Friday, September 26, 2003

Consumption Tax

Via Lawrence Solum, Daniel Shaviro of NYU Law School has a law review article arguing for a progressive consumption tax. I'm not that familiar with the literature on tax law, but the more I read of this stuff, the more I'm convinced that a progressive consumption tax is the way to go. Anyway, here's part of the abstract:
Shifting from an income tax to a consumption tax would offer major simplification advantages. Even if Congress created as many preferences and other special rules to what it has under the existing income tax, the massive set of complications that relate to realization and to the taxation of financial transactions would largely be eliminated. The main (though not the only possible) reason for opposing such a shift is the concern that it would require reducing progressivity. However, the capacity of a consumption tax to achieve progressivity comparable to that of an income tax is widely misunderstood, for two main reasons.
First, a consumption tax purportedly exempts "capital income," seemingly raising the specter of its exempting the likes of Bill Gates and Warrant Buffett. As recent tax policy literature has shown, however, the only difference in theory between an income tax and a consumption tax pertains to the risk-free return to waiting, which historically has averaged less than one percent per year. The point made by this literature is by now familiar and well-accepted in some circles, but in others it remains unfamiliar or has been unduly dismissed. This article aims to win it wider acceptance.

Second, many believe that wealthy people escape the burden of a consumption tax by deferring their consumption, and that advocates of such a tax ignore the effects of unconsumed wealth on one's security, political power, and social standing. The argument overlooks the fact that what makes wealth valuable is the real purchasing power that it commands. Otherwise, real money would be no different than Monopoly money. A consumption tax affects the purchasing power even of unspent wealth, and the burden it imposes generally is not reduced by deferring one's consumption.


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