Can anyone explain the proposed border tax/subsidy?

It seems like there are new questions being raised almost every day.  Previously I asked whether the border tax/subsidy scheme would apply to service imports and exports.  I never got a clear answer.

John Cochrane raises an even more important issue.  The House proposal is not a stand alone tax and subsidy, but rather a revision of the corporate income tax. Here’s Cochrane:

The corporate tax reform question has gotten mixed up with the border adjustment issue. Several readers have asked for my opinion. I have to admit I’m confused. Feldstein likes it Summers hates it. If sold as a VAT, which is border adjusted it makes sense. But it’s not a VAT — wouldn’t apply to non-corporate business and, I hope dearly, not to direct imports and services. When I read some of the other blogs it seems like a complex mess ripe for exploitation by clever tax lawyers. Perhaps it’s not as bad as a uniform tariff (not much could be worse), but that’s weak praise.

Anyway, I’ve spent a day or so trying to figure it out, and can’t get to solid ground. That by itself seems an important weakness. I’m not the smartest person on earth, but I am a reasonably trained economist, and I have put a day into figuring this out. Tax reform ought to be really simple, and transparent to the American people, if for nothing else to put out the smoldering fire that people feel the system is rigged and fancy people with fancy lawyers are getting away with murder.

I buy stuff directly from overseas and have it shipped to my house.  I’m not a corporation—will I have to pay a border tax?  Do I have to report eBay packages to the Treasury?  If John’s right that this only applies to corporations, it will create massive distortions.  And if the House GOP can’t get someone like John Cochrane to understand their proposal then it deserves to fail.

Update:  Ant1900 directed me to a appear by David Weisbach, which is outstanding.  Looks at all of these issues in detail.  Best tax paper I’ve ever read.

I also recommend Cochrane’s discussion of the corporate income tax, which is excellent.  We both favor consumption taxes.  Some of his commenters suggested that consumption taxes are regressive.  That’s not true, they are proportional to consumption.  Yes, they are regressive if compared to income, but since income is a meaningless concept, you want to compare them to consumption, which is what matters.  The optimal tax system is something like the following:

1.  Start with Pigovian taxes on negative externalities (such as a carbon tax), which produce a deadweight gain.

2.  Add a small land tax.  The rate should be by area, not value, with different rates for each zip code, depending on average property value by zip code.

3.  There should be a 25% VAT, with an exemption for education and training classes.  That levels the playing field between human and physical capital formation.

So far the tax is roughly proportional.  But it should be strongly progressive for utilitarian reasons.  That is achieved with the fourth leg of the system:

4.  A steeply progressive wage tax, that goes from strongly negative rates for low wage jobs to strongly positive rates for high wage jobs (perhaps topping out at 75% for wage earners making more than $100,000,000/year.)  Recall that in the long run a wage tax is identical to a VAT—they are both consumption taxes.

If needed, of if negative wage taxes are too administratively complex, the additional progressivity can come from a (modest) lump sum rebate to people over 18, so that no one below the poverty line has to pay any VAT.

In my proposed system, most people with wage jobs (like me!!) don’t have to fill out any 1040 forms.  Self-employed and those with large capital income would still need to do tax forms, to make sure wage income is not being falsely classified as capital income. (I.e. “capital income” from companies that employ you should be viewed as wage income, unless proven otherwise.) I hope it goes without saying that there are no deductions for business lunches.  That’s consumption.

That’s my federal tax system.  Local governments like New York City currently have highly regressive property taxes, where the rich pay a far lower rate of tax on their property than the poor.  That should be reversed, those $100 million penthouses should pay higher rates of property tax than Archie Bunker.



46 Responses to “Can anyone explain the proposed border tax/subsidy?”

  1. Gravatar of Scott Freelander Scott Freelander
    28. January 2017 at 11:59

    Not surprisingly, since at least some economists can’t seem to get their heads around this border-adjustment tax, I can’t either.

    However, it seems Miles Kimball had a much simpler idea for how Trump can boost exports that may be far less risky. His idea is to boost US savings by making employee 401k contributions automatic by default. That would lower the value of the dollar. which Trump seems to want to do.

    Then, I say just eliminate business income taxes. Better to eliminate than create any room for legislators and lobbyists to come together on corporate tax changes in the future.

  2. Gravatar of Jose Jose
    28. January 2017 at 12:00

    75% above $ 100k ? Doesn’t that hurt the “upper middle” class, and by that I mean workers who are not company owners and live from just one (high) salary?

  3. Gravatar of Tim M Tim M
    28. January 2017 at 12:10

    Jose, $100 million…

  4. Gravatar of Potato Potato
    28. January 2017 at 12:14


    Scott said $100 million. Which in no way is middle class. I’d be interested to know how many people in the US make that much in wage income. My understanding is that anything near this level is usually classified as capital income: stock options for CEOs, or buy in options for investment bankers, or carried interest for hedge fund managers.

    I’d be surprised if anyone/company is stupid enough to pay 100 million in wages with the current system. Of course, under Scott’s system these would be reclassified as wages.

  5. Gravatar of ant1900 ant1900
    28. January 2017 at 12:16

    This is the best source material that I am aware of:

    Here’s the Tax Foundation analysis:

    Paper by David A. Weisbach:

  6. Gravatar of Christian List Christian List
    28. January 2017 at 12:34

    Recall that in the long run a wage tax is identical to a VAT—they are both consumption taxes.

    So why do you need both in your system?

    And what do you mean by “wage” tax? What about capital gains? You meant all income, right? Not just wages.

  7. Gravatar of Steven Kopits Steven Kopits
    28. January 2017 at 12:46

    The border adjustment tax exists as a miracle source of tax revenues for the Republican Party. In theory, the increased tax is offset by an appreciating dollar, such that Germany, Japan and Korea pay the tax, and not the US consumer. Should the dollar fail to fully appreciate, however, it would be one of the biggest consumer tax increases in US history, and the Tea Party would be wiped out at a stroke.

    As proposed, the BAT would not apply to direct imports. Thus, we would start buying our TVs direct from Samsung Korea. Of course, if we sell that TV, would could not deduct the cost of sales.

    VAT’s are not border adjusted, any more than New York sales tax is. Any good or product sold in a VAT country is subject to that VAT. A BAT applies only to imported goods (and exported goods). Domestically made products are not subject to BATs. VAT, by contrast, is applicable to both domestic and foreign goods, otherwise high European VAT rates would feature as the central topic of US trade talks.

  8. Gravatar of Steven Kopits Steven Kopits
    28. January 2017 at 12:56

    I lived for many years in high VAT Hungary. I found the VAT to be materially regressive.

    First, every Tom, Dick and Harry gets their own LLC to have a deduction vehicle. If I buy a computer, is that for personal use, or corporate use? An iPhone? A TV? A bed? A car? In this game, the little guy gets hosed, and the clever guys find ways to deduct the VAT. It’s a sucker’s game in reality.

    In addition, of course high end sales flee the country. If before you could afford a Lexus, it’s now only a Toyota. As a result, items like electronics, clothes and jewelry tend to be purchased abroad and more or less smuggled in. Who travels like that? Upper income people.

    If we allow the declining marginal utility of wealth and income, a VAT is highly regressive. The difference between owing a Camry and a Maybach is not a big as the difference between taking the bus and owning a Camry. A VAT goes a long way to insuring that many can’t own even a Camry.

  9. Gravatar of morgan warstler morgan warstler
    28. January 2017 at 13:02

    The first and primary tax should be LVT. It’s rate should as much as possible before DWL.

    It should be as close to 100% of Land value gains yearly as possible. This FORCES ALL NIMBY TO END and makes this actually passable… bc everyone in red states and the poor in blue states ALL get favor shifted toward them.

    Set rates high enough that Malibu becomes Miami.

    Land is the first function of govt and lan owners should bear as much of weight of tax a of govt as possible.

    THEN, VAT the rest to get 20% of GDP total.

    Have states collect it and pass DC it’s share, because to do this we need to 38 states to do Convention of States and pass 28A which requires repealing 16A.

    Ted Cruz can deliver it.

    This is optimal and doable, not just theoretical, or at least MOST doable. GOP already controls 37 states.

    Border adjustment will likely be broad not narrow, remember purpose is to HURT Mexico, break her will and adopt 1st world property rights.

  10. Gravatar of Becky Hargrove Becky Hargrove
    28. January 2017 at 13:41

    you may live in Texas now but you’re NOT a native Texan and not every Texan wants to hurt Mexico.

  11. Gravatar of Scott Freelander Scott Freelander
    28. January 2017 at 14:10

    This is one of those rare cases I agree with Morgan. A federal land value tax makes a lot of sense to me.

  12. Gravatar of Effem Effem
    28. January 2017 at 14:42

    Agree that the border tax is silly. Highly disagree that income is a meaningless concept. Wealth (not consumed) brings great status and as best I can tell humans care a lot about status. Unspent income (wealth) has many tangible benefits as well: if we get into a legal dispute and you know I have the wealth to out-lawyer you, you are much more likely to back down without me having “consumed” a penny. If we both donate $x to a cause but they know I have ample reserves behind that, I will receive preferable treatment and have more influence. Hardly meaningless.

  13. Gravatar of ssumner ssumner
    28. January 2017 at 15:26

    Ant1900, Thanks. That Weisbach paper is awesome.

    Christian, No, just wages. No tax on capital income, which effectively double taxes wage income.

    Steven, I’m trying to understand how the dollar would not appreciate. We have a lot of experience with border adjustments for VATs, and the currency always seems to adjust.

    I agree that tax evasion is a problem for VATs, as it is for other taxes as well. The best solution is small government, as in Singapore.

  14. Gravatar of ssumner ssumner
    28. January 2017 at 15:28

    Effem, I said income is meaningless, I agree that wealth is meaningful. But wealth is basically present value of future consumption. So if you think wealth matters, you should favor a consumption tax.

  15. Gravatar of anon anon
    28. January 2017 at 16:30

    Morgan, interesting comment. My guess is that Scott suggested only a “small” land tax because LVT as a revenue source is best directed to local and state governments. Plus a land tax might have to be phased in gradually over a rather extended time, in order to avoid undue disruptions to the existing system. (Of course ‘land’ here should also include other sources of fixed rent, such as spectrum rights and the right of extracting natural resources. Also, in practice it’s just not possible to tax 100% of the land rent, resource rent etc. We have to content ourselves with just grabbing a big chunk of it, and having that be a stable and efficient tax base.)

  16. Gravatar of dtoh dtoh
    28. January 2017 at 16:37


    Simpler is better. Do it this way.

    1. A national sales tax of between 20 to 30%. Everyone gets an exemption on their first $5 to $10k of purchases. Business purchases are exempt. Nothing else is exempt. This is far simpler than a VAT and essentially the same thing if

    2. State and local governments get revenue through a fixed assets tax – land, buildings, airplanes, (anything over $50k). States are free to make it progressive if they want, which I would favor.

    3. No taxes whatsoever on capital, earnings or income of any kind.

    And don’t tell me the numbers don’t add up or that there would be excessive evasion. I’ve already answered those objections in previous comments.

  17. Gravatar of dtoh dtoh
    28. January 2017 at 16:43


    Repeat of my comment from two years ago.

    Let’s look at the numbers.

    – US Federal Tax Revenues $3 trillion
    – Less Social Insurance Premiums $1 trillion (assume this will continue to be funded with a payroll tax)
    – Federal Revenues net of Social Insurance $2 trillion

    – US PCE $12 trillion
    – Less exemption $3 trillion ($10k per person)
    – PCE after exemption $9 trillion

    So you need an average 22% tax rate with a $10k exemption (19% with a $5k exemption which BTW is less than the EU average VAT rate of 19.5%).

    1. You said, “Also your percentages are for price inclusive of tax, thus a 33% tax would be like a 50% retail sales tax.”

    No it’s percentage of the pre-tax price. As a percentage of price inclusive of tax it would be 18% (15% with a $5k exemption.)

    2. You said, “The 2.9 ratio he provided does sometimes exclude items like food (not always) but even with everything included the ratio is surprisingly high.”

    Per Jim’s figure, exemptions and lower rates “equal 36% of collections compared to if the top rate was applied to everything.” Eliminating the exemptions and lower rates drops the ratio from 2.9 to 1.9.

    3. Jim further says, “The OECD reports an average VAT tax avoidance rate of 18%.” This is an overall rate. Countries like the UK with better enforcement report avoidance rates of 14%. Half of this is from “carousel” frauds specific to VAT systems that I described in my previous comment. Eliminating the VAT specific frauds reduces avoidance to 7% and further drops the ratio to 1.8

    4. PCE as a percentage of GDP is significantly lower in the EU than in US. 56% in France and Germany versus 68% in the US. Adjusting for higher PCE in the U.S. the ratio further drops to 1.5.

    5. Adding back in the $10k exemption, the ratio goes back up to 2.25 (or 1.8 with a $5k exemption)

    So summarizing… to achieve $2 trillion revenue (11% of GDP), you would need a 25% tax rate (or 20% with a $5k exemption), which is consistent with the numbers above after taking into account avoidance and fraud.

    With respect to the “implicit rent on owner occupied housing,” I have already stated that this could be captured with a fixed assets tax on any assets (houses, land, cars, jets) that are used for non-business purposes.

    Your point on education is well taken, but as you have said, government subsidies for education mitigates the distortion of a consumption tax on education.

    As for progessivity, I think you are wrong. In fact, I think the real objection to a progressive consumption tax would come from the trustafarians who would face higher overall taxes and from the lawyers and accountants who would need to find alternative “productive” employment. Regardless however, it would certainly be possible to make the system more progressive with additional rate level(s) for annual consumption in excess of a certain amount(s) which would be easy to implement with the “tax credit card” system, which I have suggested.

  18. Gravatar of Ur_humble Ur_humble
    28. January 2017 at 16:52

    If a VAT and a wage tax are the same in the long run, why have both?

  19. Gravatar of Arun Khanna Arun Khanna
    28. January 2017 at 17:00

    Could you expand on why a land area tax rather than one based on value?

  20. Gravatar of dtoh dtoh
    28. January 2017 at 17:03

    Steve Kopits,

    Good points. See my post.

    1. If people use things claimed as business expense (i.e. exempt from the the sales tax) for personal use, fine them or put them in jail. We already have a system for doing this.

    2. Apply the sales tax to any overseas credit card expenditures. Tax overseas purchases on re-entry to the U.S. Outgoing and incoming currency declarations on international travel. Transfers of funds to foreign countries are taxed unless investment in foreign financial assets are documented.

    Except for the outgoing currency declaration and tax on foreign credit purchases, all of this is already in place. The credit card and currency declaration can be easily put in place.

  21. Gravatar of B Cole B Cole
    28. January 2017 at 17:09

    Nice post.

    If anything, Sumner’s tax plan is still too complicated.

    How about a national sales tax, Pigou taxes, fossil fuels taxes, and a simple across the board 10% tariff on imports? Shrink goverment in half.

    Unfortunately I think Social Security payroll taxes have to stay in place (not enough revenues), although anti-recessionary FICA tax holidays financed by QE are good idea.

    A fun idea: a federal rax on land, but not on completely unzoned land.

  22. Gravatar of dtoh dtoh
    28. January 2017 at 17:21

    And BTW – The only advantage of House plan is that it keeps in place the tax bureaucracy….the IRS, accountants, lawyers, investment bankers, lobbyists, Congressional aides, academics, etc. Bid out a national sales tax to Visa or Amex, and all these over-educated workers who provide no real value can move on to productive work.

  23. Gravatar of jim jim
    28. January 2017 at 17:24

    The less wealthy live paycheck to paycheck. Refunding a vat tax at tax return time hurts them because they have to pay now reducing consumption or increasing debt and will not see the refund for up to a year.

    If business is vat tax free then there will be a lot of abuse, so much that will either be too expensive in money or political costs to enforce.

  24. Gravatar of d d
    28. January 2017 at 18:12

    i thought the BAT was on all domestic sales, or how do you avoid violating the WTO? and such a massive violation punished by essentially all countries being able to levy tariffs as large (or larger since there would be some time before the WTO ruled on the violation) than the the US BAT? and just curious how does the 10,000 exemption happen? when the average house hold income is about 50,000 nationally (and a lot lower in some states), how does it make it less regressive. seems like you would have to have a massive number of people to do this, and out sourcing this to states or credit card companies, is just one way to let the fox watch the hen house.
    and just what do we make in the US that doesnt have foreign sourced parts or materials? about all it seems to do is exempt services (great if your a banker or insurance company, not so good if make some thing. like gasoline say).

  25. Gravatar of mbka mbka
    28. January 2017 at 19:14


    you describe something quite close to the average European tax system. Taxes for the vast majority of people are simply wage taxes. No extra income tax forms are ever filed. And in some cases, capital income is not taxed either. Until a few years back for example, Austria had a regime where investment income was not taxed, as long as the holding period was over one year (this to prevent short term speculation). Eventually, and sadly, this was scrapped for “social” = envy reasons. Capital is now taxed at a flat 25% rate directly at the source. At least, this way it does not add any proressive effect to wage income, small consolation, and still no income tax form to fill out.

    As for the other effects of a VAT, bad incentives, I have seen them too, a la Steve Kopits, everywhere where there is a VAT. A 25% VAT is very high and VATs are very easy to evade, especially in services. So what you get is 2 things: 1) sophisticated people create companies to create deductions. Sometimes home ownership is enough, if you’re renting out space, to create the legal deductibility. 2) the simple guy just buys and sells without writing bills. I am not talking apples and oranges. I am talking root canals at the dentist, not being billed through the system. Entire house renovations too. Think of it, the consumer gets a 25% discount just by not insisting on a receipt. The company has no extra cost and since this is now undocumented income, they save on corporate tax too. A match made in heaven. So as a result, in many European countries, experts estimate 20% odd of the economy is not documented at all. I’ve heard stories of ski resort owners running around with suitases worth of “black” cash to buy cars etc. Much of the tax code in Austria is about sophisticated schemes to circumvent evasion. Example, the tax man taxes restaurant income by estimating it from the numbers of paper napkins consumed, not from the income declaration, which they’d never believe anyway. Mind you, this is Austria. Not Greece.

    Corollary 1, this is probably where the GDP differential between say, Germany and the US comes from. There quite possibly isn’t any. The “gap” is the part that’s not documented because of tax evasion. (often produced in “holiday” or other off time: no tax = greater incentive). High VATs are a major contributor to incentives for evasion.

    Corollary 2, the amount of VAT really changes the tax evasion. In Singapore, the VAT used to be 3% and I never saw attempts at evasion. Now at 7%, it starts already with questions of the kind “you need bill, boss?”.

  26. Gravatar of Tom Brown Tom Brown
    28. January 2017 at 19:14

    O/T: passing this along via a mutual friend:

  27. Gravatar of morgan warstler morgan warstler
    28. January 2017 at 19:24

    Becky, I don’t want to hurt Mexico long term, just hit them so hard short term they are forced to delete Article 27.

    Having a 3rd world on our border is unacceptable. Mexico MUST become #NewFlorida.

    Trump is well versed in both Mexico’s failure on property rights and on Henry Flagler. It is simply ridiculous to imagine that he wouldn’t trade the wall for:


    Yes, yes, this is vulgar and whatnot, but it’s:

    GOD’S (math) PLAN
    BEST for Mexico
    BEST for US

    And like so much in this world if it is not couched as WE WIN, YOU LOSE… it will not happen.

    The mistake people make is trying to topple the order of things. There is a hegemony in the US – the home team – team Trump…

    And we should happily tell them they are winning one for Western Civilization, that they are the side of right and the weaker colonized beta liberals and 3rd worlders have been defeated.


    Ah yes the losers. The ones who hate the way US History is taught.

    Too bad.

    The only other choice is Zombie Apocalypse and it ends with the same basic outcome except millions of dead zombies.

  28. Gravatar of Don Don
    28. January 2017 at 19:34

    A consumption tax without a wealth tax leads to a concentration of wealth. Since one of the primary purposes of government is to protect wealth, wealth should pay for half of all taxes. Consider it imputed consumption if you like. The other purpose of government is personal liberties. That is reasonable to pay for with a consumption tax.

    Also, we need to tax education, which priced at luxury good levels. I am sure we all would like to claim that our industry should be tax exempt, but govt. interference has already driven college costs to ridiculous levels.

  29. Gravatar of morgan warstler morgan warstler
    28. January 2017 at 20:24

    Progressive consumption taxes (for those who work) solves your concerns Don.

  30. Gravatar of dtoh dtoh
    28. January 2017 at 20:31


    After all the faux outrage, now that Trump has actually done something horrible (banned legal residents from returning to their homes in the U.S.), WTF don’t you write a post on it.

  31. Gravatar of Carl Carl
    28. January 2017 at 21:32

    “I agree that tax evasion is a problem for VATs, as it is for other taxes as well. The best solution is small government, as in Singapore.”

    I agree completely with your second statement. As to your first statement, I think that tax evasion is much less a problem for your first two kinds of taxes–Pigovian taxes on negative externalities and LVT–then for other kinds of taxes. They also require less government intrusion into people’s lives than the other kinds of taxes.

  32. Gravatar of Bob Bob
    28. January 2017 at 21:33

    An all VAT would be great for me: I spend a small percentage of my income, and plan to retire very early overseas: 25% is less than my effective federal tax rate already. This year, a change to that tax regime would have saved me 6 figures worth of federal taxes: Enough to buy myself a very nice luxury car for use in my European vacations.

    Or maybe the US would not be happy with me earning here and paying most of my taxes somewhere else.

  33. Gravatar of dtoh dtoh
    28. January 2017 at 23:01

    Or they could tax you on your overseas consumption, as I recommended in an earlier post.

  34. Gravatar of Brian Brian
    28. January 2017 at 23:08

    This report (linked) has surprisingly high estimates of the impact of tariffs.

    “A Trump tariff against all countries costs households in the lowest decile 53% of their annual income, while it would cost households in the highest decile 7% of their incomes. The tariffs would cost households in the second income decile 20% of their annual income”.

    Yet at the inauguration Trump said: “Protection will lead to great prosperity and strength.”


    Of course nothing is real until it has materialized but the complacency is a little surreal. Since Trump is often insincere I suppose another take on it is that it just won’t happen.

  35. Gravatar of Ray Lopez Ray Lopez
    28. January 2017 at 23:23

    Stupid is like stupid does. The entire country is up in flames over closing the border and our host is concerned about what tax he’ll pay for his Amazon package. Scott-Nero fiddles while US-Rome burns. As dtoh implies, no matter what the tax scheme is, gov’t still has to pay the bills, so it doesn’t really matter, a point missed by Ben Cole, who thinks that government will get smaller with a new tax scheme (I do like the GOP plan to make debt and equity more equal however, not to mention abolishing death taxes). As mbka says, and I can confirm occasionally living in Europe (I have many houses), a VAT simply creates a ‘two-book’ system. It’s routine for professionals to simply ask you: “do you want to pay tax or get a discount by me not writing you a receipt?” (I usually pay tax, which baffles them, just for fun; somebody has to pay). Waiting for a better Sumner post on Trump…

  36. Gravatar of Benjamin Cole Benjamin Cole
    29. January 2017 at 04:15

    Ray Lopez: you thrust a dagger into my very heart!

    My tax plan would not reduce outlays per se.

    I am advocating smaller federal outlays, including national security

  37. Gravatar of Benjamin Cole Benjamin Cole
    29. January 2017 at 04:44

    If anyone cares, the “trade deficits do not matter” stance is crushed and destroyed here:

  38. Gravatar of Scott Sumner Scott Sumner
    29. January 2017 at 07:33

    anon, Land taxes are difficult to do properly, which is why I suggested a fairly low rate.

    dtoh, There’s a reason almost all countries choose VATs over sales taxes, the latter is difficult to enforce.

    My exclusion of education assumed no subsidies, but the problem here is that the subsides are very unbalanced. The sort of private education that would be taxed is the least subsidized.

    Regarding no wage tax, keep in mind that the wealthy find it easier to evade consumption taxes than the middle class. Larry Ellison can easily buy his $500 million yacht in Panama, not so for the average middle class boat buyer. Yes, you might be able to catch some of that money, but so far we haven’t ended these shelters.

    I still don’t think your sales tax would collect 11% of GDP, and of course the government needs far more than that. Piled on top of state sales taxes, the evasion would be enormous.

    Also, don’t confuse “consumption” with “sales”, they are radically different concepts. Implicit rent on an owner occupied house is a big part of consumption, but is not “sales”. Sales of a used car doesn’t add to consumption.

    Ur, The wage tax adds the progressivity to the system.

    Arun, You don’t want to discourage improvements to a property.

    Ben, Why a tariff? That’s a silly idea.

    dtoh, The biggest problem with the House plan is that it keeps complexities like depreciation rules in place, eve though they are not needed anymore under the House plan. See Weisbach’s paper.

    You asked:

    “After all the faux outrage, now that Trump has actually done something horrible (banned legal residents from returning to their homes in the U.S.), WTF don’t you write a post on it.”

    I wrote one yesterday. Glad we agree that one was appropriate.

    mbka, You mean Europeans don’t tax interest income? That doesn’t seem right. Otherwise I mostly agree.

    Because of evasion, it’s better to have two tax systems (VAT and wages) rather than one. The best solution is low overall government spending, as in Singapore.

    Don, Wealth taxes don’t tax wealth, they tax saving. Consumption taxes tax wealth.

    Ray, I wish you and dtoh would pay attention, I did a post on Trump’s action yesterday.

    Ben, So let me get this straight. The protectionists are mad that foreigners don’t buy more of our cars, thus denying jobs to workers in the auto industry, and the protectionists are also mad that foreigners buy so many of our houses, thus providing work to our unemployed construction workers. America really has become a nation of crybabies.

  39. Gravatar of mbka mbka
    29. January 2017 at 08:27


    “mbka, You mean Europeans don’t tax interest income? That doesn’t seem right. Otherwise I mostly agree.”

    It depends on the country. Most countries do tax interest income through a one-off flat tax retained at the source, e.g. the bank or bond issuer. It’s often in the range of 25%. The tax is single, flat, and final, i.e. the remaining amount of interest paid out to the capital owner is NOT to be included in any further income tax statement. And yes, many Europeans never file income tax. The wage tax is deducted at the payslip and that’s it for tax matters. You’d have to apply to file a separate income tax form in Austria, and you’d do this only if you believe that you have unusual deductions not covered within the wage tax system. It’s a different matter for business owners of course, here you’d declare income the US way. But 90% of people are salaried and always were. They only ever see payslips with deductions already done. The never feel like they even made a tax payment because they never saw their gross income in the bank. They believe they made 2,500 Euro monthly and don’t quite realize that the employer paid out 5,000.

    And yes, until a few years back in Austria, your coupon payments or capital gains proceeds were not taxed, as long as you held the underlying investment for >1 year. It was a really smart solution, until social democracy decided they needed to plug another budget hole and fight for “justice” and “equality”.

  40. Gravatar of mbka mbka
    29. January 2017 at 08:37

    Edit:”your coupon payments or capital gains proceeds were not taxed, as long as you held the underlying investment for >1 year” AND it was reinvested through compounding.

  41. Gravatar of dtoh dtoh
    29. January 2017 at 09:05

    1. How is a sales tax more difficult to enforce. I have never heard that argument.

    2. Simple mechanisms that already exists (as noted in my commments) easily prevent Larry Ellison from buying a yacht tax free in Panama.

    3. Why wouldn’t it collect 11% (and where did this number come from?) Please address the specific numbers I’ve noted regarding avoidance and evasion. Why are be numbers wrong. How is there more incentive and to evade under a sales tax than under the current system. How would it be easier. In fact, exactly the opposite is true.

    4. Implied consumption of owner occupied dwellings. Did you miss my second point on a fixed assets tax?

  42. Gravatar of dtoh dtoh
    29. January 2017 at 09:07


    Your earlier post on immigration does not address the issue I raised. AT ALL!!

  43. Gravatar of Matthias Görgens Matthias Görgens
    29. January 2017 at 15:16


    What’s the advantage of adding a land tax by area as opposed to by value?

    I see that by value needs some teeth in the assessing—but once you got that roughly right, is there anything else that would be better with a tax by area?

    And I see that politically a land tax is hard to introduce—but are they are economic reasons not to set it to tax essentially all land rent?

  44. Gravatar of ssumner ssumner
    30. January 2017 at 08:13

    dtoh, The reason almost all countries use the VAT rather than a sales tax is that evasion of a sales tax is far higher. If the retailer hides sales from the government they save the tax on the gross amount, Under a VAT they only save the tax on the value added. The incentive to cheat is an order of magnitude higher for a sales tax, especially one as high as you are proposing.

    Matthias. The standard argument is that value-based land taxes discourage improvements which increase the value of land. Consider what Disney World did to the value of Disney’s vast land-holdings in the Orlando area.

  45. Gravatar of Effem Effem
    30. January 2017 at 13:19

    Scott, disagree that wealth is the NPV of future consumption. Put $100m in my account and I guarantee you I will reap all sorts of benefits (tangible and intangible) without ever spending a penny.

  46. Gravatar of ssumner ssumner
    31. January 2017 at 14:09

    Effem, Those benefits are called “consumption.” In any case, I think you missed the point. Nothing that is intangible can be taxed.

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