Arnold Kling at EconLog has a great post regarding taxing consumption, rather than income. Mike Moffat over at economics.about.com, adds a great insight.
To summarize, currently, the idea of “income tax” is that those who make more, should be taxed more. That seems fair, based on some notion of fairness. Kling makes the point that “When you earn income, you can either spend it on consumption, save it, or give it to charity. The latter two should not generate taxes.” This is a very valid point. Saving is good for the economy, and the US could certainly use higher levels of savings. And charity is good from an altruistic standpoint. A tax is a negative incentive, and there should never be a negative incentive on a positive behavior.
Moffat adds that the type of taxes we should pay on consumption are ones that compensate for the social cost, allowing consumers to pay the true cost of their consumption. True cost = nominal cost + social cost, where nominal cost is the “sticker price” and social cost is the cost of the effects of consumption. This would be a good way to implement a tax policy. If the true cost of consumption is inflicted upon consumers in the form of taxes, and those taxes go towards the improvement of the relevant issue (pollution, congestion, etc), then the market will naturally reach some equilibrium at some optimal level. Since the social costs have been factored in price, this will be the socially optimal level of consumption. That would be great.
3 responses so far ↓
Mike Moffatt // August 8, 2007 at 3:18 pm |
Hi Steve,
Thanks for the kind comment! It’s greatly appreciated.
Ian // August 10, 2007 at 5:36 am |
While many who are invested in the current income tax system seek to demagog the well-researched FairTax plan, its acceptance in the professional / academic community continues to grow. Failure to enact the FairTax – choosing instead to try to “flatten” a NON-FLATTENABLE income tax system – will result in an irrevocable economic meltdown!
Here is why the FairTax MUST replace the income tax. It’s:
• SIMPLE, easy to understand
• EFFICIENT, inexpensive to comply with and doesn’t cause less-than-optimal business decisions for tax minimization purposes
• FAIR, loophole free and everyone pays their share
• LOW TAX RATE, achieved by broad base with no exclusions
• PREDICTABLE, doesn’t change, so financial planning is possible
• UNINTRUSIVE, doesn’t intrude into our personal affairs or limit our liberty
• VISIBLE, not hidden from the public in tax-inflated prices or otherwise
• PRODUCTIVE, rewards, rather than penalizes, work and productivity
Its benefits are as follows:
FOR INDIVIDUALS:
• No more tax on income – make as much as you wish
• You receive your full paycheck – no more deductions
• You pay the tax when you buy “at retail” – not “used”
• No more double taxation (e.g. like on current Capital Gains)
• Reduction of “pre-FairTaxed” retail prices by 20%-30%
• Adding back 29.9% FairTax maintains current price levels
• FairTax would constitute 23% portion of new prices
• Every household receives a monthly check, or “pre-bate”
• “Prebate” is “advance payback” for monthly consumption to poverty level
• FairTax’s “prebate” ensures progressivity, poverty protection
• Finally, citizens are knowledgeable of what their tax IS
• Elimination of “parasitic” Income Tax industry
• NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals
• Those possessing illicit forms of income will ALSO pay the FairTax
• Households have more disposable income to purchase goods
• Savings is bolstered with reduction of interest rates
FOR BUSINESSES:
• Corporate income and payroll taxes revoked under FairTax
• Business compensated for collecting tax at “cash register”
• No more tax-related lawyers, lobbyists on company payrolls
• No more embedded (hidden) income/payroll taxes in prices
• Reduced costs. Competition – not tax policy – drives prices
• Off-shore “tax haven” headquarters can now return to U.S
• No more “favors” from politicians at expense of taxpayers
• Resources go to R&D and study of competition – not taxes
• Marketplace distortions eliminated for fair competition
• US exports increase their share of foreign markets
FOR THE COUNTRY:
• 7% – 13% economic growth projected in the first year of the FairTax
• Jobs return to the U.S.
• Foreign corporations “set up shop” in the U.S.
• Tax system trends are corrected to “enlarge the pie”
• Larger economic “pie,” means thinner tax rate “slices”
• Initial 23% portion of price is pressured downward as “pie”
increases
• No more “closed door” tax deals by politicians and business
• FairTax sets new global standard. Other countries will follow
The time for sitting around, pontificating, is over. We have NO CHOICE but to demand Congress Scrap The Code – NOW!
John Hurliman // September 7, 2007 at 10:27 pm |
One of the things I find interesting about taxing consumption instead of income is that it is easier to track. A company can easily hire someone and pay “under the table” because the employee is only generating units of labor which don’t show up on the books. When taxes are applied on consumption (such as sales tax) it is much more difficult to subvert since the sales are generating revenue.
Is the basic thought here (in the original blog post, not the strange comment above me) to switch to something like the European/Australian GST, or is it more in depth?