By Arnold Kling
Writing in Slate, Tim Noah discusses consumption taxation, an idea for tax reform that goes back well over half a century.
Lester Thurow, a liberal economist, made the case two decades ago for a consumption tax that would include a generous income-based refundable credit to help people at the lower end of the income scale. More recently, Cornell University economist Robert Frank, author of Luxury Fever, proposed a consumption tax that would exclude all families earning less than $20,000.
Noah argues that while it might have been ok at one time for liberals to support consumption taxation, that is not the case today. He says that when the Economic Report of the President proposes shifting toward a consumption tax,
the whole (unspoken) idea behind the plan is to lower taxes on rich people and raise taxes on poor people.
If the Administration’s idea is to raise taxes on poor people, then a consumption tax is not the right way to do it. For one thing, economists Steven Venti and David Wise have found that people with low incomes have just about as large a propensity to save as people with high incomes. As this article on their research says,
The top 10% of the lowest income group nonetheless had saved more than $150,000 per household. Meanwhile, middle-income folks, on average, had only $45,000 in assets.
Moreover, the only way that rich people can avoid paying a consumption tax is by saving instead of consuming. By saving, they increase the supply of capital in the economy, which will raise productivity and worker incomes. Thus, the overall impact of a consumption tax may be quite progressive.
On the other hand, from the conservative side of the political spectrum, Bruce Bartlett once worried that consumption taxation could become too efficient and popular, leading to bigger government. Now, however, he has changed his mind.
For Discussion. If the same consumption tax idea had been floated by a Democratic administration, do you think that Noah would be more supportive and Bartlett more antagonistic?