The Progressive Consumption Tax-an Idea Whose Time Has Come?

      Don't get me wrong I'm still a skeptic. I've always seen the idea as a contradiction in terms. After all consumption taxes are by definition regressive-aren't they? However from what I've read lately there are ways that it could possibly be progressive and an idea worth considering. Again I preface this by saying I remain a skeptic.

       I don't really get part of the idea's conceptual underpinnings. The idea is that we must free up people to save and invest. This is the kind of supply side argument never impresses me. And I never get why the Supply Siders hate capital gains taxes as well as the top marginal tax rates so much. Here we'll let Sumner tell us why he does:

       "the public doesn’t understand taxes. Actually, forget about the public, I’d estimate that half the economists I talk to don’t understand that taxes on capital are double taxing the same wage income. That Buffett’s comment about paying 15% taxes is nonsense. If every voter were as well informed as Matt Yglesias (who favors a progressive consumption tax, which would amount to about a 1% income tax on Buffett), then we could survey public opinion on tax and spending questions."

        http://www.themoneyillusion.com/?p=15005

       Convinced? Not really-neither am I. Sumner believes in the progressive consumption tax but he's a fairly feeble advocate. I don't get this whole fetish about capital taxation as double taxation. It's not the only example of double taxation in our economy anyway far from it. Sumner here does another curious thing:

       "Obama’s new tax bill calls for a top federal income tax rate of 43.4% in 2013, meaning the rich will face 50% tax rates in NY and California. Krugman and Saez favor still higher rates. I guess they weren’t asked."

       Ok, so there's a lot not to be impressed with here. I considered leaving a comment about how misguided so much of what he says here is but haven't yet as where do you start? I usually try to limit my criticism to as few points as possible with Sumner otherwise he'll grasp onto some tangential point and act like he's glibly demolished the argument when he hasn't even touched it. The one thing to be impressed with on this post was Major Freedom who out of about 125 comments 114 were the Major's.

     Why does Sumner act like only the rich pay the state taxes? I agree you should factor them in which is why the 9-9-9 Cain plan was draconian on the nonrich who's taxes he raised, but why does Sumner or any other conservative-or libertarian, it amounts to the same thing-only worry about the rich, capital gains taxes, and corporate tax rates? This is where the strange logic of supply side takes you.

     Ok, well let's look at some good reasons for a progressive consumption tax. I've already indicated I don't see why capital gains and top marginal rates are so onerous, and I don't really get why we should want to encourage savings rather than consumption. However while I don't agree with the conceptual underpinnings necessarily I am impressed by those plans that suggest you could wholly do away with the payroll tax-the most regressive tax in the country. It would work like this: someone with say $50,000 of income would pay a consumption tax at the end of the year. It is not a sales tax which proponents admit is regressive.

     You don't pay anything at the point of sale. Instead at the end of the year you pay a tax on whatever income you haven't saved minus a healthy standard deduction. On the $50,000 for example, you get say the first $30,000 deducted. If you save $5,000 then you pay say a 10% consumption tax on the remaining $15,000. This would come out to $1,500 which would be better evidently to what would be paid now. The consumption tax would go up to about 50% on the top rate.

     Of course an end to the individual income tax and capital gains tax would be part of the bargain. There are certainly some real questions that remain. One is that even if people were paying a net lower amount of tax than currently, and in some ways it's attractive to take home all your income right away it would also demand a much bigger tax bill come April 15.

     To be sure people in low income levels wouldn't be paying anything. Still it's daunting to have to come up with a big check every year-though it would be nice to not have your check whittled away every week.

     The most important objection is revenue neutrality. If it cuts revenue then that effectively means a cut in public spending and services, a cut entitlements, etc, which balances out any tax saving. Then you add the fact that those who depend on public spending are mostly lower income and the progressiveness fades away pretty quickly.