"the further reduction, if not the elimination, of taxes on savings and investments, including taxes on dividends and on capital gains on stocks, bonds and real estate".

Rove gets sloppy, the NYT has discovered Bush's darkest secret : he's a tax cutter !

Krugman used to be an economist, not that anyone would be able to tell by reading his columns.

As for the objections to a consumption tax, the regressive nature of such a system can easily be addressed by expanding programmes such as the EIC, wherein lower income wage earners would get a rebate from the Federal government.
Further, no flat tax or consumption tax scheme is ever presented without a low income exclusion or shelter, so the entire argument presented here is a red herring.

It makes sense to me. In both cases you are maximizing your cash in pocket. If it costs more to consume, you will consume less as a matter of course.

However, voluntarily reducing your spending is much harder. Just like work takes long enough to fill up the time at hand, so do people naturally spend money up to how much they have. This is why many financial advisors say to "pay yourself" first by automatically deducting money into a savings vehicle. Money you don't know you have, you never miss.

However, the fact that most people do not already take advantage of 401(k) or IRA to the extent they could shows this is harder than it sounds.

Far worse is that most people have no sense of financial literacy. It is not something taught in schools, although obstensibly money management is one of those essential skills everyone should have. They don't know the difference between various investment vehicles, how the stock market works, or the strategy of diversification. They are inclined to think of brokers and financial advisors as a kind of brilliant stock pickers rather than the truth that they are glorified paper shufflers with only a bit more integrity than used car salesmen.

There are many ways this transfer can be botched, and if it is, heaven help us.

Chris:

They just don't understand it--ask a few co-workers if they're maxing out their 401k's and why not. That's why you need mandates.

Mr. Judd;

I've tried that. Here, the company matches the first $1500 in the 401(k) so you can, in fact, make money by contributing the $1500, then withdrawing the $3000 and paying the 10% surcharge. Or, alternatively, if you just put in $1500 a year you get a 100% return on it first year. And if you're working here, you can spare the $1500. Yet many people don't contribute at all. I've tried asking them why not and never once got a coherent answer. I didn't bother asking why they didn't max out.

Chris: Ouch. Perhaps not ALL financial advisors are "..glorified paper shufflers with only a bit more integrity than used car salesmen." The fact that the average investor doesn't have a natural propensity to follow the most probable path to financial prosperity certainly leaves room for an honest Wealth Coach or two out there (shameless plug).

OJ: You're right. Most don't understand it or might have understood it two tax law changes ago but now? Your comment is a perfect example. In fact, it makes more financial sense only to fund the 401(k) enough to get the full match from the employer. Then fully funding the Roth IRA makes the most sense. If there's money left over after that, topping off the 401(k) is the next place to put it. That is ..... if you don't have an HSA -- which is like a Roth on steroids. Pre-Tax going in, Tax Deferred growth & Tax FREE withdrawals for qualified health care expenses.

The problem with having rebates based on means testing for income is...and its a big one...the IRS can't be eliminated.

And I don't understand why consumtion tax is not progressive. After all, you may have made a lot of money, but if you never spent it, then it is not unfair or any different than the poor poor people right? If you do buy the yacht then you pay the tax.

Perry

AOG:

I used a calculator once to show a 21 year old how much he'd have when he retired and that did get him to max out. :)

I used to work for a company that had an employee stock purchase programme that would, every six months, allow employees who had previously signed up to purchase the company's stock for 85% of the lowest publicly traded price from the preceding six months. Additionally, it wasn't part of the retirement programme, which meant that the stock could be immediately flipped, if desired.
Although that frequently meant an instant 50%+ profit, far fewer than half of all eligible employees participated.

Perry:

The IRS isn't going to be eliminated under any tax scheme, although it might be re-named. However the taxes are collected, some agency will have to oversee it, and attempt to eliminate avoidance. Even before income taxes, there were customs, tariffs and other fees to collect.

Means-tested rebates won't eliminate filing, but, it will eliminate filing by those who don't qualify, or don't care, so at least a third of the workload will disappear.

Consumption taxes are regressive because everyone must spend some minimum amount to survive, on food, clothing, marijuana, and so forth.
For some, all of their income goes toward such necessities, and so they are fully taxed; for many, most of their income would be taxed; and for the top 15% or so, they wouldn't even notice the additional expense of survival.
Thus, it makes a moral sense to exempt from taxation some minimum amount, that everyone must needs spend to live, and tax only the discretionary spending that you describe.

Thanks Michael,

Yes, some vestage of the IRS would remain for the purpose of collecting consumtion tax, agreed, but that would be very similar to State taxes and use same mechanism. Eliminating the "tax code", the big set of laws - is really the only thing I am interested in and where I think the big payback would come from.

All those out of work lawyers, accountants, and governernment auditors, -oh boy - so this will never happen, but nice to dream.

Perry