Don't think by my last post that I've totally drank the Kool-Aid on the idea of a progressive consumption tax just keeping an open mind as I always try to do.
http://diaryofarepublicanhater.blogspot.com/2013/04/a-progressive-consumption-tax.html
Again, I'm reading a book a "public finance" guy-in the past when I questioned Sumner on it he accused me of being ignorant of public finance- Laurence Seidman wrote about the progressive consumption tax back in 1997-in that book he focused specifically on a bill that had been proposed in Congress at the time by the Republican Representative Pete Domenici from New Mexico and the Democratic Rep. Sam Nunn of Georgia.
http://www.amazon.com/USA-Tax-Progressive-Consumption/dp/0262514532/ref=sr_1_4?s=books&ie=UTF8&qid=1367149825&sr=1-4&keywords=laurence+seidman
He's written a number of other books about it.
http://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Dstripbooks&field-keywords=laurence%20seidman
In the last post I wrote largely about what impressed me about the idea-or at least fired my imagination. Seidman argued that while it's true as critics argue that many kinds of consumption taxes are regressive-the sales tax, the flat tax, etc.-the USA proposal-for a consumption household tax is progressive. This is achieved by having graduated rates, and giving a large deduction for low income people as well as a 100% deduction on payroll taxes and Social Security taxes-SS is maintained in full standing-and maintaining the Earned Income Tax Credit (EITC).
I was intrigued. I wondered if maybe this would maintain the current level of tax progressviity. Of course, I'm also greedy and want to increase it's progressvity. Incidentally, the European Model-where there is a much more generous welfare state and social safety net-is actually achieved by having a tax system considerably more regressive than ours. However, their distribution of the welfare state is much more progressive than ours so there's the tradeoff.
I was also impressed that Nicholas Kaldor supported the idea of a progressive consumption tax and wrote a book about it in the early 50s, as did Irving Fischer.
http://www.amazon.com/gp/product/0415489059/ref=gno_cart_title_1?ie=UTF8&psc=1&smid=ANILSG0184L7S
However, the most impressive quote was from Keynes who said of it while advising Parliament in the 20s that it's:
perhaps theoretically sound but practically impossible.
Because the idea of a consumption tax seems so un-Keynesian doesn't it? Keynesianism says we want consumption that this drives the economy. After all, if70% of economic activity is consumption driven how why do we want to discourage it? Yet a Keynesian like Kaldor advocated it and even Keynes seemed-at least at one time-to think it's a good idea though even then only in theory.
Actually there is a long history of advocating the consumption tax going back to Alfred Marshall but it was always thought to be impracticable: after all how do the tax authorities keep record of eveyrone's consumption? The answer now seems to be that you simply do a headcount on what a taxpayer has saved compared to what they were actually paid or received. Does it require the authorities to take their word on what they have saved though?
However, that may be, the real question is not whether it's possible-maybe it is. What really matters is why is it such a great idea? Even if it can be made as progressive as our current income tax system why should we want to change to a consumption tax system?
In chapter 2, Seidman discusses this crucial point. He argues that saving is important for productivity and that a declining savings rate leads to declining productivity. This argument seemed dead on at the time-1997; and he was only looking at statistics up till 1993-as the U.S economy-and the world economy for that matter-had been in a 20 year productivity slump starting in 1973.
However, what wasn't known the time, was that the slump had ended in 1995 so by the time of his book this was no longer true-it is arguable that the productivity boom fed by the Internet ended in 2005 and that since then productivity has again been weak.
He argued to increase our productivity we needed to increase our savings. However, he does finally come to the crucial point: he admits that raising the savings rate in this way lowers the consumption rate and that this would lead to layoffs in what he calls the consumption goods sector; however he says that this would be offset by a rise in the investment goods sector.
He allows that this increase in investment must be done slowly. What will happen is a drop in present consumption for future consumption. However, in the long term, consumption and output will rise along with investment. So basically we sacrifice today's consumption-some, he says we shouldn't do this too much too fast-for more investment today and more investment and consumption in the future.
Putting the tax in place, what happens according to a study he did is that capital and output per worker rises immediately but consumption per worker still rises-if done gradually-but at a slower rate than before. However, in the long run consumption per worker catches up to where it would have been without the increase in investment-when this is depends on how gradual the increase in investment, and temporary cut in consumption, was phased in-and from then on it's higher than it would have been without the investment increase.
In less than a decade this is achieved and within 5 decades output per worker is 10% higher per year than it would have been otherwise and consumption per worker is 6% higher.
Having gone through this, I find it hard to believe that Keynes at least post General Theory could have gone for this-maybe I'm wrong, but I'd be very surprised. Keynes' point if I grasp it is in the long run we are all dead. How can anyone really believe that we can sit here and make policy for output 50 years in the future?
Keynes was also very critical of the idea that money not spent to day was necessarily deferred spending later: you can't assume that if it's not spent today it will definitely by spent tomorrow.
So while I'm still only in chapter 2 I'm still very skeptical about why we need to encourage saving at the expense of at least present consumption; part of the trouble is that I don't know that I buy this idea of present vs. future consumption. Isn't the truth of it that all consumption is present consumption?
http://diaryofarepublicanhater.blogspot.com/2013/04/a-progressive-consumption-tax.html
Again, I'm reading a book a "public finance" guy-in the past when I questioned Sumner on it he accused me of being ignorant of public finance- Laurence Seidman wrote about the progressive consumption tax back in 1997-in that book he focused specifically on a bill that had been proposed in Congress at the time by the Republican Representative Pete Domenici from New Mexico and the Democratic Rep. Sam Nunn of Georgia.
http://www.amazon.com/USA-Tax-Progressive-Consumption/dp/0262514532/ref=sr_1_4?s=books&ie=UTF8&qid=1367149825&sr=1-4&keywords=laurence+seidman
He's written a number of other books about it.
http://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Dstripbooks&field-keywords=laurence%20seidman
In the last post I wrote largely about what impressed me about the idea-or at least fired my imagination. Seidman argued that while it's true as critics argue that many kinds of consumption taxes are regressive-the sales tax, the flat tax, etc.-the USA proposal-for a consumption household tax is progressive. This is achieved by having graduated rates, and giving a large deduction for low income people as well as a 100% deduction on payroll taxes and Social Security taxes-SS is maintained in full standing-and maintaining the Earned Income Tax Credit (EITC).
I was intrigued. I wondered if maybe this would maintain the current level of tax progressviity. Of course, I'm also greedy and want to increase it's progressvity. Incidentally, the European Model-where there is a much more generous welfare state and social safety net-is actually achieved by having a tax system considerably more regressive than ours. However, their distribution of the welfare state is much more progressive than ours so there's the tradeoff.
I was also impressed that Nicholas Kaldor supported the idea of a progressive consumption tax and wrote a book about it in the early 50s, as did Irving Fischer.
http://www.amazon.com/gp/product/0415489059/ref=gno_cart_title_1?ie=UTF8&psc=1&smid=ANILSG0184L7S
However, the most impressive quote was from Keynes who said of it while advising Parliament in the 20s that it's:
perhaps theoretically sound but practically impossible.
Because the idea of a consumption tax seems so un-Keynesian doesn't it? Keynesianism says we want consumption that this drives the economy. After all, if70% of economic activity is consumption driven how why do we want to discourage it? Yet a Keynesian like Kaldor advocated it and even Keynes seemed-at least at one time-to think it's a good idea though even then only in theory.
Actually there is a long history of advocating the consumption tax going back to Alfred Marshall but it was always thought to be impracticable: after all how do the tax authorities keep record of eveyrone's consumption? The answer now seems to be that you simply do a headcount on what a taxpayer has saved compared to what they were actually paid or received. Does it require the authorities to take their word on what they have saved though?
However, that may be, the real question is not whether it's possible-maybe it is. What really matters is why is it such a great idea? Even if it can be made as progressive as our current income tax system why should we want to change to a consumption tax system?
In chapter 2, Seidman discusses this crucial point. He argues that saving is important for productivity and that a declining savings rate leads to declining productivity. This argument seemed dead on at the time-1997; and he was only looking at statistics up till 1993-as the U.S economy-and the world economy for that matter-had been in a 20 year productivity slump starting in 1973.
However, what wasn't known the time, was that the slump had ended in 1995 so by the time of his book this was no longer true-it is arguable that the productivity boom fed by the Internet ended in 2005 and that since then productivity has again been weak.
He argued to increase our productivity we needed to increase our savings. However, he does finally come to the crucial point: he admits that raising the savings rate in this way lowers the consumption rate and that this would lead to layoffs in what he calls the consumption goods sector; however he says that this would be offset by a rise in the investment goods sector.
He allows that this increase in investment must be done slowly. What will happen is a drop in present consumption for future consumption. However, in the long term, consumption and output will rise along with investment. So basically we sacrifice today's consumption-some, he says we shouldn't do this too much too fast-for more investment today and more investment and consumption in the future.
Putting the tax in place, what happens according to a study he did is that capital and output per worker rises immediately but consumption per worker still rises-if done gradually-but at a slower rate than before. However, in the long run consumption per worker catches up to where it would have been without the increase in investment-when this is depends on how gradual the increase in investment, and temporary cut in consumption, was phased in-and from then on it's higher than it would have been without the investment increase.
In less than a decade this is achieved and within 5 decades output per worker is 10% higher per year than it would have been otherwise and consumption per worker is 6% higher.
Having gone through this, I find it hard to believe that Keynes at least post General Theory could have gone for this-maybe I'm wrong, but I'd be very surprised. Keynes' point if I grasp it is in the long run we are all dead. How can anyone really believe that we can sit here and make policy for output 50 years in the future?
Keynes was also very critical of the idea that money not spent to day was necessarily deferred spending later: you can't assume that if it's not spent today it will definitely by spent tomorrow.
So while I'm still only in chapter 2 I'm still very skeptical about why we need to encourage saving at the expense of at least present consumption; part of the trouble is that I don't know that I buy this idea of present vs. future consumption. Isn't the truth of it that all consumption is present consumption?
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