December 8, 2011


The Progressive Consumption Tax: A win-win solution for reducing American income inequality. (Robert H. Frank, Dec. 7, 2011, Slate)

The good news is that we could pull a few simple policy levers that would greatly reduce the adverse effects of growing income gaps without threatening the benefits that have been made possible by improved technology and increased competition.

The simplest step would be to scrap the current progressive income tax in favor of a much more steeply progressive tax on each household's consumption. Families would report their taxable income to the IRS (ideally under a tax code that greatly simplifies the calculation of taxable income), and also their annual savings, as many now do for IRAs and other tax-exempt retirement accounts. The difference between those two numbers--income minus savings--is the family's annual consumption expenditure. That amount, less a large standard deduction--say, $30,000 for a family of four--is the family's taxable consumption. Rates would start low and would then rise much more steeply than those under the current income tax.

Families in the bottom half of the spending distribution would pay lower or no higher taxes than under the current system. But high marginal rates on top spenders would not only generate more revenue than the current system, but would also reshape spending patterns in ways that would benefit people up and down the income ladder.

If top marginal income tax rates are set too high, they discourage productive economic activity. In the limit, a top marginal income tax rate of 100 percent would mean that taxpayers would gain nothing from working harder or investing more. In contrast, a higher top marginal rate on consumption would actually encourage savings and investment. A top marginal consumption tax rate of 100 percent, for example, would simply mean that if a wealthy family spent an extra dollar, it would also owe an additional dollar of tax.

We are all neoconomists now.

Posted by at December 8, 2011 5:32 AM

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