Purple Tax Plan
Laurence J. Kotlikoff, a Boston University economist who is a columnist for Bloomberg View and previously endorsed the FairTax, now proposes what he calls the Purple Tax (a blend of red and blue), a consumption levy that he says cleans up some problems with the FairTax. It taxes the benefits that homeowners get from living in their own homes. That catches people who would shelter income by buying big houses. It also attempts to tax Americans’ consumption abroad. And it would tax inheritances and feature a payroll tax that, in a nod to liberals, exempts the first $40,000 of income and has no ceiling.
From the Purple Tax Plan:
The Purple Tax Plan replaces the federal personal and corporate income taxes as well as the estate and gift tax with a broad-based, low-rate, progressive consumption tax and a low-rate, progressive inheritance tax. It also makes the highly regressive FICA payroll tax highly progressive. The plan eliminates the need for households to file tax returns and enormously simplifies business tax compliance.
In considering the Purple Tax Plan, please bear in mind that we can have a highly progressive tax system without high marginal tax rates. The Purple Tax Plan features lower marginal tax rates than the current system, yet achieves a much more progressive distribution of tax burdens. It should also generate substantially more revenue. This is due not to “trickle down” or the Purple Tax Plan’s very likely strongly positive growth effects, but simply the fact that consumption is a very broad tax base.
We certainly need more revenue. Based on the Congressional Budget Office’s long-term forecast of June 22, 2011, our nation’s fiscal gap – the difference measured in the present (the present value) of all future projected spending, including servicing the existing debt, and all future taxes is $211 trillion! The fiscal gap represents, in effect, the nation’s credit card bill. Unfortunately, we’re not even paying interest on this liability, which helps explain its $6 trillion growth over the past year. The Purple Tax Plan would shave roughly $36 trillion off our fiscal gap.
Many people view consumption taxation, imposed as a fixed-rate retail sales tax, as regressive and the taxation of wealth, in addition to wages, at a fixed rate as progressive. Since doing one is mathematically and functionally equivalent to doing the other, both views can’t be correct. In fact, both are wrong.
Taxing consumption or, equivalently, the resources used to pay for consumption at a fixed rate is neither progressive nor regressive, but proportional. I.e., if you double economic resources (current wealth plus current and future wages), you double the consumption that those resources will finance, when both quantities are properly measured as present values. Hence, with a fixed consumption tax rate, doubling economic resources will double consumption and double the associated taxes. This is why economist say a consumption tax is proportional.
To make the Purple Tax Plan’s consumption tax truly progressive, the plan includes a monthly payment (demogrant), which ensures that those living at or below the poverty line pay no tax, on net, on their consumption.