It’s not fully clear what president-elect Obama plans to do on tax policy other than “redistribute” and make those families making over $250,000 pay their “fair share.” But I was intrigued by his platform pledge to:
I don’t think for a minute that real tax simplification and genuine transparency (to make protest and revolt easier) are imminent; but one can fantasize.
The heyday of the simple “flat tax” idea was back in the â€˜90s. Dick Armey’s flat tax on a postcard was a simplified income tax. Meanwhile, two prominent consumption tax proposals (according to my hazy memory) were a sales type tax, and a “savings exempt” version that would apply a tax rate to income not saved. The first is collected at the point of sale, and the second is computed by the individual. If we ever reach the stage of actually debating Mr. Obama’s brand of simplification, the pros and cons of a consumption tax are worth keeping in mind. (Presumably any flat(er) or simpler tax would generate calls to move the base increasingly toward a consumption tax rather than an income tax). Some thoughts:
Consumption tax: what’s good, or might be:
- It gets the IRS out of the public’s pocket
- As long as it’s not like a value-added tax (applied at every level of production), a consumption tax could reduce bureaucracy. (I wrote an angry riff against a value-added tax back then).
- Americans now spend billions of hours filling out gov’t paperwork, most of it tax forms. That’s the equivalent of millions of Americans working full-time all year.
- Taxing consumption rather than income can increased production and wealth-creating incentives.
Consumption tax: what’s bad:
(I’m assuming a “point of sale” type of tax that exempts no one: however this can be modified to help avoid these “bads.”)
- No one is exempt, as many would be with a flat tax paid by filing a simple return.
- May hit poor and middle class hardest, who spend a higher percentage of their budget on necessities.
- Since the tax is so broad based, vast amounts of money can be raised with very tiny, almost imperceptible rate increases, and since no return is filed people may lose track of just how much they are paying.
- Might encourage black market transactions (But if you know anything about me I’m more tempted to put this in the “what’s good” category).
- The tax must replace the current income tax, not supplement it. This is probably the greatest threat.
- Since a consumption tax might hit the poor hardest, it may provide a built-in excuse to expand social welfare programs. (This has happened in European countries that have adopted VATs. One economist argued that a VAT could be made fairer in the U.S. by expanding Food Stamps rather than by staggering rates.)
- Since exempting necessities to protect the poor will decrease revenue potential, higher rates may come to be imposed on politically incorrect categories of luxury goods.
Let the debates begin.