Taxing doghouses

Matt Yglesias is a well known liberal fan of progressive consumption taxes.  In this post, however, he foresees some practical difficulties in implementing such a tax:

Note also that while in principle I think we should tax consumption rather than income, the dividing line between consumption and investment can get a little fuzzy. A really fancy doghouse is arguably a form of residential investment, but in practical terms I’d consider it consumption.

I’m confused.  Doesn’t the price of a doghouse reflect the present value of future consumption services that it provides?  In that case it shouldn’t matter whether you tax the dog house at the point of sale, or whether you treat it as an investment good and tax its flow of housing services.

Obviously it’s usually easier to tax these things at the point of sale.  So what’s the problem?  Perhaps there are goods where it would be difficult to implement a consumption tax.  For instance, we usually don’t impose a sales tax on new single family houses, but instead tax the subsequent flow of housing services.  There are practical difficulties in implementing a progressive consumption tax, as with any other tax.  But unless I’m missing something, products like luxury doghouses would be fairly easy to tax.

Off Topic:  Noah Smith has a post arguing that a NGDP futures market run by the Fed might not generate the optimal forecast for NGDP, citing the Shiller argument that stocks swing far more than they should based on fundamentals such as future dividend flows.  I’m not at all convinced by Shiller’s argument (recently he’s done poorly in forecasting the market) and even if Shiller is right I don’t see how the argument applies to NGDP futures.  In the stock market most investors are long, and dividends are received far out in the future.  The NGDP market has a payoff in just one or two years, and investors are equally spread between long and short positions.  It’s clear that if stock investors get irrationally exuberant, stocks will tend to rise.  If NGDP futures investors got irrationally exuberant, it’s not clear it would impart any bias in the price of NGDP futures.  So Noah’s analogy seems pretty weak to me.  In any case, if the Fed really thought the market was getting bubbly, they would be free to counteract it with their own trades.  Bill Woolsey also responds to Noah Smith.

Update:  Speaking of taxes, I really liked this comment from Miles Kimball:

Let end with a point that ties into the concerns I raised in my first post “What is a Supply-Side Liberal?” The fact that employees are willing to put up with so much for the sake of keeping their jobs indicates just how valuable jobs are to the typical employee. Economists tend to use simple models with no preexisting distortions to illustrate the benefits of low taxes. In simple models with no preexisting distortions, workers actually don’t value their existing jobs much at all””they can always get another job. The fact that, in the real world, jobs are very valuable to people makes the destruction of jobs by taxes and unwise regulations much worse than if people didn’t value jobs.

The simple models are nice because what happens in the absence of taxes is clean and neat and attractive.  But the benefits of low marginal tax rates are actually much greater in more advanced models where, in ways I will discuss down the road, (a) imperfect competition is already leading firms to underproduce and (b) minimum wages, union power, occupational licensing, and the need to obtain worker cooperation lead to jobs being valuable to people, as jobs are valuable to people in the real world.

Most economists vastly overestimate the value of general equilibrium mathematical models (in both monetary theory and tax theory) and vastly underestimate the importance of thinking about complexity, of debating others in order to see the issues from many different perspectives.


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68 Responses to “Taxing doghouses”

  1. Gravatar of Martin Martin
    8. July 2012 at 05:21

    “Off Topic: Noah Smith has a post arguing that a NGDP futures market run by the Fed might not generate the optimal forecast for NGDP, citing the Shiller argument that stocks swing far more than they should based on fundamentals such as future dividend flows.”

    I think implicit in this type of argument is the nirvana-fallacy. NGDP futures are compared to some perfect alternative and it is simultaneously assumed that central bankers are equivalent to that perfect alternative.

    “For instance, we usually don’t impose a sales tax on new single family houses, but instead tax the subsequent flow of housing services.”

    Good thing too: you’d get a mess if you did the opposite. You’d have people building and demolishing houses or intermediate sales just to avoid or opt into the tax regime.

  2. Gravatar of dtoh dtoh
    8. July 2012 at 05:57

    Scott,
    See my clairvoyant last post on Singapore property rights in which I anticipated this issue. The solution is simple which is just to have a property (or fixed asset) tax on housing and other assets.

    This would be equivalent to a tax on housing consumption and could easily be made progressive …or not.

    Also it would be an easy way to delineate federal versus state/local taxes. Federal could be a consumption tax on non-fixed assets, which state and local could derive their tax income from property taxes.

  3. Gravatar of dtoh dtoh
    8. July 2012 at 06:07

    Scott,
    And while we are on the topic of progressive consumption taxes, another big advantage of a consumption tax is that it makes tax evasion much harder. With an income tax, a small business with a lot of cash receipts, can eliminate 100% of their liability by not disclosing 5 or 10% of their sales. With a consumption tax, that only eliminates 5 or 10% of their tax liability.

  4. Gravatar of 123 123
    8. July 2012 at 06:34

    Scott, please take a look at my discussion with Bill Woolsey in his blog about the issue
    Noah Smith has raised.

  5. Gravatar of Evan Soltas Evan Soltas
    8. July 2012 at 06:42

    Scott,

    Your comments at the end of the post about economic thinking and Miles Kimball’s are pretty encouraging. What paper(s), also, was/were Kimball referencing? It’s pretty important that, once one starts to introduce into simple models the more complex facets of real life — like the uncertainty Kimball mentions here, or the Mankiw paper on heterogenous preferences between income and leisure — they tend to result in increasing costs of high marginal tax rates and thus reduce the optimal level.

  6. Gravatar of dwb dwb
    8. July 2012 at 06:51

    there could be a lot of reasons futures do not generate an unbiased forecast (if its biased for tax or other reasons, its easy to adjust for that). However, i would expect the market to be about as volatile as TIPS and bonds (about 60 bps annually):

    http://research.stlouisfed.org/fred2/graph/?g=8ym

    of course, this shows volatility when the fed is *not* managing the economy very well, so this is an upper bound on volatility.

    even if it were twice a volatile, they would run 5%+/- 1.2% reasonable, depending on the size of *unanticipated* shocks.

    second, ngdp futures volatility would become a metric for central bank credibility (just as breakeven inflation is for the fed now to a certain extent).

  7. Gravatar of ssumner ssumner
    8. July 2012 at 07:18

    Martin, I agree.

    dtoh, As you know, I favor progressive consumption taxes.

    The state/federal split seems reasonable.

    123, I strongly disagree that investors would use an NGDP futures market for hedging. If there was any interest in that sort of market, it would already exist. There are derivatives in almost everything—except NGDP.

    Evan, Good question. I’m not sure–I’d ask Kimball, as he knows 100 times more about the tax literature than I do.

    dwb, Actually, under my proposal there would be zero volatility, as the Fed would peg the price, or perhaps I should say while the Fed is pegging the price. Once it no longer pegs the price, the price could move around, but of course it would not longer matter as it wouldn’t impact monetary policy.

  8. Gravatar of Lorenzo from Oz Lorenzo from Oz
    8. July 2012 at 08:34

    dtoh: I will repeat my concern with such taxes–they greatly increase the incentive to ration land use to drive up values and so revenues. That is, they fiscally reward generating supply side inflexibility. Not good.

    But, worse than that, the above then undermines the provision of infrastructure because it:
    (1) makes it more expensive to provide,
    (2) undermines the revenue benefit from providing it
    (3) increases NIMBY resistance to it.

  9. Gravatar of Saturos Saturos
    8. July 2012 at 09:45

    Federer just won Wimbledon. He has like every single record now. I’m off to bed now, night everyone.

  10. Gravatar of Neal Neal
    8. July 2012 at 09:54

    General equilibrium models are like the string theory of economics: potentially pretty mathematics, useless for predicting observations. “Not even wrong.”

  11. Gravatar of Mike Sax Mike Sax
    8. July 2012 at 10:40

    “once one starts to introduce into simple models the more complex facets of real life “” like the uncertainty Kimball mentions here, or the Mankiw paper on heterogenous preferences between income and leisure “” they tend to result in increasing costs of high marginal tax rates and thus reduce the optimal level.”

    I’ve got to admit I just don’t get supply side arguments. If there are so many costs why were the 60s such a boom with a 70% top MTR? I know it’s a mere empirical arugment but I can’t help but think that if you can have boom years like the 60s while doing all the things supply siders tell you are anthema that some overestimate the costs as well.

  12. Gravatar of bob bob
    8. July 2012 at 10:46

    The evasion of consumption taxes is hatd for some people, but very easy for others: Foreign vacations as tax dodges? How about retiring in Australia? Not to mention that black markets happen. To male every tax a consumption tax, we’d create great incentives to spend on such markets, like we see in Europe. Becoming a corporation for VAT dodging and underreporting of real prices for big ticket its are not uncommon in Spain and Portugal.

  13. Gravatar of Steve Steve
    8. July 2012 at 10:49

    Krugman, so close, yet so far:

    “Iceland did not engage in fiscal stimulus; it didn’t have to, given the kick from a huge depreciation of the currency.”

    “Iceland is a dramatic demonstration of the wrongness of conventional wisdom in these times…Iceland broke all the rules, and things are not too bad.”

    http://krugman.blogs.nytimes.com/2012/07/08/the-times-does-iceland/

  14. Gravatar of Tommy Dorsett Tommy Dorsett
    8. July 2012 at 10:56

    Scott – Speaking of doghouses : http://krugman.blogs.nytimes.com/2012/07/08/taxes-at-the-top/

    Do Krugman, P&S for a moment consider that the surge in after tax incomes were a supply side response to lower MTRs? I mean, the revenue share of GDP was no higher with those higher MRTs.

  15. Gravatar of Mike Sax Mike Sax
    8. July 2012 at 11:59

    If a consumption tax can be progressive a sales tax or flat tax are out of the question. I’ve seen some suggestions that could work-though the devil is very much in the details.

    It should be nothing like Herman Cain’s 9-9-9 which was anything but progressive

  16. Gravatar of Mike Rulle Mike Rulle
    8. July 2012 at 12:13

    Re: 60s boom.

    I do agree that real GDP growth over the long run does seem uncorrelated to party in power. But high MTR was much easier to legally avoid, so unclear what its effect was. Also, I have a hard time believing that a war economy (WWII being am extreme version) is an economic positive. It reminds me of the broken window fallacy. Even when war may be unquestionably necessary, economically it is a cost. For example, building bombs have two uses—creating economic destruction, or creating costs with storage etc. It may be possible useful technology does come from it, but it would have happened anyway I think. The 60s was marked by GDP expansion, but quick expansion of the “Great Society” and the Vietnam War makes me think it was not real economic productive growth equal to the measured GDP growth.

    Re: NGDP futures and price volatility.

    I assume Scot means the Fed will announce its target and keep that fixed. But since we want market fedback, I am assuming he does not mean the Fed will intervene in the futures markets to keep its price steady! Obviously, they can peg the target, but NGDP is not Fed Funds. If the Fed were to adopt NGDP targeting, there would be a pretty large market for its futures contracts. The point about its volatility is interesting. Normally, one would guess its price volatility would be comparable to actual measured historical NGDP volatility. But since this is the first time targeting would be a policy, one should expect its volatility to be lower than what we have seen historically—-assuming the Fed has the ability to actually create actions to achieve its target, something which remains to be seen since they have never tried it before. In the short run, of course, we will see volatility spikes and periods of low smooth price paths like any forward looking forecast translated to a price.

    Re: Consumption taxes

    Under the “no nirvana” rule of economic policy wishes, I am highly skeptical of any type of consumption or VAT tax. Unless it were accompanied by a constitutional amendment against income tax, personally I would be against it. My reasons I assume are obvious.

    Re: Shiller and irrationality

    I actually do believe there are times when you can place a high probability on prices being “irrational”. But these times are far and few between. Far less than Shiller assumes. His point, which on the surface is appealing, is that earnings are less volatile than prices. Or that dividends are less volatile than prices. That may be so. But I do not think free cash flow is less volatile than prices—-although I have no hard evidence, other than my own anecdotal observations. More telling, I believe, is he does not use FCF volatility in his analysis. FCF cannot be manipulated. Clearly earnings and dividends can. Now he may think certain policies can make economies more stable, but he seems to lead with the irrationality argument, not a bad policy argument. I strongly disagree with his approach, including his data mined 10 year trailing earnings approach to valuation.

    (Having said that, I remember when Cisco was valued at 500 bil in early 2000. I made some reasonable back of the envelope assumptions and then concluded the following. In order for its pricing to be correct at that time, one had to assume in 20 years time either a) Cisco would be larger than GDP (plausible in the sense that its products are sold worldwide) or that GDP growth would need to be near 10%. Since both seemed more than remote possibilties, not just by me but every sentient person, Cisco and about 20-100 other tech companies were irrationally priced. I rarely have a view on prices per se, but that was one of the few times I did).

  17. Gravatar of Mike Sax Mike Sax
    8. July 2012 at 12:46

    Mike Rulle

    “I do agree that real GDP growth over the long run does seem uncorrelated to party in power. But high MTR was much easier to legally avoid, so unclear what its effect was. Also, I have a hard time believing that a war economy (WWII being am extreme version) is an economic positive. It reminds me of the broken window fallacy. Even when war may be unquestionably necessary, economically it is a cost. For example, building bombs have two uses””creating economic destruction, or creating costs with storage etc. It may be possible useful technology does come from it, but it would have happened anyway I think. The 60s was marked by GDP expansion, but quick expansion of the “Great Society” and the Vietnam War makes me think it was not real economic productive growth equal to the measured GDP growth.”

    I wasn’t actually talking about party in power. On that basis the Democrats win hands down if we’re going by GDP and employment.

    You seem to be saying a few things about the 60s boom. One is thaat there was-you’re presuming-a high level of tax avoidance. If this were true I’d be interested to see the evidence.

    You also talk about WWII-surely teh 60s boom had nothing to do with WWII spending.

    My trouble with Supply Side arguments is that it seems that all the assertions are based on theories of what Laffer, Mundell, et al think happens with high MTRs.

    No one wants to get empirical about it. For example, I wonder if the reason you think there was more avoidance in the 60s is because Laffer presumes there will be when there are higher rates

  18. Gravatar of Jason Jason
    8. July 2012 at 12:56

    I was confused by Matt’s analogy too. The best sense of it I could make was that he thought of a doghouse like an addition or a deck. (He considers pretty much any structure on a property as a consumption good — at least for wealthy people.)

    Regarding the NGDP targeting I agree with you Scott, but inasmuch as I agree, it is because I see NGDP as following a relatively stable trend where over-predicting is not as damaging as under-predicting.

    http://research.stlouisfed.org/fredgraph.png?g=8yU

    And because of the stability of that trend in the face of wildly changing MTRs, regarding the Kimball comment, I don’t believe lower MTRs will have any positive effect on NGDP growth. There is probably a broad regime of MTRs that allow monetary policy to maximize sustainable growth (potential NGDP). However at large and small MTRs the resulting equality or inequality, respectively, will only lead to a lower potential NGDP (for rich countries, lowering NGDP enough will make us a poor country that can grow rapidly from a low base).

    Distributing money to a bourgeois minority over-values the future (higher savings rates on most wealth) and distributing money to an impoverished proletariat over-values the present (lower or even negative savings rates on most wealth).

    [Sorry for the Marx terminology. I think this is what Stiglitz is getting at, though.]

  19. Gravatar of Jim Glass Jim Glass
    8. July 2012 at 13:21

    I’ve got to admit I just don’t get supply side arguments. If there are so many costs why were the 60s such a boom with a 70% top MTR?

    Because nobody paid it. Capital income was always tax favored. And pre-Tax Reform Act of 1986, there was a huge tax shelter industry, which enabled those with the very highest salaried and investment incomes to pay lower effective rates than those with less income — just as with the estate tax today. Returns to tax shelter planning increase with scale.

    For example, from IRS Statistics of Income data for 1965, the days of the good old 70% top tax bracket, effective tax rates by income level (tax actually paid/reported income, 1965 dollars)…

    Over $1 million: 30.8%
    $500k to $1,000k: 32.8%
    $100k to $500k: 36.4%
    $50k to 100k: 31.2%

    The richest, with income *over* $1 million ($7.3 million in 2012 dollars) paid a lower effective rate than people who had only 5% of their income.

    The richest didn’t start paying the *highest* effective rate until the Tax Reform Act of ’86 lowered the top rate to 28% while also killing off the tax shelter industry (partly by law, mostly by the fact that with a top rate of only 28% it no longer paid for itself) and eliminating the favorable rate for capital gains.

  20. Gravatar of Rajat Rajat
    8. July 2012 at 13:48

    Scott, how do you deal with children under progressive consumption taxes? These days, more people are not having children or having fewer children, sometimes out of direct choice and sometimes due to circumstances. A single or a couple without children or with fewer children will have more income available to spend on fancy clothes, holidays and eating out. They might also prefer to live in smaller and more centrally-located homes, which are more expensive on a per square foot basis. Apart from a couple of examples like mega-mansions and private jets, it would be difficult to impose a progressive consumption tax without making profound value judgments on the social utility of children. What’s your response to this issue?

  21. Gravatar of Secret Agent Secret Agent
    8. July 2012 at 13:53

    If NGDP futures investors got irrationally exuberant, it’s not clear it would impart any bias in the price of NGDP futures. So Noah’s analogy seems pretty weak to me.

    Wouldn’t NGDP futures prices FIXED by Fed policy?

  22. Gravatar of Rajat Rajat
    8. July 2012 at 14:00

    …I should probably more importantly add, the *private* utility of children. To what extent are children a form of personal ‘consumption’ for parents, giving them benefits that are not available to the childless? And if the benefits of children are largely appropriated by their parents, why should the childless pay higher taxes on their restaurant meals when parents are not taxed on the pleasure their children provide?

  23. Gravatar of Bill Ellis Bill Ellis
    8. July 2012 at 16:08

    Scott,
    I really like the idea of a progressive consumption tax in theory. ( Sane Incentives !) But the proposals I have looked at never seem to be able to collect enough revenue to maintain entitlements. ( Weather that is a good or bad thing is a different issue. )

    Is there a particular plan you like ?

    I like this approach…. From “Progressive Consumption Tax” by Robert Frank. Excerpt…

    “Their taxable consumption would then be calculated as income minus savings minus a large standard deduction-say, $30,000 for a family of four. For example, a family that earned $50,000 and saved $5,000 during a given tax year would have taxable consumption of $50,000-$5,000-$30,000, or $15,000 total. Tax rates on taxable consumption would start off low-say, 10 percent for the first $30,000 of taxable consumption. Under the consumption tax, this family would owe $1,500, about half of what it would pay under the current income tax.” http://www.democracyjournal.org/8/6591.php

    But, considering that the elite actually spend a very small % of their income, I don’t see how this can raise as much revenue as our current (Awful) tax system.
    BUT what if we went to a progressive consumption tax for all… but retained a progressive income tax (no loopholes please) for say…the top 1%, or 5% or what ever it took ?

    I think that might be a tax plan the dems could get behind.

  24. Gravatar of Mike Sax Mike Sax
    8. July 2012 at 16:15

    Bill Ellis:

    “I really like the idea of a progressive consumption tax in theory. ( Sane Incentives !) But the proposals I have looked at never seem to be able to collect enough revenue to maintain entitlements. ( Weather that is a good or bad thing is a different issue. )”

    That’s my reservation as well. I have seen some good books that I plan to read to get a better idea. But for me a drop in revenue makes it a nonstarter. The devil is in the details in any consumption tax that claims to be progressive

    http://www.amazon.com/gp/offer-listing/0262514532/ref=sr_1_2_np_1_main_olp?s=books&ie=UTF8&qid=1341792860&sr=1-2&condition=new

  25. Gravatar of Bob Murphy Bob Murphy
    8. July 2012 at 18:07

    Scott, OK either you or I are being completely stupid on this doghouse issue. I will agree not to call you an idiot if it turns out you’re making a basic mistake, if you agree to do the same for me.

    Why couldn’t we take your same argument and then claim that the following two tax codes are equivalent:

    (a) The government taxes all capital goods at POS by 10%,

    (b) The government taxes all consumption services at the moment of enjoyment by 10%.

    After all, the economic function of capital goods is to provide a future flow of consumption services, so whether you take the hit upfront or later on, it’s all the same.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. July 2012 at 19:05

    @Bill Ellis and Mike Sax,
    OK, I’m completely perplexed. I’ve read a number of things on the PCT and not once was its inability to bring in enough revenue mentioned as drawback. What makes you both think that a PCT would have trouble generating revenue?

    One of the major criticisms I have seen of consumption taxes in general is that they are huge revenue generators and would enable much greater government spending. Why would simply making it progressive make this not true?

    Is it because most high income people are like Warren Buffett, living fairly frugally? If so, that’s not at all true. The Fed estimated savings rates by income quintile and found that the top quintile had a *negative* savings rate in 2000, and accounted for 46% of all consumption (Table 2 and Appendix C):

    http://www.federalreserve.gov/pubs/feds/2001/200121/200121pap.pdf

    Yes, I’ve read a study by Dynan, Skinner and Zeldes (2004) that suggests that the savings rate might increase with disposable income but even if that is true the US personal savings rate is currently less than 4%. So even if those with top incomes account for all the savings in the US that still leaves a heck of a lot of profligate consumption.

    So given the relatively large amount of national consumption devoted to oversized mansions with 30 bathrooms, yachts the size of ocean liners, private jumbo jets and cars more expensive than the average house, what makes you so convinced a PCT would have such a hard time generating revenue?

  27. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 01:47

    “One of the major criticisms I have seen of consumption taxes in general is that they are huge revenue generators and would enable much greater government spending. Why would simply making it progressive make this not true?”

    Mark you’ve seen different studies than I have. I mean for those proposals where the consumption tax is supposed to replace all the other federal taxes-inidivudal income. corporate, capital gains, it’s a reasonable question that the consumption tax will replace all of it.

    The other issue is if it will really be progressive. I was very skeptical of that as when I thought of consumption taxes I thought of things like Cain’s 9-9-9 plan.

    However the progressive comsumption tax wouldn’t be a sales tax which is regressive but maybe a tax paid once a year on income not saved above a certain level-maybe a $30,000 deduction.

    That sounds like it might be progressive-though again I’m skeptical of it raising enough revenue. Basically it’s all based on the consumption of rich people but I have no idea what that would actually add up to.

    There is also the logistical question-how is the government going to determine how much you’ve really saved-hopefully it will be by more than simple word of mouth. I made a million and guess what, I saved a 999,999.

  28. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 01:53

    As far as wealthy people living frugally, it’s just that whether you have $10,0000 or $1 billion your basic needs don’t change all that much.

    Even if you are on the spendthrfit side it’s not going to add up to that much. Or put it this way-what percentage of the median rich person such that it is-maybe someone with like 5 or 7 million dollars do you think is actually spent on consumption? Is it really going to be more than what their net income taxes are now?

    It seems obvious this will result in less taxes-rather than taxing all their income you’re just taxing what they choose to spend.

  29. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 02:06

    “Because nobody paid it. Capital income was always tax favored. And pre-Tax Reform Act of 1986, there was a huge tax shelter industry, which enabled those with the very highest salaried and investment incomes to pay lower effective rates than those with less income “” just as with the estate tax today. Returns to tax shelter planning increase with scale.”

    Jim Glass if we had such strong growth under this regime you wonder why the urgency to change it then.

    As to your numbers that show that supposedly the effectivec rate was lower for the top rates-what source is this I’d be interested to see.

    Today, the top individual rate is 35% and the effective rate is only about 17.2%. So there are still tax shelters and tax avodiance.

    In reality the top tax rate follows a divisor rule-whatever the offical nominal rate is the effective rate is a little less than half that.

  30. Gravatar of dtoh dtoh
    9. July 2012 at 02:27

    You all make it so complicated. A PCT would be incredibly easy to implement. Just impose a 20% (or 18% or 25% or whatever number you like) sales tax. Give everyone a card with a $20,000 (or whatever exemption number you like) balance. Every time you make a purchase, the amount of the purchase gets deducted from the balance. Once the card has a zero balance (or you don’t have the card or you don’t want to use it), you pay the tax.

    For housing and other high priced assets, you just have a property or fixed asset tax which is effectively a consumption tax on housing (jet airplanes, etc.)

    Agree with Rulle that you get rid of income, corporate, and all capital taxes at the same time.

    The mechanics for the property tax are already in place. Bid out the rest of the system to MasterCard or VISA so you have minimal transaction and processing costs.

    Other than the basic economic superiority of taxing consumption rather than production, you get the additional benefits of a) reduced tax evasion, b) no personal income tax forms to prepare, c) everyone at the IRS get fired, d) 3/4 of all lawyers and accountants have to find real jobs.

  31. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 02:45

    What basic economic superiority is that? Agreeing with Rulle is fine-meanwhile how is this going to be revenune neutral?

  32. Gravatar of Max Max
    9. July 2012 at 02:48

    We already have a consumption tax system (partially), since we have retirement tax shelters. Just remove the limit on contributions. What would be taxed isn’t sales transactions, but income minus tax-sheltered savings.

  33. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 02:53

    The main thing I like about the progressive consumption tax idea is that you could eliminate the ultra regressive payroll tax. I’m not nearly as impressed as the supply siders about how nefarious the MTR, capital gains tax, and corporate tax is.

    However I might be willing to give them that in exchange for getting rid of the payroll tax-ie, a demand side tax cut-as long as it realy were revenue neutral-that is to say no cuts in entitlements.

  34. Gravatar of dtoh dtoh
    9. July 2012 at 03:51

    Mike Sax,
    If remember my econ right, there is a reduction in deadweight loss. Plus, people don’t seem to realize what a huge impact of capital taxes and income taxes have on new business formation and entering professions requiring a large investment in training. The main reason for this oversight is that they fail to consider the asymmetric returns from venture investing and trying to get into Harvard Law. Do the exercise, assume 10 or 20 investors. All but one goes bankrupt. What happens to the expected after tax return? A positive expected pre-tax return quickly goes negative.

    As to revenue neutrality, if I remember my arithmetic from 2nd grade, by raising the rate of the consumption tax, you can raise the amount of tax revenue.

    Max,
    Why make it complicated (income minus savings). Just have a sales tax and you get or the IRS and all the accountants.

  35. Gravatar of dtoh dtoh
    9. July 2012 at 03:53

    “….get rid of the IRS and all the accountants”

  36. Gravatar of 123 123
    9. July 2012 at 09:07

    Scott:
    “I strongly disagree that investors would use an NGDP futures market for hedging. If there was any interest in that sort of market, it would already exist. There are derivatives in almost everything””except NGDP.”

    1. Never reason from the absence of a market. The idea of an index mutual fund has its origins in 1951, however John Bogle started Vanguard in 1975 only, three years after the idea has received the “Dubious Achievement Award” from Pensions & Investments magazine in 1972. There are two reasons NGDP-linked securities do not exist – NGDP risk was low under Greenspan, and there is no underlying security to base the NGDP derivatives on.

    2. For the monetary volatility argument, it does not matter if investors will hedge stocks with NGDP futures. The no-arbitrage equilibrium condition is sufficient to show how changes in risk investor risk aversion as measured by VIX would change the gap between the risk-neutral expected NGDP and the actual expected NGDP, contributing to the large swings in monetary base.

    “In the stock market most investors are long, and dividends are received far out in the future. The NGDP market has a payoff in just one or two years, and investors are equally spread between long and short positions.”
    VIX measures stock-market risks over the next three months. VIX is swinging wildly, and believe me it is the new information about the near-term NGDP outlook that is the key source of such swings.
    The fact that most investors are long stocks is irrelevant for the hedging argument. If Fed is willing to sell cheap hedges against NGDP risk, hedgers would move from VIX market to the NGDP futures market.

    3. I believe it is a good time to introduce NGDP-linked securities. NGDP risk is elevated in the eurozone, and NGDP-linked corporate bonds could be a partial solution for the eurozone troubles. It would be nice if market monetarists would popularize this idea.

  37. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. July 2012 at 09:08

    Mike Sax,
    “Mark you’ve seen different studies than I have.”

    Try this CBO study of the USA Tax:

    http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/0xx/doc36/taxrefor.pdf

  38. Gravatar of Jim Glass Jim Glass
    9. July 2012 at 09:14

    Jim Glass if we had such strong growth under this regime you wonder why the urgency to change it then.

    The very high top tax rates were gotten rid of in 1986. There wasn’t such wonderful growth through the 1970s. (And many things beside taxes affect an economy. The 1950s and 60s were still rebounding from the 1930s and 1940s).

    They got rid of the very high top tax marginal rates — *bipartisanly* got rid of them, Bill Bradley’s and Dick Gephardt’s names are on the 1986 legislation — because of their huge deadweight cost.

    Taxes impose deadweight cost on the economy. When a tax rate increases, the deadweight cost increases not with the increase in the rate but by the square of the increase in the rate. As Mankiw says:”if we double the size of a tax, the deadweight loss increases four-fold; if we triple the size of the tax, the deadweight loss increases nine-fold.” [More details.]

    The exponentially increasing deadweight cost appears in many ways, not just through reduced economic activity but also for instance the creation of a massive tax shelter industry. There are powerful incentives to escape the deadweight cost by buying ‘loopholes’ in the tax law from Congress (and on Congress to sell those loopholes, as they draw a great price!) … pay large amounts to lawyers and accountants to construct transactions for tax rather than economic purposes … drive investment funds into entirely tax- rather than economic-motivated transactions, etc. This all went on in a *huge* way prior to 1986.

    Of course, capital gains, tax-exempt bonds etc all escaped the very high top rates outright, because an economy could not operate with a 70% tax on capital gains *not* indexed for inflation, the states want their favored financing, and all the rest.

    Since that’s where the richest investor class get their income to start with, they jumped into them with both feet and never paid the top rates at all.

    Then the huge gaps between the favored capital gain/tax-exempt rates and top marginal rate created massive incentives for the semi-very rich with very high salaries to game the system through tax “arbitrage” via shelter strategies right there. It’s not so difficult to turn a seven-figure salary into capital gain if you are willing to pay a lawyer and accountant and you have influence over how your business pays you. A big tax rate gap on seven figures gives plenty leeway to pay the lawyer and accountant and still come out ahead.

    As bad as all that is by itself, there’s tons of economic distortion in all that too, of course.

    Killing the massive tax shelter industry that existed then was an explicit purpose of TRA’ 86. It worked, and the precedent was followed by nations around the world, including Sweden.

    The deadweight cost of taxes is why the public finance textbooks say revenue should be collected via multiple kinds of taxes at low rates rather than one single tax at a high rate.

    As to your numbers that show that supposedly the effectivec rate was lower for the top rates-what source is this I’d be interested to see.

    I gave the source, IRS Statistics of Income. Alas for the pre-Internet years one has to look up the numbers the old fashioned way, by pulling the book off the shelf.

    Today, the top individual rate is 35% and the effective rate is only about 17.2%. So there are still tax shelters and tax avodiance.

    No, those numbers are calculated differently, not comparable.

    And the point is that in the era of very high top marginal rates supposedly taxing “the richest” — the 1% — they didn’t. The very richest paid effective rates significantly lower than the less rich: 30.8% on over “$1 million” is a good deal less than 36.4% on “$100k to $500k”.

    That was a constant during the era of very high marginal rates. The idea that the very richest paid those very high rates back then is purely imaginary. You can still see the same thing today with the estate tax, where the very largest estates pay a lower effective tax rate than smaller ones. It didn’t reverse for the income tax, the richest didn’t start actually paying the highest effective rate, until TRA ’86.

    Is there tax avoidance today? Sure. But the tax shelter industry is nothing like pre-’86. And at least effective tax rates consistently rise with income. Although we have been subverting the effect of TRA ’86 by increasing rates, putting more holes in the tax base, etc., ever since. Even while the rest of the world continues to go the other way.

  39. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. July 2012 at 09:19

    Mike Sax,
    Or Bush’s Tax Reform Panel analysis of the Growth and Investment (GIT) tax (Chapter 7):

    http://govinfo.library.unt.edu/taxreformpanel/final-report/TaxPanel_5-7.pdf

    Sufficient revenue was never ever mentioned as an issue.

    Americans with high incomes are just as profligate as those with low incomes. Remember we have a 4% national savings rate (and look at the savings rate estimates by income level). You can easily make it even more progressive than our current system if that is your druthers.

    And logistics is not an issue either. If you use a cash flow approach as in the USA or GIT proposals, it’s up to the taxpayer to prove what they saved.

    It sounds to me like you’re just shooting from the hip.

  40. Gravatar of ssumner ssumner
    9. July 2012 at 11:09

    Neal, I agree.

    Mike, Ever hear of the Kennedy tax cuts, which trippled the amount people in the top bracket could keep? How should that have affected the equilibrium level of real income?

    Bob, All taxes have evasion issues. VATs are some of the hardest to evade. Ditto for payroll taxes, another form of consumption tax.

    Steve, So let’s have all countries depreciate, against goods and services!

    Tommy, Good point.

    Mike Rulle, I assume the Fed pegs the price at the target, hence zero volatility.

    You said;

    “Unless it were accompanied by a constitutional amendment against income tax,”

    I would oppose it unless Congress passed a law abolishing the income tax.

    Jason. You said;

    “I was confused by Matt’s analogy too. The best sense of it I could make was that he thought of a doghouse like an addition or a deck.”

    My argument would apply equally to those.

    Rajat, The easiest way to do a progressive consumption tax is a payroll tax.

    Secret Agent, You said;

    “Wouldn’t NGDP futures prices FIXED by Fed policy?”

    Yes, I meant it wouldn’t cause the expected future price to deviate from the futures price.

    Bill Ellis, To me a sine qua non is that we need to abolish the income tax for most people, preferable everyone. Here’s a possible compromise. A progressive payroll tax for everyone. People with more than $100,000 in capital income must fill out various 1040 forms, to prove they aren’t shielding wage income as capital income. For the rest (99% plus) no tax forms to fill out. If you insist of taxing capital (bad idea) withhold it at the source (i.e. banks withhold a certain percentage of interest, ditto for corporations, etc.

    Bob, I think the problem here is that doghouses produce a flow of consumption services without any labor needed. And those consumption services are not taxed. It you tax a typical unit of capital, like a restaurant, you are double taxing, because then the restaurant meals also get taxed later. If you only tax the restaurant capital, not the meals, then the part of the meal price that is not capital (i.e. wages) goes tax free. It’s complicated.

    Mark, I agree, the Europeans have shown you can raise massive amounts of revenue with consumption taxes, the Nordics rely on little else.

    Mike Sax, You said;

    “The main thing I like about the progressive consumption tax idea is that you could eliminate the ultra regressive payroll tax.”

    The payroll tax is a consumption tax–the key is to make it progressive, not regressive.

    123, You said;

    “VIX measures stock-market risks over the next three months. VIX is swinging wildly,”

    This is a complete non sequitor, it has nothing to say about my claim regarding NGDP futures maturing in one year. Stocks swing because dividends earned far in the future are valued very differently one month to the next. That’s a completely separate issue. T-bills have a three month payoff, and their price is very stable.

  41. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 11:16

    Appreciate the links Mark. I don’t know what makes me “shooting from the hip.”

    If I express doubts about an idea this may not be any bad faith or perversity on my part but genuine questions. If the case can be made for it I’d support it. I do like the links though I don’t get why you think I’m operating in bad faith.

  42. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 11:20

    Now Scott I have to say that payroll taxes may well be hard to evade-it’s tough to argue with that-but they are also about my least favorite taxes.

    For one they are very regressive-due to the very low cap at $105,000 and more generally they take a huge chunk out of low and middle income.

    The main thing I like about the idea of a progressive consumption tax is that it could rid us of the payroll tax.

  43. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 11:23

    Now that I wrote the above comment I see you did say the key to the payroll tax is to make it progressive. Ok, will you give me though that it is regressive right now?

    What ways could it be made progressive? My idea may not be popular with everyone but it would be to take the first $105,000 taxed and put it on the second or third $105,000 earned.

    Ie, if someone made $315,000 it would apply to their third $105,000 rather than the first.

  44. Gravatar of 123 123
    9. July 2012 at 11:26

    Scott, here are traders discussing how to trade VIX depending on what Bernanke does:
    http://seekingalpha.com/article/670501-volatility-players-mind-the-gap

    Of course we want to fire Bernanke and replace him with NGDP futures.

    Take a look at this chart:
    http://finance.yahoo.com/q/bc?s=%5EVIX+Basic+Chart&t=5y

    It is clear that moneyary stimulus was able to reduce VIX. The Fed is the main driver of VIX now.

  45. Gravatar of Jim Glass Jim Glass
    9. July 2012 at 13:32

    I’m all for consumption taxes in general, but there is no way an “on sales” type consumption tax will ever replace other federal taxes, just by the arithmetic.

    Regular sales tax systems collapse at rates over 10% due to the deadweight cost issues I mentioned above. That requires resort to VAT mechanisms, which collapse at rates over 25%.

    VATs in Europe collect only single-digit percent of GDP in revenue in spite of pushing right up against that rate limit. In 2008 the average VAT collection was 6.8% of GDP, that’s with all those 20+% rates — still only a minority of their revenue. That’s obviously far below what’s needed to replace current US tax revenue such as from the income tax, etc.

    And an extra complication here is that the states already have sales taxes, approaching a 10% rate in many cases, which means there are that many fewer points of consumption tax the Feds could impose.

    Still, there is a simple way to create a comprehensive progressive consumption tax in the USA, an idea that’s been in tax circles a long time and that I’ve mentioned before:

    (1) Create a “super IRA” that holds investment funds on a tax-free basis, until they are distributed and then taxed as income at normal rates, exactly as IRAs function now — except contributions to the IRAs would be unlimited for all; and (2) Eliminate the capital gain tax rate, so all income not earned in a super IRA is taxed at ordinary rates.

    This way no hedge fund manager could ever again throw a million-dollar birthday party for himself using income taxed at 15%. Either the money stays invested in the fund tax-free or it is taxed the max. Warren Buffett doesn’t pay for his private jet and cartons of Coke using 15% capital gain income either.

    This is a politically plausible deal, just like TRA 86, because each side gets something — the left gets rid of tax-favored rates for the income of the rich (Warren Buffet can never again say he pays a lower rate than his secretary) the right gets totally tax-free treatment for invested funds as long as they really are invested.

    Moreover, very important for actually getting something enacted, it uses the already proven politically/ legally/ administratively functioning system, no revolution required. It is as progressive as the current income tax, and the IRA-taxation system has already worked for trillions of dollars going back near 40 years.

    This could actually work to create a progressive consumption tax that leaves investment tax-free and the government funded.

    Because it could actually work, this idea, which has been around in tax reform circles for ages, will continue to be ignored by people who prefer to propose a multitude of revolutionary fixes that have zero chance politically of being enacted and equally zero chance of working as advertised if they were.

    BTW, I don’t see why a dog house would be any more difficult to tax than a car, analytically speaking.

  46. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. July 2012 at 13:51

    Mike Sax,
    I don’t think you’re operating in bad faith. I just think you’re commenting without having really put forth any effort to research an issue. I can’t imagine where one would get the idea that it would be hard to raise revenue with consumption taxes (progressive or otherwise) when it’s easy to see that they’re cash cows.

  47. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 13:56

    Mark in looking at those links they don’t talk specificaly about a progressive comsumption tax-but a proportional consumption tax

  48. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 14:02

    “I can’t imagine where one would get the idea that it would be hard to raise revenue with consumption taxes (progressive or otherwise) when it’s easy to see that they’re cash cows.”

    Well it doesn’t seem so obvious to me. Put it this way do you think this will mean an increase or decrease for the median taxpayer compared to what they pay now-assuming this were in place of individual, capital, and corporate taxes?

    Would rich people pay more or less under it? If everyone’s net tax bill came down how could it be revenue neutral?

  49. Gravatar of dwb dwb
    9. July 2012 at 14:27

    my two cents, FWIW, is that i dislike consumption taxes strongly. i agree with the theory and all, but the practical application is that we end up with *both* income and consumption taxes. if we had a limit on govt expenditures, (like 30% of gdp) then i would be less concerned about one more revenue source and unchecked spending. Plus, its harder to administer (most states have exclusions on state sales taxes to try to make them more progressive, which is very inconsistent). I looked at my hotel bill the last time i went to NY and it was 20% taxes, on top of the state sales tax. So, we already have a lot of very inconsistently applied consumption taxes at the state level and that experience leads me to think the practical application will involve many loopholes (lobbying) and be very haphazard.

    People forget that alcohol sales is still largely a state run monopoly in PA, and they de facto collect a lot of taxes on alcohol consumption. Plus there are property tax transfer fees at the point of sale (for cars, houses, boats) in many jurisdictions.

    the very fact that we think a new revenue source is a cash cow makes those hairs on the back of my neck go up.

  50. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 14:32

    Interesting line in the your link Mark from the CBO:

    “A consumption-based tax would continue to tax
    earnings either directly, as under some comprehensive
    reform proposals, or indirectly, by taxing the goods
    and services that people buy with their earnings. If
    there were no other changes to the tax system and if
    tax revenues were held constant, a switch from the
    current income tax to a consumption-based tax would
    in fact raise the tax on earnings. By way of example,
    consider that a simple definition of consumption is
    income less saving. A consumption-based tax removes
    saving from the tax base. To maintain the
    same amount of revenue, the remaining piece of income,
    which is primarily earnings, must be taxed at a
    higher rate than before.”

  51. Gravatar of Negation of Ideology Negation of Ideology
    9. July 2012 at 14:36

    Jim Glass –

    “(1) Create a “super IRA” that holds investment funds on a tax-free basis, until they are distributed and then taxed as income at normal rates, exactly as IRAs function now “” except contributions to the IRAs would be unlimited for all; and (2) Eliminate the capital gain tax rate, so all income not earned in a super IRA is taxed at ordinary rates.”

    I endorse both proposals. I’d like to go even further.

    3) Change all corporations to REIT or S-corps like entities, meaning they pay out all their profits in dividends but pay no taxes.

    4) Limit the mortgage deduction to 15 year loans. No home equity loans, no cash out, and no refinancing to extend the term. (e.g., if you refinance 5 years in, you get the deduction on a 10 year or less term.)

    5) Eliminate all other itemized deductions.

    Lest you think I am one of the “people who prefer to propose a multitude of revolutionary fixes that have zero chance politically of being enacted” – I endorse your 1 and 2 whether we can get my 3,4 and 5 or not.

  52. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 14:39

    Negation the flip side though is ending deductions means raising many people’s taxes

  53. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. July 2012 at 14:41

    Mike Sax,
    The USA Tax has a PCT component and the GIT is PCT.

  54. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 14:42

    See the CBO puts it best:

    “Changes in saving and investment, economic output,
    and the allocation of resources are not, of course, ends
    in themselves; they are instead avenues by which society
    as a whole may become better off. By mitigating
    the effects of taxation on relative prices and economic
    decisions, fundamental tax reform would enhance economic
    well-being (or “utility”) and reallocate resources
    to more productive uses. Some people would lose,
    however, so whether society as a whole was better off-that is, whether “economic efficiency” would increase
    &becomes an empirical issue, depending on the size of
    gains to winners relative to the size of losses to losers.
    For the purposes of this analysis, general-equilibrium,
    utility-based models of taxation are used to estimate the
    potential magnitude of any gains in efficiency and the
    extent to which those gains result from each particular
    feature of fundamental tax reform.”

    That’s exactly right, there are always Pareto effects. No plan you can ever come up with will benefit everyone and at least someone will be a net loser.

    The key is which plan benefits the most people and society as a whole.

  55. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. July 2012 at 14:48

    Mike Sax,
    “Interesting line in the your link Mark from the CBO”

    Both the USA Tax and the GIT broaden the base so the rates are in fact no higher. Why don’t you go read the book by Seidman (incidentally a hardcore Democrat and a professor at my University).

  56. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 15:01

    I’m reading the CBO Mark just pointing out some good lines. If you say the USA and GIT are both progressive good enough-I’m only on page 22 right now.

  57. Gravatar of Jim Glass Jim Glass
    9. July 2012 at 15:02

    The easiest way to do a progressive consumption tax is a payroll tax…

    To me a sine qua non is that we need to abolish the income tax for most people, preferable everyone. Here’s a possible compromise. A progressive payroll tax for everyone. People with more than $100,000 in capital income must fill out various 1040 forms, to prove they aren’t shielding wage income as capital income…

    I haven’t seen any particular proposal, so I am not criticizing anything in particular, don’t anyone take this that way, but for perspective…

    Wages and salaries in 2012 Q1 were $6.8 trillion, GDP was $15.5 trillion, annual rate.

    The fed govt in normal times collects about 20% of GDP in revenue (and by all signs this will have to rise significantly in future years, for better or worse) with about 10% of that being from non-income, non-payroll tax sources (excise taxes, estate tax etc.) So payroll tax replacing income tax would have to amount to about 18% of GDP.

    On the 2012 numbers that implies a payroll tax rate of 41%. If the tax were to be as progressive as the status quo, under which many on payroll get EIC tax credit refunds paying no income tax, the tax rates would have to range from under 15.3% to over say (for symmetry’s sake) 66.7%.

    Nothing close to a 66.7% payroll tax rate will ever survive. Business owners today convert earned income to investment income on a mass scale to avoid the 15.3% payroll tax. Filling out 1040 tax forms does nothing to stop it, they’re all doing that now. First, it’s perfectly legal to do in many ways, second the “fudging” methods are far beyond the IRS auditors’ very finite ability to catch and litigate. And that’s ignoring the cheating methods that would gain a really huge payoff at a 67% rate (people do follow incentives).

    This is all just order-of-magnitude back-of-the-envelope, bit it indicates there would have to be another major revenue source besides payroll taxes, probably one larger than payroll taxes, to replace the income tax.

  58. Gravatar of Morgan Warstler Morgan Warstler
    10. July 2012 at 05:33

    The PCT is easy:

    1. You tax LAND even more progressively than you tax housing, you re-asses yearly.

    2. You do the debit card.

    3. You make ALL corporate spending on anything personal, trips, jets, business and coach class, dining, hotels rooms above $60 a night, etc. ALL part of PCT.

  59. Gravatar of Mike Sax Mike Sax
    10. July 2012 at 05:43

    I am kind of intrigued by the debit card idea-with a say $25,000 limit. So your’e first %25,000 of consumption is tax free. Then you either end the payroll tax or make it progressive.

    If the conservatives give us this we can talk about getting rid of capital gains-if the numbers add up to no less revenue than now

  60. Gravatar of Becky Hargrove Becky Hargrove
    10. July 2012 at 06:13

    Lorenzo,
    You have some of the same concerns which I have about keeping ownership as flexible as possible. Can you point me to some of your more helpful links in this regard?

  61. Gravatar of Bababooey Bababooey
    10. July 2012 at 11:03

    Distinguishing between investment and personal expenditure is no obstacle to a consumption tax. Current tax law makes that distinction, supported by mature regulations and endless administrative and judicial precedent.

    Owner occupied housing is not an investment, you cannot depreciate it, net interest expenses against other investment income, expense costs, etc.; its special tax benefits are one-off provisions. All real estate is subject to an excise tax like sales tax– documentary transfer taxes.

    My favorite consumption tax proposal is an annual self-reported consumption tax upon a tax base determined by this formula:

    Y – (z(Dec 31) – z(Jan 1))
    “Y” is your income for the year,
    “z(Dec 31)” is savings/investment on December 31, and
    “z(Jan 1)” is savings/investment on January 1.

    (And yes, if you dip into your savings your tax base can exceed your income). The benefits of this proposal are:

    1. Simple
    2. Permits progressivity and generous exemption (~$50,000)
    3. All the complications (investment/personal distinction, timing & realization, basis, quarterly/monthly payments, etc have been worked out by current tax law.
    4. Doesn’t force businesses to play tax collector (except for banks, which report your account’s activity).
    5. Incentivize savings, disincentivize consumption

  62. Gravatar of ssumner ssumner
    11. July 2012 at 08:25

    123, I don’t see what that has to to with my comment, I never denied monetary policy can affect the VIX.

    Jim Glass, The likely route would be a mix payroll and VAT.

  63. Gravatar of Doug M Doug M
    11. July 2012 at 08:46

    Bababooey,

    What about appreciation, investment gains, investment income etc.? One of the worst parts of the current tax system is the effort requred to determine ones income.

    You simplify further if there were some sort of investement trust that would be considered “savings” — such that any investment activity within the trust would not be taxed, transfers into the trust would earn a tax deferral, and trasfers out would be taxed.

    In fact, we could move to a consuption tax without changing much of the current tax system with simply an expansion/liberalization of the IRA.

  64. Gravatar of 123 123
    11. July 2012 at 09:21

    Scott:”I don’t see what that has to to with my comment, I never denied monetary policy can affect the VIX.”

    It seems that you agree that VIX and monetary policy are in equilibrium. So I don’t understand how you come to the conclusion that excess volatility of VIX index will not cause the excess volatility of monetary policy in a regime of futures targeting.

  65. Gravatar of dtoh dtoh
    11. July 2012 at 09:41

    The math for a PCT are simple. Total personal consumption is 11 trillion. A $16,667 per capita exemption times 300 million people is $5 trillion. That leaves 6 trillion of taxable consumption. 25% on 6 trillion is 1.5 trillion, which is exactly current federal tax receipts exclusive of Social Security. That allows you to eliminate all income, capital and estate taxes.

    An income less savings approach is much more complex, produces the same results, requires everyone to file a return, and leaves the IRS in existence. Why anyone would suggest such a moronic approach is a mystery to me.

  66. Gravatar of dtoh dtoh
    11. July 2012 at 09:44

    Scott,

    Stop suggesting payroll plus VAT. It’s stupid. Also, why use VAT. A sales tax is much simpler. You just exempt purchases by any business with a valid EIN number. It’s essentially the same thing and much easier to implement.

  67. Gravatar of Bababooey Bababooey
    11. July 2012 at 14:31

    Doug M: Yes, exactly. I passed over some administrative features for brevity’s sake. Closely held investments might be tricky, but much less than, say, the domestic production activity deduction.

    I like the idea of self-reporting and paying tax quarterly or annually, instead of ten thousand point-of-purchase & payroll nicks. Citizens, I believe, care more about governance when forking over large chunks of cash. If this causes cash flow problems to the govt, oh well.

  68. Gravatar of ssumner ssumner
    13. July 2012 at 07:52

    123, I don’t follow your question. I don’t even understand what VIX and monetary policy being in equilibrium means. Yes they are correlated, as monetary policy affects VIX. But so what?

    dtoh, In a country where everyone is honest, I agree, but VAT is much harder to evade than a sales tax.

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