David Warsh has a useful overview of the move to replace the income tax with a consumption tax. Tracing the current administration’s policy makers to the Ford years, he seizes on a Treasury Dept. treatise called Blueprints for Basic Tax Reform. According to its its author, David Bradford,
The great advantage of consumption taxation would be simplicity. By excluding savings, all the difficult problems of income measurement would disappear Â- depreciation rules, double taxation and the like. Then there was the goad to saving that would arise from eliminating the disincentives of the present system. The consumption tax would encourage capital formation, Bradford wrote, “leading to higher growth rates, more capital per worker and higher before-tax wages.”
This idea has been taken up by some Republicans, notably Bush’s economic advisors in the latest tax-cut proposal. A couple of days ago, I called the consumption tax scheme crazy, which really is too dismissive. Taken from a standpoint of tax efficiency, the proposal has its merits: less need for tax lawyers and accountants to wade through the complicated tax code, potentially easier enforceability, more incentive to save. Given the currently low (hovering just below zero) national savings rate, maybe the last wouldn’t be such a small achievement after all.
Only the reasons that a consumption tax is appealing to tax experts and some economists are not likely to be the same reasons it’s appealing to others. Laymen like the idea of scrapping an income tax because they feel they pay too much and that 75% of government revenue goes to welfare mothers, porkbarrel graft and indolent postmen’s pensions. The business elite (and that includes entrepreneurs and would-be entrepreneurs) feels that their investments and corporate profits are needlessly taxed and that their ordinary income shouldn’t be taxed at a higher rate. In other words, tax efficiency for them is appealing mainly because it eliminates specific tax burdens and ultimately lowers their tax bill by spreading the revenue share over the general population. Republicans talking of a national sales tax seek to draw support from both camps.
But what will people do when they realize that yes, they don’t have an income tax, but that they have to pay a 50% tax on anything they buy? Might such high sales tax not encourage black-market activity? How would politically popular deductions for mortgage payments or charitable gifts be overturned? Ultimately, even though a consumption tax might be rigged to be progressive, I don’t trust those who are proposing it to do so - they in fact are not interested in tax efficiency so much as “tax relief”. And even if tax efficiency is the issue, we shouldn’t lose the forest for the trees: giving incentives to save won’t mean too much if we’re pushing our national savings rate downward with government deficits.
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