The Economic Benefits of a Consumption Tax?

February 12, 2008  ·  Filed under: Education

When I first learned about the FairTax, one of its most immediately attractive features, to me, was that it taxed consumption rather than income.

Consumption taxes, as many economists have pointed out, are far more beneficial to the economy, since they encourage savings and investment, rather than penalizing them the way an income tax does.

Increased savings and investment means more innovations in products and services, more jobs created, more wealth from returns on investment (go middle class!), and greater economic mobility for those with lower standing.

In subsequent discussions of the FairTax, however, I’ve seen very little consideration of these basic merits of moving to a consumption tax.

We see discussions of everything else — the prebate, the impact on this-or-that group, whether government expenditures oughta be taxed, etc — but I’ve seen barely any discussion at all of the more globally significant economic benefits of a consumption tax.

Apparently “it’s the economy, stupid” — except when it involves eliminating a Marxist-inspired income tax? If a consumption tax significantly boosts savings, investment, and economic growth, isn’t that the mother of all “rising tides” that lifts all boats?

Anyway, I’d like to offer this post as an open thread for (summarizing as well as linking to) information about the economic benefits of a consumption tax, as compared to an income tax.

NOTE: If you want to bash consumption taxes as regressive — which is mathematically untrue, by the way — or the worst thing since Bushitler, please do that somewhere else.

This thread is for summarizing (and providing links to further discussion of) the economic benefits of consumption taxes.

And, er, you know, real benefits — so no need to point out how you’d have the perfect excuse to move to the Bahamas, right Hayden? 😉

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14 Responses to “The Economic Benefits of a Consumption Tax?”
  1. My favorite benefit is that it causes imported goods to receive a share of the tax burden that they currently don’t receive, thus bringing the prices of domestically-produced and imported goods closer together in terms of tax burden. Think of that part like a tariff that doesn’t let the WTO bring down the hammer.

    Barry  ·  Feb 12, 2008 at 3:21 pm  ·  Permalink
  2. I like the fact that consumption taxes are indexed directly against the cost of goods and the volume of goods sold. This, to me, is the most accurate and fair way to recoup the costs of government.

    Because government’s only customer is the economy, then the only thing it can produce is goods and services for the economy. Therefore, it is, by definition, a cost of the goods created in the economy – it is a vendor. If this is the case, since all costs of goods are recouped in the sale of the goods, why should the cost of government be recouped any differently?

    Mark Bostleman  ·  Feb 13, 2008 at 2:51 pm  ·  Permalink
  3. Reposting this comment to this area, since it is more on topic and the other thread was getting long.

    One thing regarding the book that I think was done very well (and this goes toward another post on the blog, which may be a better place to discuss it) was that they did a great job discussing the need for economic growth. We are currently around 18.5% of GDP for government size, which is an average tax rate of about 40% of income (since the income base is so much smaller then GDP). See Your real tax rate: 40%. It is estimated that if the size of government was maintained, no new social programs / expansions (cough), and economic growth continued as is, our government would have to grow to 40% of GDP. When my 4 year old daughter reaches adulthood, she’ll be a slave to taxation (paying over 80% of income). I loved Boortz’ analogies to how much 60 trillion really is.

    We have to supercharge the economy. We need a larger tax base. You have to untax savings and investment, you have to drop the corporate tax rate, we have to adjust our border taxation and remove embedded taxes. We need to avoid self-destruction and the half fixes or status-quo implied by opponents won’t do it. The FairTax has its faults, but it’s an economic machine, something which economists almost universally agreed on. We wear out the debate on rates, transparency, government, evasion, taxing savings, and distribution but in the end we’re left with a big picture and bigger realities. We have to do something and we need to do it soon. I’m tired of being on the defensive, when the alternatives are non-existent, no better, or in most cases worse. If we keep progressing the way we are, the U.S. is going to implode under fiscal irresponsibility, something this America loving purple heart vet is desperately fearful of.

    Note: I intentionally made this post a little extreme to generate some additional discussion.

    Morphh  ·  Feb 27, 2008 at 10:29 am  ·  Permalink
  4. Morphh, thank you for your service to our country.

    Morphh said:

    Note: I intentionally made this post a little extreme to generate some additional discussion.

    A little extreme? I say you got it right on.

    I’m very worried about the future my 19 year old son is going to inherit. Every parent hopes their children will be able to attain at least the same standard of living they have. The way we are headed now looks like our children will have a much harder time attaining even the same standard of living we have now, unless there are drastic cuts in spending.

    Cuts in the benefits of entitlement programs are not fair either to all of us that have been forced to pay for these programs all of our lives, but may be the only solution for our children if we don’t do something. Congress, very quietly, already passed a bill that indexes Social Security to income, in effect, screwing citizens out of benefits they have paid for. The Supreme Court has already ruled this is legal.

    I see the FairTax, by virtue of economic growth, as the best way to meet our obligations to the entitlement programs and also allow our children the chance to attain the best possible standard of living. The sooner we get it passed the better because economic growth is a lot like compound interest; the sooner we start and the higher the rate the better the end result.

    Many people look at the economy like they have to fight for a slice of the pie. Economic growth is, in effect, the growth of the pie making more and bigger slices available for all of us. As the economy grows, wages grow too. Who wouldn’t want to earn bigger and/or quicker raises?

    We do need to act fast if we want the best results. Already other countries have been asking about the FairTax. Neal Boortz recently said on his show that Rep. Linder was visiting a foreign country that wanted to learn about how they could implement the FairTax. One has to wonder how many more jobs we will lose overseas if other countries pass the FairTax and we don’t.

    Here is a good article: The Fair Tax Is About Economic Growth By Louis R. Woodhill who is on the Leadership Council of the Club for Growth.

    Another good article showing economic growth during the Reagan years: Supply-Side Tax Cuts and the Truth about the Reagan Economic Record by William A. Niskanen and Stephen Moore.

    And here’s The FairTax and economic growth by the AFFT that shows several estimates for economic growth of the FairTax. Interestingly the highest estimated increase in GDP is 36.3! While I doubt we would get it that high, even half way there would be phenomenal.

    Currently we are growing GDP around a measly 2%. The Reagan years averaged 3.2%. Can you imagine 5%…10%…maybe even 15%?

    You can now sign a petition at FairTax.org.

    Just do it!

    :)

    dculling  ·  Feb 28, 2008 at 5:45 pm  ·  Permalink
  5. Josua — This might warrant a new thread.

    Expansion of Tax Base — Myth or Reality

    FairTax proponents claim that the FairTax rate can be kept low because it “expands the tax base.”

    When pressed exactly what that means, they usually claim that “foreign tourists, illegal aliens and the ‘underground economy'” will provide heretofore uncollected tax revenue which will allow the rest of us to pay less in tax.

    It’s an appealing argument, though, for reasons I’ve elaborated on before, I don’t think really works. However, I am certainly willing to be educated. So, here’s my challenge/question to some of the more quantitatively-inclined FairTax proponents, which might help all of us understand the issue a little better:

    1. Can you elaborate on whom exactly the FairTax is going to tax that our current tax system does not tax. If possible, give estimated numbers of these groups.

    Example: Illegal aliens. Approximately 11 million.

    2. Can you provide a rough estimate of the net increased amounts those groups will pay in taxes vis-a-vis what they currently pay. In making this calculation, you should estimate what they currently pay in taxes versus what they will be expected to pay in taxes.

    Example: Illegal aliens as a group currently pay approximately x dollars in payroll taxes, but are expected to pay y dollars in taxes under the FairTax.

    3. Please state your position as to whether prices will rise under the FairTax, and if so, by how much. This is important, because if prices will not rise (i.e., the 22% “embedded taxes” are replaced by a 23% “tax inclusive” FairTax rate), then the drug dealers and other members of the underground economy are going to be paying almost exactly the same in embedded taxes today as they would under the FairTax, so there wouldn’t be any real net increasd in their tax obligations. Of course, if I’ve missed something, please point that out.

    4. Please add any other comments or numbers that you think might be relevant.

    As a starting point, here are some numbers to consider.

    a. Bush just proposed the 2009 budget. It is $3 trillion.
    b. There are approximately 110 million families in the country.
    c. Each family, on average, is to get around $5000 per year as “pre-bates” inder the FairTax, for a total of approximately $550 billion.
    d. Thus, spending under the FairTax will be at least $3.55 trillion.

    Hayden Kepner  ·  Mar 28, 2008 at 7:41 am  ·  Permalink
  6. Hayden,
    Instead of going through all that… why don’t I just point you to a recent study of the FairTax base in comparision with other bases. It lays it out in detail.

    A Comparison of the FairTax Base and Rate with Other Tax Reform Proposals by the Beacon Hill Institute

    Morphh  ·  Mar 28, 2008 at 8:51 am  ·  Permalink
  7. Morph — Thanks for the link. In my opinion, this study — like all Beacon Hill studiesI have reviewed — is heavy on quantititative analysis, but short on practicalities. In my opinion, they through out very complicated equations to hide the key facts.

    For example, they bury the fact that in their “revenue neutral” analysis, they are assuming a federal deficit of $476 billion. (See Table 7, line 3.)

    Moreover, they fail to answer the question I posed above. It’s one thing to say the tax base is expanded because it “avoids exemptions and deductions characteristic of the current tax law,” but it’s another thing to identify just just who is supposed to be paying taxes under the FairTax that aren’t currently paying taxes today.

    I do note one thing (which is consistent with what I have been saying all along), if you look at the 6th bullet point under Section VII. Conclusion, it notes that the FairTax, like all consumption-based taxes, are REGRESSIVE when measured by current income, though it says the FairTax is progressive when measured by lifetime income.

    For some reason, I don’t normally hear Boortz or Linder telling middle class families that their current tax burden will increase under the FairTax, but — not to worry — the average taxes they pay over the span of their lifetime will probably be lower. I realize that Boortz and Linder are not affiliated with AFFT, and AFFT isn’t responsible for what they do and don’t say, but a little more truth in advertising from the most vocal proponents of the FairTax would be nice.

    Hayden Kepner  ·  Mar 28, 2008 at 12:27 pm  ·  Permalink
  8. Hayden, the base analysis is for what they calculated to be revenue neutral and as such would not include debt, since the current system would not (hence the “debt”). At the time of their analysis, the debt was estimated to be $476 billion. Of course, good economic growth showed that figure was too high for that year. However, the numbers used as the base economy for that year were the same figures that estimated a $476 billion shortfall with the current system. So, if the updated economic figures were used, it would of course increase revenue under the FairTax and decrease that number, just as it did with the current system for the year. Growth of GDP tends to outpace income, so it is likely that the FairTax would have generated more revenue then the current system if recalculated using the latest economic figures. Now we’re going into a recesion, which will of course increase the debt for the this year. It’s a moving target but one thing to keep in mind is that consumption fluctuates less then income – it is a more stable base of revenue.

    There are several other studies that have been done that outline what you’ve questioned above, which is essentially tax burden distribution. Every study that has been done (and I’m not suggesting I fully believe all of it..) shows that it would decrease tax burdens for most americans. Of course any consumption tax measured by current income (yearly) will show as “regressive”. However, this assumes that no savings is spent or taxed, which I’m sure you would agree is ridiculous. We even measure some savings under the current system as tax deferred or outside “taxable income” for that year. Consumption has to be measured in some length beyond a year (multi-year or lifetime) to make any sense or realistic comparison. I think we all to often get stuck on terms like regressive without really looking at what it means, how it compares, etc. As far as middle class paying more, that will all depend on how much they consume – if they live above their means then perhaps they will. But to start this discussion, we have to be strait about what the true tax burden is under the current system, which opponents often avoid. It’s easy to say someone will pay more when doing some apples to oranges comparison (not saying your doing this.. just a generic statement).

    Morphh  ·  Mar 29, 2008 at 12:14 pm  ·  Permalink
  9. I just get a thrill reading all of these comments. It seems we’re all getting tangled up in fancy calculations, which I suppose are necessary when we set about what it will cost US in our SPECIFIC instances.

    But, presuming that the FAIR tax would be truly revenue nuetral and also presuming that whatever revenues are NOT sucked up by the government are either spent or invested [money given away with either be spent or invested too], then revenue nuetrality means that we citizens fair equally well before and after the FAIR tax is activated, because it is after all, “revenue nuetral”.

    So the main benefit of the FAIR tax, it seems to me is that I won’t have to pay to have my taxes prepared (whether I pay HR Block or my tax man) and I won’t have to pay quite as much for goods and services by the amount that companies pay their tax attorneys and accountants to minimize their tax burdens. Keep in mind that whatever they pay their attorneys and tax accountants will be restated in their prices next year (ie. prices will be highter).

    So, it seems to me that if the fair tax is immediately revenue nuetral, that in some future period it will be beneficial in the form of lower prices, even if only marginally so.

    A possible benefit will be that the government may in the future lower the fair tax rate as people who pay no income tax now (folks who run illegal businesses or who can’t pay income tax because they are illegally working) will have to pay the fair tax (unless they slip over one of our borders to buy goods there and then slip back in at night to get ready for next days work).

    On the other hand, I know numerous foreigners who visit the US (and they can do this very handsomely today since the dollar is in the toile) and buy suitcases full of blue jeans here rather than in their own country where the VAT taxes they pay are so high that the prices in their countries are thrice what they are here. We need to think about whether our effective prices will jump 30% after the FAIR tax and whether that will be a strong enough disincentive to foreigners to come and unload their marks, franks and rupees over here for the priviledge of keeping Uncle Sam affloat.

    Keep in mind, I’m asking the question. I personally don’t have a clue. Nevertheless, if the FAIR tax has a promise to stop employing people whose only value added is transferring OUR money to Uncle Sam, the FAIR tax is of great value. My goal is to reduce the size of the federal government because everyone who works for it tends to like to keep it going if you know what I mean…. hey it’s a paycheck, right? But if we all think about it, there are probably an infinite number of more useful things we could be doing with our lives that would make us all better off in the long run. If the FAIR tax can help with this problem, sign me up.

    George  ·  Mar 30, 2008 at 3:36 pm  ·  Permalink
  10. here is my idea on the Consumption Tax and how the republicans can get there mojo back
    do you do the right thing – not smoke, eat right, go to school, not break the law, try to recycle
    if you do these things and are poor that a problem for me
    ask the average joe and the American people do the go to work and pay taxes to support people
    who smoke, don’t eat right (see the movie supersize me – think of the extra heath cost (soon under obama
    tax cost),dont go to school,etc
    its time for people and American people to pay based on results and stop living beyond there means and having the
    average hard working American pay for it
    my plan
    keep the income tax on people above 125,000 or so – that’s just a number i picked it can be debated and go up or down
    then get rid of all other taxes – people and corp
    then have a consumption tax on bad things
    no tax on non processed food and recycled items, other good things that society can decide on.
    tax fast food, smoking the most (i personally would legalize drugs (expect under 21, get caught selling or giving to kids life sentence) and taxes them the highest (call it the new death tax – to pay for there death and heath care cost) and require you to show you have 40 hr a week job to support the habit – because you never going to stop someone from using that wants to)
    tax the rest of products a normal rate
    instead of having a jail system like today for nonviolent offenders have weekend workcamps – if you steal or have a dui work weekends for a couple years (like 10 to 15) on a farm – that will have end illegals – if the farms and other low paying jobs are done by lawbreakers than the demand for illegals will dry up and stop both it and crime.
    industry that provide high paying jobs (like auto that make high mpg cars) that we want here in the USA – don’t tax what they sell or what the buy to make the product
    from the taxes from smoking, fast food, other consumption products give a reward for completing school or training for a new job
    you the average Joe that does not smoke, eats rights, recycles and goes to school will pay less and have a better life
    the coming baby boomers that are going to live the work force is going to mean either we start rewarding for recycle and doing the right things or lower are stardered of living

    james  ·  Nov 8, 2008 at 2:13 pm  ·  Permalink
  11. Great Britain has a fair tax and yet their current economic situation is worse than ours.

    J  ·  Mar 20, 2009 at 3:21 am  ·  Permalink
  12. Great Britain does not have a FairTax. They have an income tax (personal & corporate), national insurance (payroll tax), VAT, excise tax, and an inheritance tax. Also, it doesn’t really matter what type of form of taxation you have if your tax rates are too high – the amount of taxation has a much larger effect on economic growth than the type of taxation. So your point is double moot.

    Morphh  ·  Mar 20, 2009 at 8:35 am  ·  Permalink
  13. James,

    First the Repulicans will never get their mojo back with the lunitics running the asylum.

    Next your idea of a consumption tax is not accurate at all. If your path were to be followed we would have a simular mess as we already have with the current income tax system. While I do agree that some activities that should be discouraged are not covered by the consumption tax, the income tax does not cover them as well. The excise tax is the usual method used to create a “sin” tax. The Fair Tax would not apply anyway.

    RMForbes  ·  Mar 20, 2009 at 1:04 pm  ·  Permalink
  14. Most interested Americans can, upon reflection, that the current income tax will in the near future grow to 50 to 60 % of gross income (for those working). Currently at approximately,40 % …Increasing personal income tax is not a solution, neither is government borrowing…Fair Tax (consumer) seems a solution.. We as a country, should be exploring ways to grow our national wealth, reduce national debt and expand job opportunities and business expansion..It appears that the more money remaining in the hands of citizens allows for growth im the national well being.. A discussion by various groups such as local governments

    Robert Weiss  ·  Jun 27, 2014 at 2:06 pm  ·  Permalink