World needs a progressive consumption tax

[blazespinnaker]

http://video.msn.com/?mkt=en-us&fg=r...699a8c&from=34

http://economistsview.typepad.com/ec...-frank-we.html

Time to scrap the income tax and replace it with a progressive consumption tax.

Basically, the world needs to tax to discourage the the wasting of world wealth (consumption of non productive luxury goods) and stop taxing people who actually build wealth (innovate, take risk, invest, build businesses, work hard, etc).

This way people will shop less and work harder.

Europe is moving towards with this with their extremely high VAT. The rest of the world needs to do this as well.

F**king Harper in Canada cut the GST though, which is why I hate his guts.

[bpwoods]

Re: World needs a progressive consumption tax

blaze,

'A progressive consumption tax' - a rational concept, except it is not a 'progressive' tax, rather it is a 'regressive' one.


'Shop less and work harder' - fair enough, but there are vast un-stated assumptions behind this seemingly simple statement. How is this achieved? What are the un-intended consequences?

Please, could you and other contributors to these fora preface your future contributions with a brief description of your Economic Model-in Use. Thanks.

Mine is Flatland: an annual negative GDP of -0.0x%.

The other one that contributors could use (just to keep things simple!):

Permagrowth: an annual positive GDP of +0.0x%

Brian P

[blazespinnaker]

Re: World needs a progressive consumption tax

blaze,

'A progressive consumption tax' - a rational concept, except it is not a 'progressive' tax, rather it is a 'regressive' one.

Read the links. A progressive consumption tax would increase if your income increases making it by definition "progressive" rather than "regressive". This is why it is as a "progressive" consumption tax rather than merely a "consumption tax".

'Shop less and work harder' - fair enough, but there are vast un-stated assumptions behind this seemingly simple statement. How is this achieved? What are the un-intended consequences?

Staying with our current system has vast un-stated assumptions behind this seemingly simple statement. How is this achieved? What are the un-intended consequences?

However, I think the consequence should be that people who work hard should be rewarded and people who waste money on useless things should be penalized. What really is there more to say?

[we_are_toast]

Re: World needs a progressive consumption tax

'Shop less and work harder'

Nope! Not for me. I'm for Shop less and work LESS!

We have but a brief time in this world.

Time spent exchanging ideas with others, time spent reading a good book, time spent with your family and friends, time spent learning about this beautiful and wonderful universe that we were born into, is FAR more valuable than a lifetime spent building widgets so I can have 3 cars and a 7 bedroom McMansion.

Let those who wish to spend their time accumulating and being owned by their possessions do so. But they need to pay the FULL economic, environmental, and social costs of acquiring those possessions. The personal cost of such a lifestyle will become apparent on their deathbed.

A consumptive tax with the FULL cost of the product built in, sounds good to me. It will require constant adjustment and political independence, but it's certainly time for something different from what we have.

[johnw106]

Re: World needs a progressive consumption tax

Would it not be far simpler to toss the federal tax codes in the trash and start over?
I advocate doing away with individual icome tax all together. Instead institute a federal sales tax of 7% on all non food consumer goods at the retail level.
Institute a flat 10% income tax on businesses.
Eliminate long term capital gains taxes and raise short term capital gains taxes to discourage speculation in vital comodities such as oil.

Simplifying the tax codes and cutting the size of the IRS in half would save billions of dollars in waste and lost productivity.

[sunskyfan]

Re: World needs a progressive consumption tax

We need a TRANSACTION tax. Every transaction in the economy needs about a 4% tax including the sale and the buying of stocks, bonds, houses, sports teams ectera. High enough to generate the revenue but low enough to not be circumvented. It is not fuzzy such as Income or VAT taxes. Think this is strange? Pull out your credit card folks and that is exactly what they do. Consumption is not a bad thing. WASTE is a bad thing. SPECULATION is a bad thing. Computer aided automated trading is a bad thing.

[GRG55]

Re: World needs a progressive consumption tax

http://video.msn.com/?mkt=en-us&fg=r...699a8c&from=34

http://economistsview.typepad.com/ec...-frank-we.html

Time to scrap the income tax and replace it with a progressive consumption tax.

Basically, the world needs to tax to discourage the the wasting of world wealth (consumption of non productive luxury goods) and stop taxing people who actually build wealth (innovate, take risk, invest, build businesses, work hard, etc).

This way people will shop less and work harder.

Europe is moving towards with this with their extremely high VAT. The rest of the world needs to do this as well.

F**king Harper in Canada cut the GST though, which is why I hate his guts.

I tend to agree with the overall tone of your message.

But somehow I am sceptical that more tinkering with the tax system will fix anything. An overhaul maybe, but not tinkering. And sticking on a "VAT patch" sounds like tinkering to me, because the authorities are unlikely to ever give up the revenue and information disclosure that income tax reporting provides.



But let's briefly explore the idea:

• the UK VAT was 17.5%,; Brown just reduced it to 15% for "a limited time only" to boost the economy [presumably you hate his guts too... ]. To create the appearance of a "progressive" tax [and buy votes] some items like utilities carry only a 5% VAT. To further complicate matters, and to silence the "poverty lobby", many of the items that consume the budgets of low income earners, such as food and children's clothing, are completely exempt. Canada's VAT [the GST] had to deal with similar political issues when it was constructed. For example the food exemption is hilarious...if you buy one donut at the lunch counter it's "fast food" and you will incur the GST. If you buy six or more it's "groceries", and you avoid the tax.
• After spending quite a lot of time in jolly old England earlier this decade, frankly I didn't notice any real difference in consumer behaviour or attitudes between VAT-burdened UK and consumer-haven USA. The revelations that are now coming out regarding personal & household balance sheets in both the UK and USA would suggest a good deal of commonality of attitudes towards consumption, as would the horrifyingly similar level of distress among retailers on their respective high streets. The rather steep VAT does not appear to have changed the macro-outcome in any material way given the UK is facing essentially the same structural problems in its economy as the USA...or am I missing something?
• The suggestion that the consumption tax can be made progressive by varying it with income is intriguing. However, it means that no good or service has a known price, as it varies by each customer, and raises the real potential that 1) just like income tax it discourages efforts to increase income [why work hard, take risk, etc. if it just raises my cost of living compared to my slack-azz neighbour?], 2) opens the possibility that every check out counter and payment till will need some magical way to do a means test on every customer for each purchase, and 3) could promote creative diddling with income patterns...do I structure my income so it's zero next month so I can save tax on a planned consumer durable purchase?
• Isn't the purpose of production to satisfy consumption? Why is a "luxury" good wasteful compared to overproduction of, say, Detroit mini-vans? Who is the omnipotent authority that will determine which goods are wasteful of resources and in what quantities they shall be allowed, if at all?
• Continental Europe has survived discouraging domestic consumption through high taxes only because it has been able to export its production surpluses to consumers elsewhere in the world. That model is now busted, as is the Chinese variation of same. So once again, there would appear no reason to produce anything at all if there is no consumption. The Chinese, Germans and others in their situation all seem to have simultaneously discovered this simple truth, and look what they are doing...domestic demand stimulus sponsored by their governments.

[c1ue]

Re: World needs a progressive consumption tax

GRG's point on VAT's not apparently helping is a good one.

I suspect - but don't know - that a more realistic VAT system would be one based on spending levels.

After all, with income levels we have progressions, why not with a consumption tax?

Of course this entails significant reduction in privacy...

But perhaps not. After all, if everyone is given say $12000 for food, $1500 for fuel, $1500 for utilities, etc - and any spending over that is progressively taxed more, that would make for a very savings oriented skew.

Of course in reality there is going to be corruption. I can already see one: a poor person trading his 'unused' VAT to help someone buy an LCD TV...

[bpwoods]

Re: World needs a progressive consumption tax

Blaze,

Taxation needs to be equitable: - a consumption tax based as a % value is apparently equitable, more you consume, more tax you pay. So far so good - but income tax is based on INCOMING income, not OUTGOING income. Income tax is levied on your gross incoming income - for simplicity I am leaving out any allowances or deductions. Outgoing income is the residual. Hence consumption is a proportion of residual. You must consider the RELATIVE amount, not the absolute. The term Regressive, as I used it to refer to taxation, is descriptive of an inequitous level of tax imposition.

Note: My Economic Model in Use is Flatland: annual -0.0x% GDP

Brian P

[GRG55]

Re: World needs a progressive consumption tax

GRG's point on VAT's not apparently helping is a good one.

I suspect - but don't know - that a more realistic VAT system would be one based on spending levels.

After all, with income levels we have progressions, why not with a consumption tax?

Of course this entails significant reduction in privacy...

But perhaps not. After all, if everyone is given say $12000 for food, $1500 for fuel, $1500 for utilities, etc - and any spending over that is progressively taxed more, that would make for a very savings oriented skew.

Of course in reality there is going to be corruption. I can already see one: a poor person trading his 'unused' VAT to help someone buy an LCD TV...

Another mechanism [that has been proposed in the past by economists] to promote saving & investment over consumption, is to require reporting of savings balances on the income tax form. Presumably the difference between annual income and annual increase in savings balance was "consumed". The lower the savings balance increase, the higher the tax levied on income.

There's lot's of problems with this that would require "tweaking", such as dealing with low income earners, who have to spend most of what they earn, and also the difference between young families early in life and raising kids, vs older earners late in their working lives. But I am sure that's nothing that 500 tax accountants can't fix with 7 more volumes added to the tax code to make it "fair". :rolleyes:

[bungee]

Re: World needs a progressive consumption tax

A family’s annual consumption is simply the difference between its income and its annual savings. That amount, minus a standard deduction — say, $30,000 for a family of four — would be the family’s taxable consumption. Rates would start low, like 10 percent. A family that earned $50,000 and saved $5,000 would thus have taxable consumption of $15,000. It would pay only $1,500 in tax. Under the current system of federal income taxes, this family would pay about $3,000 a year.

So,

in year 1 you save $20k and pay $0 tax.
in year 2 you save $20k (+inflation rise) pay $0 tax then spend $20k from last years saving with no tax.
in year 3+ repeat

Seems like a scheme where people who have no savings get taxed to death (the poor) and people who can spend from saving (the rich) don't pay any tax.

Did I miss something?

[ggirod]

Re: World needs a progressive consumption tax

So,
in year 1 you save $20k and pay $0 tax.
in year 2 you save $20k (+inflation rise) pay $0 tax then spend $20k from last years saving with no tax.
in year 3+ repeat

Seems like a scheme where people who have no savings get taxed to death (the poor) and people who can spend from saving (the rich) don't pay any tax.

Did I miss something?

Well, how about ... when money comes OUT of savings it counts as income, like an IRA or 401-K? Simple enough? However, that probably gets "too progressive a tax" so would not get much support.

I have pondered the tax situation quite a lot. The members of this forum, for the most part, realize what has happened to our nation and now even the world over the last thirty-odd years. Our low-tax regime combined with government spending maximized by the same people who cut the taxes, has contributed to a debt collapse around the globe. Yet, these same people continue to pursue tax avoidance for themselves at the probable cost of somebody else.

I think that could be the clue - Everybody should avoid taxes at the cost of somebody else. Let the government eliminate *All* taxes and have Congress, using its power, print all of the money needed for the budget. Not borrow it, print it. Simply avoiding the complexity of collecting and enforcing taxes would be a non-trivial benefit. Imagine a government without interest on the debt, or at least the debt not increasing. That is a non-trivial savings in itself. It might be enough simplicity to make inflation fairly harmless.

Oh, you say it would cause inflation. So, you indirectly pay a little share in that your money is worth less every year, but so does everybody else. The more money you have the more you pay. Sounds terribly fair to me. Nobody has to pay taxes and everybody gets to shed the burden off on everybody else.

Other optional variants - Maybe we change the law from a situation where corporations are granted super-human status and only make carbon based humans tax free. Maybe money sent offshore would be taxed on the way out ... that would help with balance of payments, domestic employment, foreign debt, and our tendency to strip the planet of its resources.

I hope that this attempt at reductio ad absurdum has gotten some people to think.

[bpwoods]

Re: World needs a progressive consumption tax

Bungee,

No, you missed nothing! Except of course you failed to take your 'pill' ;)

The critical problem with any proposals for raising state revenue through taxation is failure by the proposer to state clearly (at the beginning) what their Economic Model-in-Use is. The proposals they make MUST be logically consistent with their Model-in-Use. In fact they will not deliberately make proposals which contradict their Model-in-Use, but do in fact make contradictory statements because they fail to realise that the statements are actually incongruent with their Model-in-Use.

I am assuming that all contributors, unless they state the contrary, are using Permagrowth (annual +0.X% increase in GDP) as their Model-in-Use. Mine is Flatland (annual -0.x% GDP). It is psychologically impossible to have a rational discussion about any topic if the dialogue or polylogue is taking place between contributors who have very different Models-in-Use.

The whole business becomes a sort of 'slanging' match. Hence my insistence that all contributors try to preface their contribution with this info. It reduces (hopefully) the amount of accidental confusion.

Your anaylsis was accurate. Mathematics has invariant rules - whether in physics or economics. Its just that the economists KNOW that they are exempt from the rules. :rolleyes:

Brian P

[hineslaw]

Re: World needs a progressive consumption tax

Frankly, IMHO we need much smaller government, an elimination of central banks, and honest money.

How about tripling the income tax on all workers of the federal government? That would do much to discourage waste.

Add in a strict limit on the costs of federal or centralized government, say a much smaller percentage of GDP than currently is the case.

In the US, it would help if the SEC and FINRA actually regulated the jackels on Wall Street and the Hedge Fund industry rather than trying to nail the small time brokers who receive big fines for marketing ads in 8 point type rather than 9 point type, but now I guess I'm just wishing for common sense by government officials.

H

[Sharky]

Re: World needs a progressive consumption tax

One of the many problems with progressive taxes is that eventually everyone ends up in the top bracket, due to inflation. Even if the brackets are "inflation adjusted," the government's definition of inflation is rarely in sync with reality.

Taxation is an effective tool of economic destruction. So why not tax the things that should be destroyed? Not income. More income should be a good thing. Not rich people; their wealth tends to employ many people, through investments, businesses and even consumption. How about taxing pollution? Tax imports to preserve and grow local jobs. Tax oil to encourage conservation and the development of new energy sources. Tax health-destroying foods like sugar. Tax toxic chemicals like pesticides. Tax bio-engineered foods. Tax foreign investment, to encourage local ownership. Instead of a consumption tax, why not a tax on trash?

But of course no amount of taxation will ever be enough unless it's accompanied by serious cutbacks in government spending -- that's where the most challenging problems are these days.