February 18, 2014


How a national sales tax could solve America's inequality problem (Christopher Matthews, February 18, 2014, Fortune)

But Avi-Yonah argues that what's done with those sales tax receipts is more important. If we use a sales tax to bolster the social safety net -- programs like Medicare, Social Security, food stamps, and Medicaid -- then even a regressive tax could work to reduce income inequality. Stronger social security will help the baby boomer generation, which has lived through an era in which private companies have abandoned guaranteed pension schemes yet members of this generation have not saved for retirement by other means. Other programs will help those on the lower end of the income spectrum, who have been left behind amid a rapid transformation of the U.S. economy and the disappearance of medium-skill, middle-class jobs. In fact, such measures may be necessary to maintain social cohesion and an open economy, Avi-Yonah writes:

Strengthening the social safety net is important to sustaining growth. Open economies tend to have stronger safety nets, because the gains from having an open economy tend to impose risk on the people who lose from globalization, so that a strong safety net is in a democracy a precondition to obtaining widespread political support for openness, which in turn produces growth.

Why use a national sales tax, rather than a progressive income tax, to finance an expansion of the welfare state? First of all, it's easier to avoid income taxes than it is to avoid sales taxes. Wealthy Americans have all sorts of ways of sheltering their income, and such deductions make financing government spending difficult. Second, sales taxes are paid by all segments of society -- working and nonworking people alike -- giving it a broad financial base. Meanwhile, the current system for financing the safety net requires taxing young and productive workers to help older and unproductive workers, which Avi-Yonah argues is fundamentally unstable. Third, a sales tax is much cheaper to administer than income taxes.

Fourth, note the positive feedback loop : one can avoid consumption taxes by saving/investing money, which strengthens your personal safety net. Posted by at February 18, 2014 6:34 PM
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