More evidence as to why the income tax should be replaced with a consumption tax. Just let people make their dammed money already and apply a simple tax when they spend it. Windfalls wouldn't be "dangerous" or punitive in that model, and savers would be rewarded.
--Of course I oversimplify the consumption tax, and safeguard would need to be in place on that to ensure it is not regressive with respect to necessities...
High consumption tax creates an incentive to not spend your money, which is bad.This also means the millionaires and billionaires of the world get to invest their money tax-free to earn even more money, often with rent-seeking, while 95% of America is getting taxed essentially up front on the vas majority of their earnings because it gets spent on stuff like housing, food, and healthcare.
This creates a massively regressive tax system, which is a super shitty thing unless you're a libertarian who can't understand the concept of marginal utility.
So you are content with having a tax system that treats you like a 1%er in the event that you cash in a payday (say $1mil - 35-40%) during a given year, despite the fact that you may have worked your whole life at a middle class level, scraping to save? A consumption tax would allow individuals to actually make choices about how/when they are taxed. Lets be honest, people will still want their "stuff". If they have more money in their pocket, they will spend. That is what America is built on. I would like the opportunity to defer spending at my choice in order to save more in the present without being taxed into oblivion.
And I'm sorry if you didn't read my entire comment. Of course an ignorant consumption tax is regressive. SAFEGUARDS would have to be in place to ensure that the population can acquire necessities without an undue burden being placed on them. Exactly the things you mention: housing (single home), food, healthcare. However, 50"+ 4K TVs do not fall in that category. 30' fishing boats do not fall in that category. Certain items in sales tax heavy states (Texas) already do this is the form of tax free checkout for certain item classes (food at grocery stores).
If I normally make 60k a year and get a one-time payday of $1MM, I'll be paying around 13% more in income tax on that million dollars than I do on my regular income. Even with AMT it isn't a huge deal. This seems pretty reasonable to me. It's not perfect but it's not a reason for completely eliminating income tax. It's a reason for having exemptions, which is exactly what this article is about.
>If they have more money in their pocket, they will spend. That is what America is built on.
This is simply not true for people with millions of dollars. Look at the percentage of income spent for someone making $500k a year, and the percentage spent by Bill Gates or any other billionaire. It's a huge difference, and there's a huge difference between both of those groups and someone making $100k a year who is usually spending almost all of their income. Consumption tax is also completely ignoring the "spend it overseas" and million other loopholes.
I am not convinced any method of consumption tax I've read about, regardless of safeguards, would retain the same level of tax income the government receives while also not increasing the burden on lower and middle income households. The vast majority of tax revenue comes from an extremely small percentage of earners, and you'd be losing the vast majority of that income if you only taxed their spending.
The only way I can see this working is if you almost exclusively taxed things rich people bought. Increase sales tax on homes over $1 million, cars and boats over $200k, private jets, etc. But the tax rate on these would have to be ridiculously high, more than doubling their costs. All the rich people would just buy them overseas.
$60,000 income with std deduction and personal deduction equates to a tax burden of $8,219 or effectively 13.7%.
$1,060,000 income equates to a tax burden of $406,314 or effectively 38.3% (treated as a short term capital gain).
That is money I could have saved and invested BEFORE being taxed an extraordinary rate for it relative to my place in life. I happened into money when I'm typically taxed at <14%, and nearly 40% of it is taken from me. Simply because I earned it over the span of 12 months. What if I built a company over 10 yrs and that is the culmination of that?
>> All the rich people would just buy them overseas.
That is a fair point. That said, if I buy something overseas from Europe right now, I don't pay VAT (coming from US). A large number of vendors compensate for this and keep the prices for US purchasers high and not an exact match to their Euro prices. So I think in practice you would see overseas retailers raising their prices to come close (or match) the US price that includes the consumption tax. That would balance out and lead people to do the easy thing and just buy in the US. Maybe... Maybe not...
> All the rich people would just buy them overseas.
You can't live in a home you buy overseas without living overseas. As for cars, boats, and planes, you pay consumption based taxes when you register them - that's the way state sales tax works on such things in most places today.
Obviously you're being sarcastic - you're right, the money gets spent eventually. But not by the billionaire. It gets spend by his kids, and his kid's kids, and so on, for generations. Meaning money that should have been taxed once in a single year is instead taxed over the course of 200 years and increasingly so on tax-exempt consumption. Meanwhile, that tax-free money is being used to invest in rent-seeking enterprises, meaning the cost of living for everyone else is being driven up. It's essentially a free loan from the US government for decades upon decades.
Totally agree! A consumption tax with a tax prebate (aka basic income guarantee) makes it progressive.
To head off the argument that it's regressive because wealthier people spend a smaller fraction of their income: true for a snapshot in time, but not over the course of their lives. Spending a fraction of your income = saving = spending later. So in retirement they could have an effective >100% income tax rate. Also, switching to this program would be a one-time double-tax on savings which will disproportionately affect those who've saved more; i.e. "progressive". I'm still not positive about intergenerational wealth transfers - that could be a way to avoid paying taxes, but maybe if we charged wealth transfers the same consumption rate, that could solve it.
I'm a big fan of a FairTax-esque approach since it simplifies things dramatically and lays the infrastructure for ramping up the prebate as time goes on, as our nation can afford it.
> Also, switching to this program would be a one-time double-tax on savings which will disproportionately affect those who've saved more; i.e. "progressive".
i.e. "putting retirees out on the street". Such a bill would need to provide a fix for that case, where someone has a fixed amount of savings intended to provide for themselves in retirement and cannot afford a sudden 10% increase in all prices.
For instance, one possible patch would be to look at people's lifetime income (already tracked by the Social Security Administration), and offer a one-time exemption up to a certain threshold, effectively calling the corresponding savings "already taxed" and providing an exemption. The challenge would be doing that without creating massive additional complexity in the tax code after that one-time event.
(This would only apply to people with post-tax retirement savings. The solution for pre-tax retirement savings is much simpler, since it won't get taxed at withdrawal anymore.)
> I'm still not positive about intergenerational wealth transfers
They wouldn't matter anymore, because they're all on the income side, and taxes would all be on the spending side. By taxing when the money gets spent, rather than when the money gets made, you no longer care where the money comes from.
You also no longer care about people who made their money in other jurisdictions, or many other issues. If you live in a country, you'll need to spend money in that country.
> I'm a big fan of a FairTax-esque approach since it simplifies things dramatically
Hopefully, but there's a pile of additional complexity involved in definition, to deal with suppliers and intermediate goods. There's a ridiculous amount of complexity in the definition of VAT; some of that is unnecessary bought-and-paid-for exemptions and adjustments on item types, but even after avoiding that, there's a pile of complexity involved in what "value added" means.
But wouldn't this encourage the rich to spend overseas? They would pay no tax on their income, and then they'd be free to go and spend it abroad in countries where there is an income tax, but no/lower consumer tax.
(I'm assuming you meant "travel and spend", rather than "order for shipment", since the latter is handled by applying sales taxes to imported goods.)
First, if they're traveling that often, they're going to be paying a substantial amount of travel expenses, subject to sales tax. Might also be worth considering if currency conversions should be subject to sales tax.
Second, who can afford to do the majority of their spending in another country, while not actually being a resident of that country instead?
Third, a country would get significant additional tax revenue from visitors and tourists, who don't make income in that country but do spend money in that country.
Fourth, where's the money coming from? The business they derive their income from has to pay sales taxes too.
And finally, a vanishingly small fraction of people could actually do that, and it's not worth making the tax code a hundred times more complicated to target a tiny number of people who will still end up paying a huge amount of tax in other ways. The administration alone isn't worth the additional revenue; you'd spend more administrating the more complex tax code for everyone than you'd have any hope of recouping.
Rather than a consumption tax (i.e. VAT or GST) a better tax would be an asset tax. Of course such a tax would be highly unpopular with the rich so it has zero chance of ever being implemented.
Interestingly, the currently-most-prominent plan in the US for a consumption tax includes a government "prebate", a pre-allocated consumption allowance based on household size, that amounts to a basic income. Under this proposal, every month, the federal government would send you a check for the household's consumption tax rebate (which is typically going to be in the hundreds of dollars).
Which seems highly preferable to a complex system of what to tax and what not to tax. Rather than maintaining an ever-changing list of what should and shouldn't have sales tax applied (with associated busybody politics on various items), just effectively exempt the first $X of purchases, whatever they might be.
I don't know. If I were self employed, and you buy a thing from me, is that your consumption (taxed) or my income (untaxed)? This stuff is complicated.
... thinking about it further: A truly crazy idea would be a consumption tax that is based on the income of the seller, to keep it from being regressive. Things from rich people are more expensive as a result, providing a nice anti-monopoly, anti-inequality balance. Now I want everyone to poke holes in why it would fall apart.
My thought is that this would be problematic in markets with natural monopolies. There aren't a lot of mom-and-pop power companies. (There are plenty of moms and pops selling power, but as I understand they sell it to the power company who resells it to you by burning less coal.)
Interesting idea about a progessive consumption tax. But would it be more costly to collect than income tax? Not to suggest that it isn't worth the cost: consider sales tax vs VAT. VAT is more expensive to collect but harder for businesses to evade.
My "luxury" VC fund features investor meetings three times a day, with meals and drinks provided by top-rated chefs and bartenders. Hell, for a higher "management fee," we'll even let you stay at our "offices".
--Of course I oversimplify the consumption tax, and safeguard would need to be in place on that to ensure it is not regressive with respect to necessities...