September 3, 2019


The Benefits of a Progressive Consumption Tax (KENNETH ROGOFF, 9/03/19, Project Syndicate)

One of the main objections is that switching systems would require a potentially complex transition to avoid penalizing existing wealth holders, who would be taxed when they try to spend accumulated savings on which they had already paid income taxes. Yet, in an environment where wealth inequality is rising inexorably, that drawback may be a virtue. Moreover, a great strength of a consumption tax system is that it does not tax saving, and also gives firms more incentive to invest. [...]

Back in the mid-1980s, Stanford University's Robert Hall and Alvin Rabushka advocated what was essentially a twist on a value-added tax (VAT) that segregated wage income and allowed for greater progressivity (even more so in a refinement proposed by Princeton University's David Bradford in his "X-tax"). A consumption tax (which is not a sales tax, but rather uses similar information to that required by the existing tax system) is simple and elegant, and could save a couple hundred billion dollars a year in deadweight accounting costs. Importantly, these plans contain a large exclusion so that lower-income families pay no tax at all.

But instead of using an exclusion for low-income households, the system can achieve progressivity by providing a large lump-sum transfer (as in a universal basic income), as suggested by leading Portuguese macroeconomist Isabel Correia, who estimates that her plan would result in both higher growth and greater income equality than under the current tax system. Correia's analysis focuses on the long run, but with a transition suitably designed to protect small family businesses, it should be possible to ensure short-run gains as well.

Of course, in terms of fairness, much depends on how large the transfers and exemptions are, and how low the tax rate is set. Until now, it has mostly been a smattering of Republicans who have favored switching to progressive consumption taxes (though a variant was championed by the liberal icon Bill Bradley, a former US senator from New Jersey). Ironically, one reason the idea has not received broader Republican support is conservatives' recognition that a consumption tax would be so efficient that the government could too easily raise funds to expand social programs.

Tax what you don't want.

Posted by at September 3, 2019 12:27 PM