let say everybody regardless of income pay 5% income tax with no loopholes and deductions. That would allow every American to prepare their tax returns in 5 minutes. The best part is no beauracrat can decide what goods and services are considered evil and unnecessary and let Americans themselves decide.
If you think our current bloated government can get by on 5%, you are sorely mistaken. A flat tax would have to be 17-20% minimum.
what do you think the average tax rate is after deductions? i don't know the answer to the question...i'm sincerely asking. if we took away deductions and just said, "you made $x.xx last year...please multiply that times .0x and that's your tax burden", i wonder what that percentage would really need to be to be consistent with where it is today.
The US tax to GDP ratio (this includes federal, state, local) for everything (people, businesss) is about 25%.
