Is It Time For A Consumption Tax?

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For the New York Times, David Brooks writes that we need to break free of the income tax paradigm and move toward a consumption tax:

What is the single biggest problem with the tax code? It’s not the complexity, bad as that is. The biggest problem is that it rewards consumption and punishes savings and investment.

You can’t fundamentally address that problem within the 1986 paradigm. You can address it only through a consumption tax. This idea is off the table right now, but reality will inevitably drive us toward it. We have to have a consumption tax if we want to both grow the economy and reduce debt.

But isn’t a consumption tax regressive since poor people spend a bigger share of their incomes than rich people? The late David F. Bradford of Princeton University effectively solved that problem with his so-called X Tax, which has recently been championed by Alan D. Viard of the American Enterprise Institute and others.

Under the X Tax, you wouldn’t pay the consumption tax at the cash register. Businesses would be taxed on their cash flow, taking an immediate deduction for investments rather than depreciating them over time. Households would pay tax at progressive rates on their wages but would not pay tax on income from savings.

The X Tax effectively taxes the money you spend right now and rewards savings and investment. The government could raise a chunk of revenue this way and significantly boost growth with little or no change in how tax burdens are distributed between rich and poor. Most economists vastly prefer consumption taxes to income taxes.

Taxing consumption, as opposed to production, makes a lot of economic sense. The problem is that what Brooks is proposing isn’t just a consumption tax. It’s a consumption tax on top of an income tax.

Americans would still be paying taxes on their income. And they’d be paying the taxes businesses pass on from the taxes on their revenues.

Taxes need to be less complicated. The tax base needs to be broader. And taxes need to stop punishing investment and earnings. But a consumption tax implemented as an income tax is really no consumption tax at all.

And besides, taxes aren’t going to fix the deficit problem, which is driven by spending.

Rob Port is the editor of SayAnythingBlog.com. In 2011 he was a finalist for the Watch Dog of the Year from the Sam Adams Alliance and winner of the Americans For Prosperity Award for Online Excellence. In 2013 the Washington Post named SAB one of the nation's top state-based political blogs, and named Rob one of the state's best political reporters. He writes a weekly column for several North Dakota newspapers, and also serves as a policy fellow for the North Dakota Policy Council.

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  • igx

    This country majorly screwed up when we started taxing income and investment over consumption. It’s like robbing from the future. it will be quite hard to change, too.

    • Guest

      How about…….a value added tax..

      • VocalYokel

        Or a flat tax on income above a certain amount.
        No loopholes, no deductions, no weasel words in the tax code.
        Wouldn’t the special interest lobbies scream about that one!

        • http://sayanythingblog.com Rob

          The only way a consumption tax is going to be a better situation for America is if it replaces completely the income tax.

          If we end up with both, we’re out of the frying pan and into the fire.

      • igx

        A national sales tax is better because that way it isn’t hidden. There are ways to make it non-regressive, too. http://www.thepurpletaxplan.org

    • http://sayanythingblog.com Rob

      Taxing income is one of the worst mistakes we’ve ever made as a country.

      • igx

        The other worst mistake is the *corporate tax*. It sounds like you are taxing “The Man” but in reality it’s regressive, robs from the future, and mandates rent seeking behavior. You have to watch a lot of youtubes about it to get your head around it , though. https://twitter.com/JohnASpry/status/273964402326257666

  • Rick Olson

    As you know, Canada has a nationwide 7 percent “Goods and Services” Tax, which is added at the register for all retail purchases. In addition to any provincial and local sales taxes that apply to the purchase.

    Maybe it’s time for the United States to consider instituting a one percent federal sales tax on the items that Americans purchase. That should cut the deficit in a hurry.

    • The Fighting Czech

      That should cut the deficit in a hurry………OR the politicians might just forcast a 500 billiion revenue from this tax, Spend 700 billion. and actually take in 300 billion. the last thing we need, is to encourage those asses in DC to find additional revenue streams…

      • kevindf

        I don’t want the same standard of living Canada offers. It’s pretty low.

        • Guest

          On a average Canadians now have more wealth than Americans.

          • WOOF

            But they’re forced to play hockey .

          • Rick Olson

            Play hockey and speak French!! Canada is officially a bilingual country.

          • VocalYokel

            They’re not forced to…they don’t know what else to do in the winter because no one has shown them how to cut holes in the ice and fish.

          • two_amber_lamps

            Can’t hardly own a handgun and have to put up with liberal fascists too.

          • kevindf

            Who did they steal it from?

      • Rick Olson

        Simple fix. Write in the law that the federal sales tax will be dedicated to deficit reduction. I realize that additional revenue streams aren’t likely an answer, but perhaps it’s a start in the right direction?

        • the Fighting Czech

          again you dont give our DC politicians enough credit. They will gladly dedicate a new tax to pay off the deficit, But they will also increase spending. It will do no good but make us poorer., IF you have a pail of water, which has a Hole in it, and is emptying out fast. You need to plug the hole, and THEN fill the pail back up with water. other wise your just hoping you can pour the water in faster then its running out. and these guys will just make the hole a bigger Until DC understands that while they are apparently made of money, The rest of us arent. until that happens. Cut them off….

        • VocalYokel

          “Write in the law…”
          A government that weaves and bobs, does end runs around and completely ignores the Constitution, and you think they will actually pay attention to a mere law?

  • WOOF

    Conservative tax reform always amounts to the
    wealthiest members of society should pay less tax.
    Bobo is wealthy.

    • jl

      No, “the rich” now pay a higher share of the bill than before the Bush tax cuts.

    • http://sayanythingblog.com Rob

      No, conservative tax reform always amounts to everyone paying for the govenrment, which belongs to all of us.

      Democrat tax reform is divide and conquer. Promise one group of people goodies paid for by another group of people.

      We see where that’s gotten us.

  • Judy Morris

    It’s just another scheme to plunder the people.

  • igx

    The other thing is consumption taxation is a way more stable revenue stream than the alternatives. Government can’t overspend as easily under that scenario.

  • Harold

    If a consumption tax doesn’t keep the power to do favors for people with money and keep the campaign money rolling in from these groups that buy these favors, then I don’t see it ever becoming a reality. Bribery in Washington over who pays tax’s and who doesn’t comes before any other considerations. So no don’t see a consumption tax ever getting off the ground with the pay for favors politicians in Washington DC although it might be a good plan overall, corruption trumps any good plans in that neck of the woods.

  • Lynn Bergman

    A value added tax, in ADDITION to current federal taxation venues, has been in the sights of the “Kent Conrad” type socialist Democrats (you know, the people that are for a balanced budget, but voted against one when it was offered up) for years. I personally believe that we should replace the personal & corporate income taxes with a national sales tax… but after the “Incumbents Club” would pass legislation, and after we would subsequently get to read it, it would be in ADDITION to income taxes. So be careful what we wish for.. something that appears similar, but ends up more like a magic trick, can always be ‘sold” to the useful idiots our nation has become due to the public schools.

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