"What’s a progressive consumption tax? First of all, it’s not a sales or value-added tax, neither of which takes individual income into account. Those taxes are imposed on the spot when someone buys a good or a service.
Under a progressive consumption tax, taxpayers would report their incomes, much as they do now. They’d also report their annual savings, much as they do for tax-exempt retirement accounts. The tax would be based on “taxable consumption” — the difference between their income and annual savings, less a standard deduction of, say, $30,000 for a family of four. Rates on additional expenditures would start low and rise gradually with taxable consumption.
Because savings would be tax-exempt, the biggest spenders would save more and spend less on luxury goods, leading to greater investment and economic growth, without any need for government to micromanage anyone’s behavior. Consumers in the tier just below, influenced by those at the top, would also spend less, and so on, all the way down the income ladder. In short, such a tax would attenuate the expenditure cascade that has made life for middle-income families so expensive.
Adopting a progressive consumption tax would be like creating wealth out of thin air. Its magical quality stems from the fact that luxury spending is strongly context-dependent, just as antlers are. If everyone spends less, you can still have the biggest mansion — or antlers — on the block, but you’ll also be able to do many other useful things. The money saved could help resolve the current fiscal impasse. And it could also be used to fix roads and bridges and support a host of other genuine improvements.
Changing the tax code in a fundamental way won’t be easy. But as the late Herb Stein, Richard M. Nixon’s chief economist, once remarked, “if something can’t go on forever, it won’t.” The dysfunctional system now in place threatens to destroy our economic future. If we don’t change it now, we’ll have to change it later.
Can anyone imagine anti-government conservatives embracing a progressive consumption tax? Actually, yes. It’s perhaps the only important policy option that could win support from both ends of the political spectrum. A version of it, for example, was proposed in 1995 by Senators Pete V. Domenici, a Republican, and Sam Nunn, a Democrat.
Many conservatives advocate a flat tax — essentially, a national sales tax — but most realize that its adoption is unlikely because it would fall disproportionately on people with lower incomes. If the alternative is to stick with the current income tax, however, a progressive consumption tax begins to look pretty good to many conservatives. And once they understand how it would reshape spending patterns, they often become openly enthusiastic about it.
In 1997, shortly after publishing an article advocating this kind of tax, I received a warm letter from Milton Friedman, widely hailed as the patron saint of small-government conservatism."
- Summary of the new book The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank (via MR)
Under a progressive consumption tax, taxpayers would report their incomes, much as they do now. They’d also report their annual savings, much as they do for tax-exempt retirement accounts. The tax would be based on “taxable consumption” — the difference between their income and annual savings, less a standard deduction of, say, $30,000 for a family of four. Rates on additional expenditures would start low and rise gradually with taxable consumption.
Because savings would be tax-exempt, the biggest spenders would save more and spend less on luxury goods, leading to greater investment and economic growth, without any need for government to micromanage anyone’s behavior. Consumers in the tier just below, influenced by those at the top, would also spend less, and so on, all the way down the income ladder. In short, such a tax would attenuate the expenditure cascade that has made life for middle-income families so expensive.
Adopting a progressive consumption tax would be like creating wealth out of thin air. Its magical quality stems from the fact that luxury spending is strongly context-dependent, just as antlers are. If everyone spends less, you can still have the biggest mansion — or antlers — on the block, but you’ll also be able to do many other useful things. The money saved could help resolve the current fiscal impasse. And it could also be used to fix roads and bridges and support a host of other genuine improvements.
Changing the tax code in a fundamental way won’t be easy. But as the late Herb Stein, Richard M. Nixon’s chief economist, once remarked, “if something can’t go on forever, it won’t.” The dysfunctional system now in place threatens to destroy our economic future. If we don’t change it now, we’ll have to change it later.
Can anyone imagine anti-government conservatives embracing a progressive consumption tax? Actually, yes. It’s perhaps the only important policy option that could win support from both ends of the political spectrum. A version of it, for example, was proposed in 1995 by Senators Pete V. Domenici, a Republican, and Sam Nunn, a Democrat.
Many conservatives advocate a flat tax — essentially, a national sales tax — but most realize that its adoption is unlikely because it would fall disproportionately on people with lower incomes. If the alternative is to stick with the current income tax, however, a progressive consumption tax begins to look pretty good to many conservatives. And once they understand how it would reshape spending patterns, they often become openly enthusiastic about it.
In 1997, shortly after publishing an article advocating this kind of tax, I received a warm letter from Milton Friedman, widely hailed as the patron saint of small-government conservatism."
- Summary of the new book The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank (via MR)
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