A consumption tax is a wealth tax

Josh Barro recently discussed a study which polled Americans on attitudes toward wealth:

Indeed, while the top quintile of Americans hold about 84% of national balance sheet wealth, survey respondents believe the figure is just 59% and would prefer a figure of 32%. The authors use the paper to argue for more redistributive policies — or rather, for the insertion of these public preferences into policy debates.

All that study shows is that Americans aren’t very good at math.  If every single American made an identical income at the same age, then wealth would still be more unequal than 32% in the top quintile.  Even if saving propensities were also identical, 18 year-olds typically have far less wealth than 55 year olds who are married and have kids.  And does anyone seriously believe Americans favor paying brain surgeons an identical salary to a clerk at Walmart?  Let’s get serious. Anyone who favors inserting that sort of “public preferences” into the policy debate needs to have his head examined. This is the sort of things that gives economists a bad reputation.  It may be a great study, but come on, use some common sense!

Ezra Klein recently suggested that the highly unequal levels of wealth (which by the way Josh Barro shows occurs in other developed countries as well), is leading to interest in a wealth tax:

So then, here’s what you should know about wealth inequality in the United States: It’s worse than Americans want it to be, much worse than they think it is, and it’s increased over the last few decades. Which is one reason that there’s been more talk of a wealth tax lately.

Matt Yglesias responds as follows:

If you want to think about taxing wealth more heavily, it’s probably worth trying to draw some distinctions. The old argument going back to David Ricardo and Henry George that you should tax land wealth very heavily seems quite sound to me. Levying heavy tax rates on valuable land (whether it’s valuable because it’s in San Francisco or valuable because it has oil in it) does not create any bad incentives. These days, a lot of wealth consists of patents that could be taxed more heavily but should probably just be abolished. But in terms of general taxation of financial assets, the basic concept of taxing estates rather than a steady drip-drip-drip of wealth taxes seems like a reasonably sound idea. We’ve reduced estate taxes a lot over the past 15 years, which seems like a very strange policy response to growing income inequality and some evidence of capital-biased technological change.

I partly agree with Yglesias—a land tax is sensible.  And I agree with his earlier calls for a progressive consumption tax.  But I strongly disagree with the inheritance tax.  Ironically, Matt has a picture of a mega-yacht on the top of his post calling for an inheritance tax.  But an inheritance tax specifically exempts services provided by mega-yachts, and instead taxes only the wealth of thrifty old guys who leave all their fortune to others!  Do we really want to tax the sort of old man or woman who puts all their wealth back into investments at a higher rate than we tax those hedonists who splurge on wine, women, and song? That seems morally grotesque, indeed I’d tax people on the basis of how many resources they consume, or take out of society, not what they produce.

Most people regard consumption as being much more equal than income, which is then much more equal than wealth.  But this is a cognitive illusion, as wealth is basically the present value of future expected consumption (for yourself, plus those you donate to.)  What causes this confusion? It’s partly life cycle effects and consumption smoothing, which I’ve already discussed.  It’s also partly due to the fact that the rich tend to have lots of easily measured wealth (financial assets) whereas the poor and middle class rely more on (difficult to measure) human capital as a form of wealth.

I can already anticipate commenters insisting that wealth is bad for other reasons—it gives people too much political power, for instance. Maybe, but it’s a pipe dream to think we can measurably reduce that problem via progressive policies.  Even the Nordic countries have very unequal wealth.

We need a mixture of the following, in this order:

1.  Taxes on externalities (carbon, but not cigarettes.)

2.  Taxes on land (by acreage, not value, with the tax rate varying by zip code.)

3.  Progressive consumption taxes.  These could include

a.  VAT with poverty level consumption exempted.  Progressive taxes on housing services (i.e. progressive property taxes.)

b.  Progressive payroll taxes—treating capital income that people earn from their own firm as wages, unless they can show otherwise.

c.  Negative taxes on low wage jobs (EITC.)

Do that, and you can pretty much adopt a radical libertarian policy in most other areas (with a few exceptions.)

PS.  Evan Soltas has some good arguments against wealth taxes.


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71 Responses to “A consumption tax is a wealth tax”

  1. Gravatar of Ashok Rao Ashok Rao
    10. March 2013 at 14:51

    If you clicked through on the Soltas post, you’d probably find me arguing for a wealth tax. 😉

    I’ve changed my views, somewhat, to accommodate for the argument that the real effect of a wealth tax compounds. As Miles Kimball noted, my proposal of a 2% wealth tax would, by virtue of the 70 rule, double in 35 years. This isn’t good.

    Given a complete removal of the income tax (including capital gains), what if the tax code was designed to implement a consumption tax in tandem with a small wealth tax. Of course, the wealth tax compounds in a way the consumption tax doesn’t, but there’s a quick fix for that.

    Implement the tax code such that the government is required to collect n% of its revenues from the consumption tax. This would automatically adjust wealth tax rates down as wealth compounds, removing the exponential effect saving has.

    It’s also easier to write in exemptions for what we think is good behavior. The first 500k can be untaxed, so consumption patterns of most Americans is untouched. Removing capital gains tax will let investors focus on future cash flow, not just speculation (which is dis-incentivized by a wealth tax).

    If government wants to invest in, say, infrastructure it can create a special exemption program rather than spend itself. This might even be more efficient.

    And it will discourage any oversaving that might result from Hall Rabushka (though this isn’t a problem for us).

    P.S. I don’t think cigarette taxes will hurt the poor as much as you claim, but we’ve already discussed that.. would love to hear your thoughts on a modified wealth tax. Especially if we get rid of income tax .

  2. Gravatar of To To
    10. March 2013 at 15:26

    We do not tax the sort of old man or woman who puts all their wealth back into investments at a higher rate than we tax those hedonists who splurge on wine, women, and song. They’re dead. We taxing their children who are getting extra wealth, most of them in the middle of their lives, just because they chose their parents well.

    Also, if wealth is future expected consumption, i really wonder what those billionnaires expect to spend it on, and when. Past a certain amount, people accumulate wealth in order for them and their children to be able to live off the interests, forever. Which is exactly what we should be preventing.

  3. Gravatar of Steve Steve
    10. March 2013 at 15:48

    Scott,

    “Taxes on land (by acreage, not value,”

    Do you mean an unimproved land tax?

    An acreage tax would be punitive towards people who live in places like Montana.

  4. Gravatar of Rademaker Rademaker
    10. March 2013 at 15:50

    The problem with the notion that wealth generation and consumption-deferment should be stimulated is that it is indiscriminate as to whether real wealth is generated or just asset prices inflation. I would favor real wealth over consumption, but consumption over asset inflation.

  5. Gravatar of Ben Southwood Ben Southwood
    10. March 2013 at 16:02

    Scott,

    Do you really need a negative income tax if we’re going down the progressive consumption tax route (which seems better). Couldn’t we have a cleaner and better (less distortionary) system with a progressive & negative consumption tax.

    Eg. first $5,000 per person per year is a credit or free money
    then tax instantly kicks in at, say, 5% from $5,000 to $20,000
    then tax ups to, say, 15%, from $20,000 to $100,000
    then tax hits, say, 30% for the rest
    (all the numbers are utterly open to argument)

    And why have a separate land tax? Why not just tax all property on its rental value per year, included within the general consumption tax to make things, again, clearer, simpler, fairer and less distortionary? After all, the rent per year should be a measure of how much resource one is consuming, right?

    We could include well-designed externality taxes as well.

  6. Gravatar of Steve Steve
    10. March 2013 at 16:25

    Ashok,

    “As Miles Kimball noted, my proposal of a 2% wealth tax would, by virtue of the 70 rule, double in 35 years.”

    A 23.8% cap gains tax on someone earning and booking an 8.5% annual return is already a 2% wealth tax — the government gets half every 35 years.

    The capital gains tax incentivizes asset parking, Buffett-Romney style. Creating investment vehicles to permanently avoid the cap gains tax.

    A wealth tax (in lieu of cap gains/interest/dividend taxes, not in addition) encourages people to find productive investments. But it might also encourage people to buy assets that can be hidden, like cash, gold and rarities.

    It’s not clear to me that the costs of a wealth tax are actually higher than the costs of other forms of capital taxation. It seems to me the best reason to oppose a wealth tax is the standard fear that the government would view it as additive to the other taxes already in place, rather than a replacement. Thus, a wealth tax would become another ratchet toward total confiscation.

  7. Gravatar of Steve Reilly Steve Reilly
    10. March 2013 at 16:27

    @Steve,

    I was wondering that too. But the second part of that point talks about varying the tax based on zip code, so I’m guessing Montana gets a lower rate than Manhattan. So, yeah, I think the point is that land should be taxed at its unimproved value.

  8. Gravatar of RobertD RobertD
    10. March 2013 at 16:30

    Why carbon, but not cigarettes? Is your point that cigarettes do not cause an externality?

  9. Gravatar of Steve Reilly Steve Reilly
    10. March 2013 at 16:36

    @RobertD,

    Isn’t that certainly true? Even if you look at the rise in health costs by cigarettes (and I’m kinda squeamish about thinking of something like that as an externality), it’s offset by the gains to Social Security of smokers who pay into the system and don’t live to reap the rewards.

    Maybe second-hand smoke is enough of an externality that it should be taxed. But I’d imagine such a tax would be pretty low.

  10. Gravatar of Greg Hill Greg Hill
    10. March 2013 at 16:37

    Scott,

    “And does anyone seriously believe Americans favor paying brain surgeons an identical salary to a clerk at Walmart?” I doubt it. Does anyone seriously believe that the six lucky heirs to the Walmart fortune should have more wealth than the combined fortunes of the poorest 30% of Americans (about 100,000,000 people)? Or that the bottom 70% have less than 10% of America’s total wealth?

  11. Gravatar of Geoff Geoff
    10. March 2013 at 16:49

    Greg Hill:

    “Does anyone seriously believe that the six lucky heirs to the Walmart fortune should have more wealth than the combined fortunes of the poorest 30% of Americans (about 100,000,000 people)? Or that the bottom 70% have less than 10% of America’s total wealth?”

    Always and forever, or based on their relative productivity differences?

    If you mean the former, then I say of course not.

    If you mean the latter, then I say that’s justice.

  12. Gravatar of Grim Grim
    10. March 2013 at 16:55

    Would a tax on capital income of billionaires really have any effect on their incentive to save, given their low marginal utility of consumption? I get the double taxation of deferred consumption argument for most people, even the rich, just not the mega-rich.

    Also, if a company director was given some shares as compensation, would he be taxed on the original value of the shares, with the tax paid by the company being deducted from his salary when the shares are received (like a fringe benefits tax) or would he be taxed on the capital gains and dividends as labour income, even ones received years after he left the company? I think there is a grey area between what income is labour income, and what represents deferred consumption.

  13. Gravatar of Geoff Geoff
    10. March 2013 at 17:06

    Yglesias wrote:

    “Levying heavy tax rates on valuable land (whether it’s valuable because it’s in San Francisco or valuable because it has oil in it) does not create any bad incentives.”

    That is wrong.

    No matter what is taxed, there are bad incentives created. Not considering those bad incentives is not the same thing as those bad incentives not existing.

    Adding a land value tax would redistribute wealth away from landowners to non-land owners. That would create the incentive for landowners to lobby the state to gain special favors, subsidies, grants, and privileges, so as to reverse this redistribution.

    Also, non-land owners, since they don’t share the same tax burden, would have the bad incentive of voting for a bigger government at the expense the land-owners.

  14. Gravatar of J J
    10. March 2013 at 17:25

    Geoff, with regard to your second post:

    The first bad incentive you mention exists no matter what taxes are in place or on whom they are levied. Right? Don’t non-landowners have the same incentive to lobby in the absence of a tax? Don’t landowners have the same incentive to lobby, in the absence of a tax, for a tax on not having land?

    The second bad incentive is not necessarily there. Suppose there is a fixed tax rate on land and that tax rate won’t increase if the size of government increases. In other words, future tax changes will occur in the form of income tax changes. Then, they will want a smaller government as they always did if they like low income taxes and low government expenditures, or a larger government as they always did if they like high income taxes and high government expenditures.

    Also, you don’t mention that the second bad incentive applies the landowners as well. They pay a disproportionately large share of the tax burden, so will vote for a smaller government.

    But, this is a problem with any fiscal policy that redistributes. It is hard to imagine a tax and spending policy that perfectly aligns private costs and benefits with social costs and benefits for each voter.

  15. Gravatar of Regressive taxation linked to a wide range of social problems | Public Record Regressive taxation linked to a wide range of social problems | Public Record
    10. March 2013 at 17:28

    […] Coincidentally, there’s been some discussion by economists and journalists recently on tax policies aimed at growing wealth disparity. While these proposals are aimed at the federal government, conservative economist Scott Sumner has some ideas on making consumption taxes more progressive. […]

  16. Gravatar of J J
    10. March 2013 at 17:29

    Steve Reilly:

    I agree about whether cigarettes really create an externality. However, what if we have to choose between taxing all consumption and taxing cigarettes? On one hand, it feels wrong and dangerous for the government to decide which types of consumption are “acceptable”. On the other hand, it is possible that cigarette smokers would be better off if we disincentivized them a little. Maybe, maybe not. Maybe a small tax on cigarettes, if it allows us to lower taxes on other things that we do not want to disincentivize, will increase social welfare.

  17. Gravatar of ssumner ssumner
    10. March 2013 at 17:39

    Ashok, It’s not a question of whether cigarette taxes “will” hurt the poor. They are hurting poor smokers quite a bit right now. I’d like to boost the real incomes of poor smokers. I know people who are suffering.

    I don’t really see the point of a wealth tax. The progressive consumption tax seems the way to go.

    To, Fine, why should we tax the consumption of their children at a higher rate then those who splurge on themselves. Do selfish people deserve a tax break? Why?

    Steve, No it wouldn’t, the rate varies by zip code.

    Ben, I don’t think it’s a good idea to pay people for not working. I’d rather subsidize low wage jobs.

    RobertD, That seems to be what the experts have found–or more precisely the externality is extremely low.

    Greg Hill, No they don’t but that has no bearing on my post. I doubt whether most Americans think selfish people should be taxed at a lower rate than unselfish people.

    Grim, There is already a “grey area” nothing would change in that respect.

    The argument over whether people should be taxed at a higher rate on future consumption than current consumption is completely unrelated to whether they are poor, rich or mega-rich. It would be like saying “I’m for legalizing pot, but not for the megarich, they are lucky enough.” It’s a non-sequitor. One issue is how progressive we want our tax system to be. Another is how to do it in the most efficient way possible. That means a zero tax on capital–for everyone.

  18. Gravatar of ssumner ssumner
    10. March 2013 at 17:40

    J, I’m sure smokers would be thrilled to pay a small tax on cigarettes, instead of the current excessive tax.

  19. Gravatar of Jon Jon
    10. March 2013 at 17:58

    “All that study shows is that Americans aren’t very good at math. If every single American made an identical income at the same age, then wealth would still be more unequal than 32% in the top quintile. Even if saving propensities were also identical, 18 year-olds typically have far less wealth than 55 year olds who are married and have kids.”

    Scott, so what’s the avg_{over age} of gini_coefficient(age)?

  20. Gravatar of Greg Hill Greg Hill
    10. March 2013 at 18:05

    Geoff,

    I don’t find the marginal productivity theory of justice, wherein incomes equal marginal products, compelling for both empirical and normative reasons. But at least you’ve got a theory that allows you to evaluate policy outcomes.

    Scott,

    I think you lack such a theory and therefore you offer a list of policy alternatives without any criterion for judging them. I recall that you said you’re a Utilitarian. Do your policy alternatives flow from this standard?

  21. Gravatar of Geoff Geoff
    10. March 2013 at 18:57

    Greg Hill:

    “I don’t find the marginal productivity theory of justice, wherein incomes equal marginal products, compelling for both empirical and normative reasons. But at least you’ve got a theory that allows you to evaluate policy outcomes.”

    We don’t live in a world where incomes are only a product of free trade, so we know that empirical, i.e. historical, data should not be interpreted using a theory that assumes only free market activity is taking place.

    As for normative reasons, I don’t find it a “compelling” justification to rob from people just because their relative productivity is that much higher.

    You can believe that widespread theft from those who are more productive is a more “compelling” position, which means you should be OK with me robbing from you in order to give to poor Africans. After all, you yourself believe that productivity differences should not protect people from theft.

  22. Gravatar of Geoff Geoff
    10. March 2013 at 19:04

    J:

    “The first bad incentive you mention exists no matter what taxes are in place or on whom they are levied. Right?”

    I thought I made that perfectly clear. Did I not mention that bad incentives exist for all taxation?

    “The second bad incentive is not necessarily there. Suppose there is a fixed tax rate on land and that tax rate won’t increase if the size of government increases.”

    It is not necessarily the case that government will never raise the rate of land tax just because you say so.

    In a democracy, if the majority vote for political candidates who intend to raise the tax, because the majority are not land-owners, but renters or what have you, then you can’t tell me that the bad incentive does not exist just because you can imagine a world where taxes never go up. Laugh.

    “Also, you don’t mention that the second bad incentive applies the landowners as well. They pay a disproportionately large share of the tax burden, so will vote for a smaller government.”

    That doesn’t refute the existence of the bad incentive from those who don’t own land!

    “But, this is a problem with any fiscal policy that redistributes.”

    Exactly. So it is wrong for Yglesias to claim that there are NO bad incentives from land tax.

    “It is hard to imagine a tax and spending policy that perfectly aligns private costs and benefits with social costs and benefits for each voter.”

    It’s hard to imagine partly because it doesn’t exist, since there are only individual benefits, not “social” benefits.

  23. Gravatar of Greg Hill Greg Hill
    10. March 2013 at 19:16

    Geoff,

    You write, “I don’t find it a ‘compelling’ justification to rob from people just because their relative productivity is that much higher.” This reply begs the question. You assume that when incomes are proportionate to “relative productivity,” justice has been served, and any “redistribution” is robbery. But it’s just this assumption – i.e., a just distribution is marginal productivity-based distribution – that’s in question.

  24. Gravatar of J J
    10. March 2013 at 19:41

    Geoff:

    If a bad incentive exists for all taxes, then, when comparing two taxes, we might as well continue the discussion without talking about that bad incentive.

  25. Gravatar of J J
    10. March 2013 at 20:08

    Geoff:

    By the way, you may not be aware of the definitions of social benefit and social cost, but the social benefit is the sum of individual benefits and the social cost in the sum of individual costs.

  26. Gravatar of dtoh dtoh
    10. March 2013 at 20:10

    Scott,
    Pretty good post, except…

    1) There is no good data on actual wealth….especially in countries outside of the U.S. where there is a long tradition of hiding wealth and evading taxes.

    2) Forget the wage tax. You don’t need it. It feeds the beast. Given politics, it will tend to creep up.

    3) Eliminate all income taxes, all estate taxes, all capital taxes and all corporate taxes.

    4) Go to a straight Federal PCT which covers all purchases for personal consumption (including rent). Exempt only purchases of fixed assets in excess of $100k

    5) Let the states tax fixed assets (primary residences, vacation homes, yachts, ferraris, etc.) not being used for business based on value or purchase price. This would effectively be consumption tax charged by the States.

  27. Gravatar of Greego Greego
    10. March 2013 at 20:41

    “1. Taxes on externalities (carbon, but not cigarettes.)”

    Do you mean a federal carbon tax? Would you still support it if other industrialized countries didn’t tax carbon, or taxed carbon at a considerably lower rate than the US?

  28. Gravatar of mijj mijj
    10. March 2013 at 21:26

    one billionaire and 999 impoverished people

    or

    one thousand millionaires

    ? which is preferable

  29. Gravatar of Peter Peter
    10. March 2013 at 21:27

    I wonder if rich people would start lobbying to get their zip codes extended to poorer areas to decrease their estate taxes.

  30. Gravatar of TS TS
    10. March 2013 at 21:29

    @Greego

    If other countries were subsidizing X, does that justify subsidizing X?

  31. Gravatar of Benjamin Cole Benjamin Cole
    10. March 2013 at 22:15

    I am a big fan of Keep It Simple, Stupid, or KISS.

    I agree with most of Scott Sumner’s suggestions, but I wonder about their administatibility. Opportunities for cheating, enforcement etc.

    I like a national final sales tax, exempting food and medical. Right at the cash register.

    No exemptions, and yes IRS agents will visit your store incognito, or buy stuff on Craigslist and eBay and make sure the taxes are paid.

    Add on, I do like PIGOU taxes, alcohol, pot, cigarettes, and gasoline. Yes, who decides PIGOU, but I still like it.

    Federal taxes at 15 percent of GDP, or 10 percent, and keep Social Security as is.

    Remember, KISS.

  32. Gravatar of Prakash Prakash
    10. March 2013 at 22:43

    Peter, It is reasons like the ones you mentioned that Georgists mention Land Value Tax and not just land tax. Scott’s proposal is a easier to administrate, but not exactly exempt from its own edge cases.

    The reason that land should be taxed and not property is because there should be no disincentive to building better buildings, as well as the fact that in most brown field cases, people don’t improve the value of the land they own. Also, it is possible to have a standard deduction for a land tax as well.

    I’m not a fan of the surveillance state. A consumption tax would almost require one. A consumption tax’s take should be much smaller than the externality tax and land value tax.

  33. Gravatar of Prakash Prakash
    10. March 2013 at 23:01

    Geoff,

    You cannot escape paying land rent. You pay it to the govt or the landlord (and the landlord pays to the govt).

    There will be a tendency in a land value tax regime for land to be much more equally distributed. Almost no one whose specific comparative advantage is not in property management/supervision will own extra land for speculation purposes. This will lead to lower land prices and other people buying their own property.

    In the long run, there will be a lower one time payment (the purchase price) and a much higher ongoing payment(land tax to government). This arrangement is also preferable from the perspective of resilience.

  34. Gravatar of Peter Peter
    10. March 2013 at 23:16

    A friend once had a pretty weird solution for the land value problem. Let every land owner pick their own price for their property. This price will be used for taxation. But it will also allow anyone to buy that property for that price. Perhaps a bit too scary.

  35. Gravatar of Prakash Prakash
    10. March 2013 at 23:47

    Peter, your friend has re-discovered Sun Yat Sen’s old prescription for this problem.

    I think this is, in principle, no different from using government approved cash registers so that you don’t skimp on paying VAT. Both are government coercion. The only question is what a society finds acceptable.

  36. Gravatar of Peter Peter
    10. March 2013 at 23:56

    Prakash, I’m mostly a libertarian. So I don’t like governments either (everything they do is coercion). But getting rid of them isn’t possible at the moment. So trying to make our tax system more efficient might be a good idea. But there’s always the argument that a more efficient tax system will only increase the total level of taxation.

  37. Gravatar of Prakash Prakash
    11. March 2013 at 01:24

    Peter, There was a debate amongst Georgists about whether externality taxes and land taxes would be enough for government as people are used to in the present day. I don’t know whether there is a solid answer. Singapore and Hong Kong manage pretty well with a meagre income tax and publicly held land / land taxes.

    As for increasing level of taxes, that is a function of the bargaining power between citizens and government. That is where more and more jurisdictions should be competing for people. I am totally in favour of seasteading and charter cities. The scenario should be created where governments compete freely for people. There could be premium governments that will try to add facilities and charge more rent and low cost governments that will improve process and charge a lower rent rate every year.

  38. Gravatar of david david
    11. March 2013 at 01:59

    But Georgist land taxes are not by acreage. They are by land value (without improvements). The value of location, rainfall, etc. is still taxed in a Georgist system.

    It’s how cities could get so much out of the Georgist tax: the city entity then captures the whole surplus value of the network impact of being in a city.

  39. Gravatar of david david
    11. March 2013 at 02:01

    Also, another method for the land tax is for the state to straightforwardly own some % of the available land and then rent it out.

  40. Gravatar of dtoh dtoh
    11. March 2013 at 02:24

    Benjamin,
    Flat sales tax will never fly politically. You need a PCT instead. On the principle of KISS…

    1) Implement it as a sales tax with businesses exempted (anyone with a valid business EIN).

    2) Give each consumer a card with a $15k (or $20k) annual balance on it. Deduct the amount of any purchase from the balance. Anyone with a positive balance pays no sales tax. Anyone without a card or without a positive balance pays the tax.

    Forget PIGOU… it’s just a paternalistic big brother scheme to tell other people what they should or shouldn’t do.

  41. Gravatar of Master of None Master of None
    11. March 2013 at 04:56

    Scott,

    The inheritance tax isn’t meant to penalize the wealthy dead; it is meant to prevent the rise of an unjust elite.

    What is more unfair than inherited wealth? It’s like a rigged lottery.

    Research suggests that, to the extent wealth is perceived to have been acquired unfairly, there is a negative impact on the desire of the “outsiders” in a society to work (i.e. the system is rigged against us, so why try at all?).

    See Chapter 13 in Shiller/Akerlof’s “Animal Spirits” (http://amzn.com/069114592X)

  42. Gravatar of John John
    11. March 2013 at 05:21

    Since the goal of all economic activity is to eventually consume, it shows a bias against individual choice to prefer a consumption tax over a tax on income or capital in order to stimulate saving. Economists are smuggling in a value judgement here, implicitly assuming that more growth is better. If people prefer leisure and present consumption over saving, hard work, and economic growth, why is it legitimate to try and over ride their preferences in the name of economic development?

    Also, sales taxes become taxes on income as the businesses the government levies them on have to increase their prices when there has been no change in demand. This move away from the purely market determined price lowers the incomes of those involved in the industries taxed as well as those that produce capital goods for those industries.

    The only truly effective way for fiscal policy to have a positive impact on the economy is to leave more resources in the hands of the private sector by cutting government spending if the government is running a deficit or cutting taxes if the government is running a surplus. The total take out of the private sector is much more important than how it’s taken.

  43. Gravatar of A consumption tax is a wealth tax | Fifth Estate A consumption tax is a wealth tax | Fifth Estate
    11. March 2013 at 05:24

    […] See full story on themoneyillusion.com […]

  44. Gravatar of Geoff Geoff
    11. March 2013 at 05:50

    John:

    You just “smuggled in a value judgment”.

  45. Gravatar of ssumner ssumner
    11. March 2013 at 05:57

    Jon, I don’t understand the question.

    Greg Hill, Yes.

    dtoh, I mostly agree (except point 2)

    Greego, Yes I would. (Of course most tax carbon more highly.)

    mijj, 1000 milionaires–why to you ask? I once did a post entitled 100 million millionaires. I’m all for policies that create lots of millionaires.

    Master of None, You claim that it’s more ethical for the rich to blow all their wealth on personal consumption, rather than to give a portion to their children. That’s fine, but I have a different value system.

    No one really deserves anything that happens to them in life. No one deserves to be born in Norway instead of Moldova. I’m a utilitarian, trying to make the best of a bad world.

    John, You said;

    “Since the goal of all economic activity is to eventually consume, it shows a bias against individual choice to prefer a consumption tax over a tax on income or capital in order to stimulate saving. Economists are smuggling in a value judgement here, implicitly assuming that more growth is better.”

    You need to study tax theory. All taxes reduce the consumption of the person who pays the tax. A consumption tax is neutral between current and future consumption, whereas an income tax taxes future consumption at a higher rate than current consumption.

  46. Gravatar of Master of None Master of None
    11. March 2013 at 06:04

    Scott,

    You say: “No one really deserves anything that happens to them in life.”

    Do you deny that people respond to incentives? Our political economy is based largely on the “pursuit of happiness”. The expectation that the “pursuit” (i.e. effort) will lead to “happiness” (i.e. wealth), is one of the pillars of capitalism (or so I have been taught).

    The perception of fairness is incredibly important, especially during the early part of one’s career (this is likely related to the research that suggests that youth unemployment impairs the lifetime prospects of the victims).

    Cannot a consumption tax and an inheritance tax be modeled such that a person is agnostic to spending vs. saving as she approaches end-of-life?

  47. Gravatar of Geoff Geoff
    11. March 2013 at 06:08

    J:

    “If a bad incentive exists for all taxes, then, when comparing two taxes, we might as well continue the discussion without talking about that bad incentive.”

    Might as well? Please. That’s exactly the kind of sloppy thinking that leads to a creeping in of bad incentives that become institutionalized and the status quo, so no reason to even consider them. That is not the position an intellectual takes. That is a position a lazy opportunist takes.

    “By the way, you may not be aware of the definitions of social benefit and social cost, but the social benefit is the sum of individual benefits and the social cost in the sum of individual costs.”

    I am aware, thanks. I disagree with it. Disagreeing with it does not mean I am not aware of it.

    One cannot add individual benefits nor individual costs together. They are incommensurable. If you prefer a hamburger over $5.00, such that you trade your $5.00 for a hamburger, while I prefer $5.00 over a hamburger, such that I trade my hamburger away for $5.00, then there are both benefits and costs, but there is no way to add the benefits nor add the costs. You can’t add the benefits of one person’s hamburger and another person’s $5.00, and you cannot add the costs of one person’s $5.00 and another person’s hamburger.

    Social benefits and social costs are figments of the imagination. They are not real world concepts. They are ideological tools designed exclusively to justify the benefiting of some people at the expense of other people by force, where the more powerful group of people who get what they want are considered justified using whatever excuse serves at the moment.

    Prakash:

    “You cannot escape paying land rent. You pay it to the govt or the landlord (and the landlord pays to the govt).”

    There is a huge difference between land rent, and land tax. For land rent, if one owns the land, one does not have to pay “rent”. One is also free to allow others to use the land at no charge, if one wants.

    For land tax however, even if you owned the land you are still forced to pay land tax.

    You can’t just look at the money flows in the purely physical sense, and conclude that because there are money flows with land rents, and money flows with land tax, that there is no fundamental difference between the two. You have to take into account the people’s minds and intentions, and whether or not the flows of money are consistent with the people’s intentions.

    “There will be a tendency in a land value tax regime for land to be much more equally distributed.”

    One can always point to a more extreme hypothetical standard to make the desired program seem less extreme, and more moderate, fair, etc. You’re not saying anything of substance there. You’re just saying “It is less bad than this worse thing I have in mind.”

    “Almost no one whose specific comparative advantage is not in property management/supervision will own extra land for speculation purposes.”

    Speculation is a healthy, productive activity. Why in the world are you knocking it as if it is something degraded?

    “This will lead to lower land prices and other people buying their own property.”

    Lower than market land prices is not inherently a good thing. It’s similar to lower than market rental prices for apartments.

    “In the long run, there will be a lower one time payment (the purchase price) and a much higher ongoing payment(land tax to government). This arrangement is also preferable from the perspective of resilience.”

    I don’t worship the resilience god.

  48. Gravatar of Master of None Master of None
    11. March 2013 at 06:15

    I would also argue that utilitarians should invest in policies that promotes trust.

    Without trust (and its friend fairness), there is not much utility.

  49. Gravatar of Geoff Geoff
    11. March 2013 at 06:18

    Dr. Sumner:

    “No one really deserves anything that happens to them in life.”

    That means nobody deserves either bad thing or good things to happen to them (since “anything” includes both good and bad things).

    “No one deserves to be born in Norway instead of Moldova. I’m a utilitarian, trying to make the best of a bad world.”

    By your own account, whatever others receive from you that is good, and whatever others receive from you that is bad, they do not deserve any of it, since “nobody deserves anything that happens to them.”

    In fact, the entire meaning of “deserve” would become rather hollow. For if nobody deserves anything that happens to them, then nobody can ever receive what is deserved. If nobody can ever receive what is deserved, then deserve has no Earthly existence.

  50. Gravatar of Tyler Joyner Tyler Joyner
    11. March 2013 at 07:37

    Geoff,

    I think what Scott was getting at there was that the concept of “deserve” is already hollow. Do we “deserve” to be born in America, where even the poorest have a much better shot at becoming wealthy than much of the rest of the world? What about someone who is born with natural genius, and who then chooses to work hard and create a good product with it. Some people would say they “deserve” the reward from the hard work, but the truth is that the genius compounded the return on hard work exponentially. So yes, no one ever gets what they deserve.

    I feel like some commentors (not Geoff) are willfully misunderstanding Scott’s point about the estate tax. His point was that a rich old man who leaves his kids 20 million will be taxed on that money, while another rich old man who spent the 20 million on escorts and fast cars will not.

    The estate tax specifically punishes savers over spenders. By comparison, a consumption tax *will* get at the 20 million, either now if the old man spends it on escorts and fast cares, or later when his kids spend it if he leaves his fortune to them. If you want to soak the rich more, then raise the consumption tax and adjust the progessivity of things like the EITC to offset the effect on the poor. At least that way you’re not overtly punishing people for saving money.

  51. Gravatar of W. Peden W. Peden
    11. March 2013 at 12:28

    Doesn’t a carbon tax in a developed country act as a tax on the “externality” of NOT offshoring to highly carbon-intensive countries like India and China?

  52. Gravatar of Rich C Rich C
    11. March 2013 at 13:06

    “I’d tax people on the basis of how many resources they consume, or take out of society, not what they produce.”

    While I’m sympathetic to your consumption tax arguments, this “take out of society” line is kind of puritanical. Besides fossil fuels and nuclear fuels, by and large all resources are either (1) recyclable (metals, crystal minerals) or (2) renewable (paper, beef, cotton, fish, wine). So long as we don’t overexploit renewable resources, e.g. limit our fisheries to a sustainable output, consumption is participation in a non-zero sum “resource cycle,” rather than “taking out of society.” Except of course the input of non-renewable, non-recyclable fossil and nuclear fuels. But then you could narrowly tax those inputs.

    Second, Consumption Spending and Investment Spending are both little-c consumption of resources. Investment spending on a forklift consumes resources just like buying a personal car. The ultimate goal of “Investment consuming of resources” is to time-shift (if not also grow) some “Consumption consuming” into the future, and an individual is consuming resources to achieve that goal. Of course, I share your desire to grow the economy (so we can all “take out of society” more and more each passing year! (kidding)), and agree delayed-gratification is an important value/behavior, but in a sense everything is little-c consumption.

  53. Gravatar of Suvy Suvy
    11. March 2013 at 13:26

    I agree completely. Just from a practical standpoint, why does it make sense to tax income? You’re taxing productivity and production in general.

    I’d also like to add a tax to OTC derivative transactions, the creation of asset backed securities, and the use of leverage(this tax rate should be increasing as the amount of leverage increases).

  54. Gravatar of dtoh dtoh
    11. March 2013 at 16:27

    Scott,

    1) It’s trivial to convert wage income into capital income and avoid a wage tax.

    2) High wage income often comes from years of investment (practicing baseball, going to medical school, etc). How is that different from sweat equity in business that then generates a capital gain.

    3) What is the downside of getting rid of the wage tax.

    I think you’re just married to the wage tax out of habit.

  55. Gravatar of Lake Atlantic-begone | It Don't Mean Much, These Seats are Cheap. Lake Atlantic-begone | It Don't Mean Much, These Seats are Cheap.
    11. March 2013 at 19:04

    […] Scott Sumner’s magnum opus on taxes, and recent commentary on the wealth tax. Scott and I are on the same page, but I should note that I jumped the gun in an […]

  56. Gravatar of Don Don
    11. March 2013 at 22:07

    People get value from govt. in 3 ways:
    1) transfers (welfare, public school,…)
    2) protection of wealth (rule of law)
    3) rent seeking and regulatory capture

    Seems like 2 of 3 are directly related to wealth, so we should tax wealth. Buying a Congressman depends on cash, not acres. 1% of wealth is “fair”.

  57. Gravatar of Prakash Prakash
    11. March 2013 at 23:18

    Geoff,

    I mentioned the relatively equitable ownership of land as a counter to your previous point where you said that people not owning land would outvote people owning land and lead to an ever increasing tax burden. That is where it might be worth knowing that one can’t escape paying a land tax.

    Calling the price of land after the imposition of a land tax as a lower than market price is a sleight of hand. It is a standard economics result that land taxes distort markets less . All prices today, of all goods and services, are set in the context of the taxes that government imposes. If government spending remains the same and the government decides to shift the taxes from income to externalities and land, then in the absence of price controls, the new prices that will arise will be the new market price.

    I realise that I sneaked in some assumptions of my own when i said that prices of land will reduce. With the removal of income tax, there may be areas that face a greater inflow of money and maybe even a higher land price, i realise I can’t say that prices will reduce for sure. Sorry for any confusions in that regard.

    I don’t think speculation is a mean activity. Sitting on land without any value addition, allowing its price to rise as infrastructure paid for by income taxes raises its value, is an activity akin to free riding. The downside is too less.

    Anyway, I had long given up on persuading people on the values of a land tax and hoping that charter cities and seasteads pick up. But seeing the recent success of Prof. Sumner in spreading the MM ideas, I am hoping that even good old persuasion might work sometimes.

  58. Gravatar of ssumner ssumner
    12. March 2013 at 06:25

    Master, You said;

    Cannot a consumption tax and an inheritance tax be modeled such that a person is agnostic to spending vs. saving as she approaches end-of-life?”

    Yes it can. A zero inheritance tax.

    Tyler, You said;

    “The estate tax specifically punishes savers over spenders. By comparison, a consumption tax *will* get at the 20 million, either now if the old man spends it on escorts and fast cars, or later when his kids spend it if he leaves his fortune to them. If you want to soak the rich more, then raise the consumption tax and adjust the progessivity of things like the EITC to offset the effect on the poor. At least that way you’re not overtly punishing people for saving money.”

    Well put!

    W. Peden, I agree that some of that would occur. Beut we can only solve our own problems, and have to hope that eventually other countries will cooperate. China is already ahead of the US on carbon taxes, as is Europe.

    dtoh, You said;

    “1) It’s trivial to convert wage income into capital income and avoid a wage tax.”

    Then why don’t I or anyone else I know do that? All tax systems can be evaded, but I think the main problem here is that Congress has explicitly exempted certain types of wage income at firms like hedge funds from the wage tax. If they didn’t do so, I’m confident the IRS could collect wage taxes on the income of hedge fund managers.

    Regarding human capital formation, education is already heavily subsidized, so that reduces the bias against human capital formation. But I agree it is a bias.

    I doubt that a VAT could raise enough revenue and be sufficiently progressive to work politically in the US. It could play a role, and be made somewhat progressive, but unless we cut government spending to Singapore levels, I don’t see it raising enough money.

    Don, You said;

    “Seems like 2 of 3 are directly related to wealth, so we should tax wealth.”

    As I said in my post, a consumption tax is a wealth tax–so you should favor consumption taxes.

  59. Gravatar of ThaomasH ThaomasH
    12. March 2013 at 11:31

    If we want a progressive consumption tax why not have a progressive consumption tax, which would be a tax on all income (wage, and investment) minus net asset accumulations at a uniformly progressive rate. If certain forms of consumption are thought to be especially worthy and not taxable (charitable deductions? State income taxes?) those could be given partial tax credits.

  60. Gravatar of dtoh dtoh
    12. March 2013 at 16:11

    Scott,
    You said,
    “Then why don’t I or anyone else I know do that?”

    Because with their current tax system and tax rates, there is little economic benefit to do so. If you eliminate corporate and capital taxes, everyone will incorporate, and pay themselves a dividend instead of a wage.

    You also said,
    “I doubt that a VAT could raise enough revenue and be sufficiently progressive to work politically in the US. It could play a role, and be made somewhat progressive, but unless we cut government spending to Singapore levels, I don’t see it raising enough money.”

    I don’t remember the numbers exactly but let’s say GDP is 15T of which 12T is PCE, of which 80% is non-housing, leaving a tax base of 10T. From this deduct $10k per person ($40k for a family of 4) as a deduction. That leaves 7T of taxable income. A 35% tax rate will get you around $2.5T in revenue (roughly equivalent to total current federal revenue under the current tax system).

    Don’t see why this won’t work

  61. Gravatar of ssumner ssumner
    13. March 2013 at 05:04

    ThaomasH, Too complex, a progressive payrioll tax does the same thing, and is far simpler.

    dtoh, As I said many times, all income from your own firm would be assumed to be wage income unless you could prove otherwise. So that’s simply not an issue. People would not incorporate. It would be complex handling the taxes of actual self-employed people, but it’s already incredibly complex–so nothing would change there.

    I know someone who got a lot of stock options from their company, and the IRS treated it as wage income–they even had to pay FICA tax. So I’m not proposing anything far-fetched here.

    You may be right about the VAT. But no European country has been able to raise even half that much from the VAT. Tax evasion is a big problem as rates rise. The level of progressivity would not be politically acceptable. By combining it with a progressive payroll tax you could get exactly the degree of progressivity needed to make it sell, and you’d get much lower VAT rates–reducing tax evasion. No need to even exempt the poor, they’d get a negative payroll tax offset at low income rates.

  62. Gravatar of Saturos Saturos
    14. March 2013 at 02:48

    Why are you against cigarette taxes? I thought you were a pragmatist?

  63. Gravatar of Geoff Geoff
    23. March 2013 at 09:52

    Tyler:

    “I think what Scott was getting at there was that the concept of “deserve” is already hollow. Do we “deserve” to be born in America, where even the poorest have a much better shot at becoming wealthy than much of the rest of the world? What about someone who is born with natural genius, and who then chooses to work hard and create a good product with it. Some people would say they “deserve” the reward from the hard work, but the truth is that the genius compounded the return on hard work exponentially. So yes, no one ever gets what they deserve.”

    This kind of argument implies that people have some sort of existence prior to their conception/birth. The ghostly me exists before I’m born, and I got dealt an unlucky bad hand by taking a human form in Zimbabwe as opposed to Greenwich Village.

    If one understands that the world is heterogeneous, that humans are different, and that humans are able to rank different external objects and concepts in terms of desirability/value, then to say that people don’t deserve to be born into relatively undesirable starting points, would require the world to be homogeneous, and for humans to be identical clone-like drones.

    Everyone cannot be born into relative poverty, and everyone cannot be born into relative wealthy..ness. If everyone were born into the same level of poverty, there would be no relative poor and relative rich. If everyone were born into the same level of wealth, there would again be no relative poor and relative wealth.

    A world of heterogeneity, and human values that rank such heterogeneity into higher and lower values, necessitates people to be born in relatively impoverished and relative rich families. I honestly do not see the problem with this, because I have accepted that the world is not a homogeneous place.

  64. Gravatar of RickG RickG
    24. March 2013 at 20:24

    “Taxes on land (by acreage, not value, with the tax rate varying by zip code.)”

    You did pick the best tax, but doing it by acreage and not value defeats the purpose. The purpose is to recover the unearned increment, the value created by public and/or community investment, which can in turn finance those investments. Taxing land by value gives the state incentives to fund those projects that increase land values, a win-win for all. And even within zip-codes, land value for the same acreage varies tremendously.

  65. Gravatar of Asymptosis » “Saving” ≠ “Saving Resources”* Asymptosis » “Saving” ≠ “Saving Resources”*
    7. April 2013 at 09:14

    […] You can see this thinking played out in Scott Sumner’s justification for consumption taxes: […]

  66. Gravatar of TheMoneyIllusion » There is no “paradox of thrift,” and even if there were it wouldn’t matter . . . TheMoneyIllusion » There is no “paradox of thrift,” and even if there were it wouldn’t matter . . .
    8. April 2013 at 12:10

    […] of the common store of goods and not according to how much he contributes.” In response to a very similar argument from Scott Sumner, a smart Steve Roth post replies that financial saving is not the same as saving real […]

  67. Gravatar of Angry Bear » Do Savers “Take Resources out of Society”? Angry Bear » Do Savers “Take Resources out of Society”?
    27. April 2013 at 08:34

    […] a previous post, “Saving” ≠ “Saving Resources”*, wherein I question Scott Sumner’s notion that people who spend and consume more (save less) take resources “out of […]

  68. Gravatar of Asymptosis » Do Savers “Take Resources out of Society”? Asymptosis » Do Savers “Take Resources out of Society”?
    27. April 2013 at 08:36

    […] a previous post, “Saving” ≠ “Saving Resources”*, wherein I question Scott Sumner’s notion that people who spend and consume more (save less) take resources “out of […]

  69. Gravatar of Series on tax: Part 5 – A primer on consumption tax | TVHE Series on tax: Part 5 – A primer on consumption tax | TVHE
    27. June 2013 at 12:00

    […] preferences we can use variable consumption taxation as a form of redistribution.  The idea of a progressive consumption tax is interesting.  However, the goal in this article was to make consumption tax relatable to forms […]

  70. Gravatar of The Free ME Iniative | Dirigo Blue | Maine's Source for Progressive Political News The Free ME Iniative | Dirigo Blue | Maine's Source for Progressive Political News
    5. September 2013 at 07:07

    […] more tempered than others in their support) by numerous economists (read here, here, here, here, here)””though there are some detractors (here) and others who are skeptical of it.  Adoption by the […]

  71. Gravatar of The Free ME Initiative | Pine Treeconomics The Free ME Initiative | Pine Treeconomics
    23. September 2013 at 09:44

    […] tempered than others in their support) by numerous economists (read here, here, here, here, here)””though there are some detractors (here) and others who are skeptical of it.  Adoption by the […]

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