February 26, 2003

Synchronicity on the Consumption Tax

Synchronicity:

Today Vaguely Right writes: According to Bruce Bartlett:
  a) "Liberals are opposing [the move from income taxation to consumption taxation] because it would benefit the rich too much."

Yesterday, I had the following conversation:

Him: "All this talk of the consumption tax seems to be just another way to justify not taxing the rich. Aren't there already enough ways to not tax the rich in this world?"

Me: "Yes, a consumption tax is another ideological justification for not taxing the rich. But this reason for not taxing the rich does have desirable long-run efficiency properties...

Posted by DeLong at February 26, 2003 01:05 PM | TrackBack

Comments

I'm unsure who is quoting who about what here...

Posted by: Dennis O'Dea on February 26, 2003 03:14 PM

Some years ago there was a tax put on luxury items, expensive cars, boats, planes, and I forget what else. A great hue and cry were (was?) raised that sales had plummeted from this terrible tax, and that countless craftsmen had been put out of work over this heartless tax. Have any studies been done on that particular episode?

Posted by: secular clergyman on February 26, 2003 10:21 PM

Here's a short synopsis of the luxury tax which just finished phasing out for luxury cars the first of this year:

http://www.ncpa.org/iss/tax/2003/pd010603b.html

For the specific effect on boat builders, here's the link and the money quote:

http://www.libertyhaven.com/politicsandcurrentevents/taxesandtaxation/shipwrecked.html

"Ocean Yachts in Weekstown trimmed its workforce from 350 to 50. Egg Harbor Yachts entered Chapter Eleven bankruptcy, going from 200 employees to five. Viking Yachts dropped from 1,400 to 300 employees. According to a Congressional Joint Economic Committee Study, the boat industry nationwide lost 7,600 employees within one year. As Bob Healy, president of Viking Yachts explained on NBC News, "Every six or seven years, you have a down cycle. You might be off 20 percent, 30 percent, or 40 percent at maximum. Our industry is off 90 percent nationally."

Posted by: Dave Roberts on February 27, 2003 12:56 AM

I don't have any expertise at all in this, but has anyone demonstrated a definite link between the tax and the decline of the industry? It seems that in a decade where the income of the wealthiest rose dramatically, affording the relatively small increase in price wouldn't be a problem.

Posted by: Tony Ringley on February 27, 2003 07:27 AM

I understand that David Bradford, one of the big names behind this idea, thinks you can adjust a consumption tax system to be fairly progressive without destroying the twin intents of simplification and promotion of national savings. Anybody?

Posted by: K Harris on February 27, 2003 08:45 AM

If a consumption tax were to be adopted, the exemption of a certain base level of consumption ($12,000?,$15,000?,$20,000?; It is hard to pin down) would be necessary. This could be accomplished by sending rebate checks to everyone, to cover the taxes on that level of consumption.

Posted by: Will Allen on February 27, 2003 09:19 AM

My understanding of the mechanics of a conumption tax is pretty paltry, but I think there is a way around the rebate check, at least for the full amount exempted. Though no proposal is on the table, at least one version of consumption tax defines consumption as income minus savings. The tax isn't necessarily collected at the point of sale, but can still be collected from wages (with the usual period-end adjustments). Thus if consumption up to a certain level is to be exempted, it can be exempted on the sending-it-in side, rather than on the after-filing sending-it-back side. That saves lower-income (oops, lower-consumption) households from having to deal with a tax-induced cashflow problem and saves a heck-of-a-lot of work for the check-sending agency.

My grasp of the issue remains pretty crude. Does anybody have a line on which consumption tax plan(s) is (are) under discussion in the administration?

Posted by: K Harris on February 27, 2003 10:56 AM

People please. The consumption tax is a stalking horse for the eventual revocation of all parts of The New Deal. If you belive in this, by all means debate the details of the consumption tax. If, on the other hand, you want retirement and medical safety nets to continue to exist, you must meet this consumption tax nonsense head on. Not by debating the details, but by pointing out the radical nature of this proposal, and its obvious class warfare implications.

Rebate checks. That'll be the day.

Posted by: biz on February 27, 2003 11:31 AM

Woo hoo, the OMB historical tables have been updated.

What federal sales tax rate will be necessary to collect ~18% of GDP?

Posted by: Jason McCullough on February 27, 2003 11:33 AM

Oh, about those details I'm not supposed to discuss, I should have said
consumption = income - net change in savings.

Now, as to not talking about things we don't like -- sorry, just can't live like that. A shift to a consumption tax, as the good professor indicated, is obviously going to involve an attempt to take from some and give to others. That is a question of the motives of those who propose the change. Any change in tax policy under this administration is likely to have the alterior motive of undercutting New Deal programs. Now, how about some good Democrat doing a "Nixon goes to China" (or a "Clinton runs a surplus"), recommending tax changes that preserve New Deal programs but get rid of the snakes' nest of loopholes, regulations and paperwork we have now?

Posted by: K Harris on February 27, 2003 12:08 PM

"People please. The consumption tax is a stalking horse for the eventual revocation of all parts of The New Deal."

Biz

Thank you for setting the discussion just right. There is indeed a serious threat to the ideals of the New Deal. I am quite worried.

Imagine my surprise -

Federal Reserve Chairman Alan Greenspan said on Thursday an aging U.S. population presents "daunting challenges" for the future that potentially imperil the country's Social Security safety net.

- Reuters

Posted by: anne on February 27, 2003 12:13 PM

Oops, should have said "ulterior". Man, this writing stuff just gets harder every time i due it.

Posted by: K Harris on February 27, 2003 12:43 PM

Though it seems as if some of the changes to retirement plans that place the burden increasingly on employees rather than employers will be set aside, the Administration budget is awful. We are building to an increased structural deficit that will imperil Social Security and Medicare, though these programs were in wonderful shape at the beginning of this Administration.

As the Administration adds in the costs of our presence in the Middle East, the deficit problem will appear all the more serious.

Posted by: anne on February 27, 2003 01:09 PM

The experience of the New Jersey yacht builders was duplicated in the Pacific Northwest. I know because two yacht builders here went under owing my company money, we collected none of it. It's one reason we no longer sell industrial abrasives.

As for repealing the New Deal, hey, it' was 70 years ago. Get into the 21st century.

Posted by: Patrick R. Sullivan on February 27, 2003 01:22 PM

Patrick

Thank you.

The luxury tax was not called for and appeared to have caused problems in several markets. I have no care for such a tax and agree with you completely. Still, the budget has a provision for a 50% tax deduction on the largest SUVs that makes as little sense.

I find no problem with moving on from the New Deal, I find a problem in creating deficits that will cause harm to social insurance programs I dearly value. Modify, modify. Fine. Social insurance is critical.

Posted by: anne on February 27, 2003 01:41 PM

Any deficit problems could be addressed by immediate means testing for Social Security and Medicare, and raising the retirement age to reflect increased life expectancy since the beginning of the New Deal. Of course, this would curtail vote purchasing with entitlement benefits, so what are the odds of that happening? Some might say that tax cuts are a form of vote purchasing, and I would agree. I simply prefer that vote purchasing be done by having people retain what property they have gained through voluntary agreement, as opposed to having the purchase made via the implicitly violent transfer of property.

Posted by: Will Allen on February 27, 2003 02:20 PM

enough with the lies about the suv write off!!!!

it isn't an "SUV" write off, it's an increase in the right off to 50k (IIRC)... point being that the existing write-off wouldn't covefr very much actual equipment (have you priced pickups recently? vans?)

Posted by: libertarian uber alles on February 27, 2003 02:33 PM

Will says "I simply prefer that vote purchasing be done by having people retain what property they have gained through voluntary agreement, as opposed to having the purchase made via the implicitly violent transfer of property."

Some might say - I simply prefer that vote purchasing be done by having people retain what property they have gained through implied violence, as opposed to having the purchase made via the voluntary agreements of a democracy.

While I wouldn't agree with either statement, you should realize that your use of the first phrase only encourages others to use the second phrase. In a roundabout way, you are encouraging violence against yourself with such rhetoric.

BTW, I'll take $18 today as payment for the $20 you'll owe me next year.

Posted by: Dan on February 27, 2003 02:44 PM

Well, Dan, if one belives that majorities can self-legitimate their exercise of power, one might agree with reasoning. If one believes, however, that majorities have limits to what powers they can legitimately exercise, and that individuals do have property rights, although subject to the same limits as other rights, then the counter-reasoning you propose is fallacious.

It is true, however, that several decades after the primary function of national government has become the forcible transfer of property that was originally gained through voluntary agreement, it is difficult to determine who obtained what through morally legitimate means. Hell, our President may his pile through the morally illegitmate use of force, although he used local government as his instrument of thuggery. Yesterday's thuggery, however, should not be used to justify tomorrow's.

I do nothing more radical than propose that one should only obtain others' property through voluntary transaction, except in those instances where the failure to transfer forcibly would threaten tyranny or anarchy. I happen to believe that if substantial numbers of people were faced with severe material deprivation, due to their being unable to provide for themselves, anarchy or tyranny might threaten, so I support forcible transfers to prevent those conditions. I doubt, however, that the wolf would threaten if Warren Buffett no longer accessed his Dairy Queen counter workers' wages for scocial security checks and medicare benefits. Not all older than 65 have Buffett's means of course, but millions of them could live safely without their Social Security benefits, and could pay for more of their medical care. That they forcibly tap the wages of those who have median income and wealth below their level, even though they have the wherewithal to provide for themselves, is a morally illegitimate use of democratic power.

Posted by: Will Allen on February 27, 2003 03:41 PM

Re: consumption tax as stalking horse for revocation of New Deal.

Actually, a tax structure that relies on consumption taxes is the best bet there is for a durable revenue foundation for the welfare state. Don't believe me? Look up the proportion of sales tax to total tax in "progressive" Sweden and France. The solid welfare states finance their spending out of sales taxes, because sales taxes provoke less political resistance than income taxes. Exempt the poor; raise the tax on luxuries; and you've got yourself a mildly regressive revenue flow with which to fund a highly durable welfare state.

Posted by: M. on February 27, 2003 03:43 PM

Will, my point is that your statement and the counter-reasoning are both fallacious. Extremist rhetoric about the use of violence begets violence.

Also your talk of voluntary agreements is ridiculous. Before the New Deal, and certainly before the income tax amendment and the amendment making senators elected by the people, most fortunes were made by those who kept people from associating and negotiating how they chose. The Wagner Act legalizing unions was part of the New Deal.

Since the New Deal, a social safety net has been part of the voluntary agreement. The income tax is part of the voluntary agreement.


Posted by: Dan on February 27, 2003 04:46 PM

Dan, could you explain what is "extreme" about the proposition that the polity should refrain from physically forcing individuals, through implicit threats of violence, to do what they would rather not, unless it can be shown that failing to do so would threaten the polity with anarchy or tyranny? Why do you find the absence of coercion so "extreme"? How does it logically follow that the illegitmate coercion of people, in order to prevent them from negotiating in the manner they would like, justifys an illegitimate coercive property transfer? Is it your position that a sufficient majority legitimates any action taken against the individual, and thus magically tranforms any act of forcible submission to majority will "voluntary"? Or is it your position that the individual is a non-entity; that the collective will is all that matters?

What is truly ridiculous is the proposition that any activity of the state flows from a "voluntary" agreement of all the people involved. The entire rationale for the state is to apply violence to those individuals deemed legitimate targets, due to their decision to not voluntarily comply with the edicts of the governing power, be it a democratic or autocratic power. Certainly, the state is necessary, given human nature, and it is also certainly true that states with democratic processes have greater moral legitimacy than states devoid of democratic processes. It is simply a soft-headed fallacy, however, to maintain that democratic processes render all actions of the state morally legitimate, or that that the activities of a state with democratic processes involve "voluntary agreement" for all those affected.

The United States had well-developed dmocratic processes in 1942. Do you suppose those citizens of Japanese descent who were strippped of their property and locked up in camps thought the action as "voluntary"? Don't try to exclude this example of majoritarian tyranny from our discussion, based upon a rationale of a inept or malicious Supreme Court; the Supreme Court is itself a majoritarian institution, and a sufficiently large popular majority can transform the Constitution into any form it desires, up to and including the incarceration of innocent people based upon their ethnicity. No, all silly sentimentality regarding democracy aside, the activities of the state do not flow from a "voluntary agreement" of all the people affected.

Posted by: Will Allen on February 27, 2003 05:27 PM

So my question is, what exactly is the problem with a simple, progressive income tax that counts all forms of money coming in as income? Exempt the first twenty or thirty K, get rid of all other deductions (including mortgage interest and dependent), and put H&R Block out of business.

Posted by: Tony Ringley on February 27, 2003 06:28 PM

Tony, it would be preferable to what currently exists, but the definition of "income", or "profit", inevitably leads down the path to where we are today.

Posted by: Will Allen on February 27, 2003 10:12 PM

Tony,
You are absolutely right. An income tax is fine, because democracies inevitably lead to where we are today (too many loopholes), not anything unique about income taxes. The clamoring will begin for loopholes even with a consumption tax.

Will,
No rights are absolute. You can't yell "fire" in a crowded theatre and you can't own a tank. So your property rights are also not 100%, as evidenced by the income tax amendment. There is, by now, a long established precedent for our policies of a social safety net. Probably as long as you've been alive. This represents the voluntary agreement we have as a society. I hate to use extremist rhetoric, but it is voluntary in that you still choose to live in this country. You can 'opt out' of the agreement by packing up and moving to South America at any time and there will be no coercion. However, if you don't follow the laws the last resource of government is force. So your moaning about government violence carries no more weight than moaning about the violence implicit in a parking ticket. But in the political arena moaning about violence radicalizes the process and begets violence.

The interned Japanese-Americans witnessed a country break from precedence and go against its own stated values. Rights were violated, not because their rights were absolute, but because the change went against anything they could reasonably expect or do anything about.

Posted by: Dan on February 28, 2003 01:20 AM

To add the obvious: The internments were so extreme they went beyond any qualitative discussion of rights. Unlike the predicament that Will moans about.

Will should be ashamed trying to ally the internment victims with his stance on taxing the wealthy.

Posted by: Dan on February 28, 2003 01:58 AM

Dan should be ashamed for using baseless invective and erecting straw-men in an attempt to avoid substantive argument. It really is quite pathetic.

If you care to actually respond to what I wrote, instead of engaging in idiotic attributions of "moaning", or other nonsensical rhetoric, you'll have to concede that I clearly support property transfers that are needed to avoid tyranny or anarchy, so the chowder-headed contention that I somehow am opposed to taxing the wealthy is yet another trip into fantasy- land.

Actually, as my remarks about our current President indicate, what I object to most vehemently is the way in which the wealthy use the power of the state to grab the property of those with less wealth. Bush's use of eminent domain and the taxing power of local governments to increase his net worth by several million dollars is among the most offensive acts that a President has engaged in, if we can discount the somewhat credible rape allegations against the last President. Bush's method of wealth acquisition is wholly illegitimate, regardless of the fact that a majority of the voters in Arlington, TX approved of the measure. Similarly, if less blantantly, due to it's commonplace occurrence, Warren Buffett's forcible access to the wages of the people he employs at Dairy Queen, in order to pay Mr. Buffett Social Security and Medicare benefits, is morally inexcusable.

To be fair to the oracle of Omaha, he didn't lobby for such an outcome, and for all I know he pays for his medical care out of pocket, and gives his Social Security payments to charity. What you call a "social safety net" (for who, CEOs and shortstops?), however, is nothing but an elaborate system of vote purchasing, with state power as the means to coercively grab the money required to buy the vote, with the largest or most motivated blocs of citizens the most valued ballot vendors, and without any regard to whether such coercion is actually required to maintain a functioning, prosperous, society. Given that those above the age of 65 have median incomes and net worth well above those below the age of 25, there are literally millions of retirees who are using state power to grab the money of those with less wealth, and are able to do so because they, and the huge lump of baby boomers waiting for there turn at the trough, are more valued vote sellers.

What you disingenuously call "moaning" is a simple recognition of the undeniable fact that the primary function of the state is apply violence, either explcitly or implicitly, against those deemed legitimate targets. That you choose to lie to yourself about this fact doesn't render it less true. Violent coercion is an unavoidable component of human relations, if an unpleasant one, but the question is, when is it justified? If you wish to advocate majoritarian tyranny, it would be preferable if you had the honesty to do so forthrightly. This may come as a shock, but it once went against the traditions of this country to have wealthier people use the power of the state to grab the wages of those less wealthy, but through the exercise of democratic power, it has become commonplace. Your answer to those who question the use of force to gain property that cannot be obtained through voluntary agreement, for no reason other than personal enrichment, and having the votes to pull it off, is to tell them to leave the country, if they don't like it. This is every bit as thuggish as telling those who exercise their right to free speech that they ought to exile themselves rather than complain.

Posted by: Will Allen on February 28, 2003 07:44 AM

There you go again Will. You have managed to say something even more dumb than your comments about violence.

"This may come as a shock, but it once went against the traditions of this country to have wealthier people use the power of the state to grab the wages of those less wealthy"

Which period do you refer to Will? The period when slavery was enforced by the state. Or the period before the New Deal when workers rights were denied by the state. No free association and no protection against endangerment. For example Carnegie's steel mills accounted for 20% of all male deaths in Pittsburgh in the 1880s. Their families had no recourse, and never mind the injured.

Which of these two periods are you refering to as a panacea for those less wealthy?

Posted by: Dan on February 28, 2003 08:48 AM

Well goodness, Dan, why would you object to slavery? After all, it was an established tradition in this country, from the colonial times, and at the time of the country's founding it was not an unpopular institution. In your view, as long as an action is popular, or at least not widely unpopular, and it is consistent with established precedent, it is wholly morally legitimate. Why would you care if Carnegie's employees were endangered? In your view, they should have just left the country if they were unhappy, and were unable to win a majority.

If you wish to maintain that the use of state power by some citizens to grab the property of other citizens was as widespread in, say, even
1953, as it is today, well you are entitled to your fantasies. The point remains; if you favor majoritarian tyranny, it would be preferable if you simply said so forthrightly. If not, please inform as to what you believe are the specific limits to the exercise of legitimate majority power. To this point, all that you written indicates that you believe majorities have the legitimate power to do whatever they wish to minorities, as long as the majority decides it isn't too "extreme", which of course means that minorities really have no rights. This standard of extremity is as nebulous, and therefore meaningless, as the invocation of "fairness" as a rationale for coercion.

Posted by: Will Allen on February 28, 2003 09:50 AM

Okay, what's the benefit to the economy of taxing consumption, rather than income? I guess that in times of high inflation, a consumption tax may tend to cool off an overheated economy, but in times of recession, I don't see why you would want to discourage consumption.

My brother, Kyle, has suggested the opposite strategy: tax wealth rather than income or consumption. One big benefit to this is that (it seems to me) it would make cheating more difficult. Ownership (of houses, stock, copyrights, patents, etc.) is something that is protected by the power of the state, so if you want to enjoy those protections, you must pay your ownership taxes.

A nice side-effect would be on copyrights: if a company wants to sit on its rights forever, then at least it will be paying taxes for the privilege.

Posted by: Daryl McCullough on February 28, 2003 10:13 AM

Defining value would get complicated, but probably no more so that defining income or profit. The consumption tax is probably the most simple, although no doubt various entities would lobby for exemption of their favored form of consumption. As to cheating, the size of the tax rate is more important that the form of taxation. Given a high enough rate of taxation, people will inevitably take extraordinary measures, legal, illegal, and in between, to avoid the tax. If the tax rate is low enough, it becomes far less worthwhile to devote large amounts of energy to lowering tax exposure. Of course, a low tax rate also lessens the ability for political entities to engage in vote purchasing, thus lessening their power. For people who covet political power, a complex tax code with high rates is an extremely powerful tool with which to satisfy that desire.

Posted by: Will Allen on February 28, 2003 10:31 AM

Will, in regards to precedent, you missed my point that begins "To add the obvious".

Also, the top tax rate in 1953 was at or above 90%.

"please inform as to what you believe are the specific limits to the exercise of legitimate majority power." The question that has been debated since Greek times and will continue to be debated long after we are gone.

Posted by: Dan on February 28, 2003 11:04 AM

I didn't miss anything, as evidenced by my remarks as to the insufficiency of the standard or extremity to limit majority power; what some consider "extreme" others, perhaps the majority, will consider unremarkable. Yes the top marginal tax rate in 1953 was 90%; WWII had huge effects on American society, many of them harmful, regardless of the need to destroy German fascism and Japanese militarism. However, the degree to which tax revenues were collected for no other reason than to purchase the votes of favored factions was less prominent than today. Do we really have to contrast in detail the budget expenditures of 1953 and 2003 in order to establish this fact?

Indeed, the question I posed is fundamental to what constitutes legitimate government, and will forever be debated. This is exactly why it is insufficient to simply offer, "What I advocate is favored by the majority ", or "This is our tradition" as a morally legitimate rationale for state action. Democratic processes are critical to legitimate government, and traditions or precedents should only be discarded with caution, but democracy and tradition are by themselves insufficient to the challenge of governing in a morally legitimate fashion.

Posted by: Will Allen on February 28, 2003 11:57 AM

Total govt expenditures in 1953 as a percentage of gdp = 25.3%

Total govt expenditures in 2001 as a percentage of gdp = 28.1%

Turns out you are right. Govt spending has been increasing by 0.2% annually since 1953.

http://www.whitehouse.gov/omb/budget/fy2003/sheets/hist15z3.xls

Posted by: Dan on February 28, 2003 01:50 PM

Dan, you seem to have difficulty referring to what I actually wrote, as opposed to referring to things that you wish I wrote. I said nothing amount total govenrmment expenditures. I referred to what the government outlays were directed to. For instance, in 1953, the wages of minimum wage employees were not being directed to people far wealthier than they, to purchase medical care for those wealthier people.

Posted by: Will Allen on February 28, 2003 04:11 PM

Consumption taxes are normally regressive. High consumption taxes in Europe is justified by progressive distribution of services funded by these taxes. More precisely, consumption tax is roughly proportional to income (minus savings that poorer have proportionally less) while medical care, childcare, education etc. provides similar services to all.

Because in US people with smaller income recieve much less services then in EU, similar consumption tax would be much less fair -- to the point of being a total political non-starter.

Posted by: Piotr Berman on February 28, 2003 09:46 PM

January 21, 2003

Bush Proposal May Cut Tax On S.U.V.'s For Business
By DANNY HAKIM (NYT)

Bush administration's economic plan would increase by 50 percent or more deductions that small-business owners can take right away on biggest sport utility vehicles and pickups; tax experts and environmentalists say plan would provide incentives for businesses to choose biggest gas-guzzling trucks because it takes several years to depreciate cost of passenger cars and smaller sport utility vehicles; potential lift for sales of big SUV's comes amid rising tension in Middle East and increasing criticism of SUV's from environmentalists and regulators; budget official Dr John Graham says Bush administration might be open to changes in tax code that would bring cars more in line with big trucks; chart (M) The Bush administration's economic plan would increase by 50 percent or more the deductions that small-business owners can take right away on the biggest sport utility vehicles and pickups.

The plan would mean small businesses could immediately deduct the entire price of S.U.V.'s like the Hummer H2, the Lincoln Navigator and the Toyota Land Cruiser, even if the vehicles were loaded with every available option. Or a business owner, taking full advantage, could buy a BMW X5 sport utility vehicle for a few hundred dollars more than a Pontiac Bonneville sedan, after the immediate tax deductions were factored in....

Posted by: jd on March 1, 2003 02:56 PM

"Turns out you are right. Govt spending has been increasing by 0.2% annually since 1953."

Yet it dropped 2% from 1980 to 2001. Of course, Bush is driving it back up again though, so.....

Posted by: Jason McCullough on March 2, 2003 12:54 PM
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