Bravo!!!

I don’t care for higher gas taxes by themselves; however, it would make sense turn our tax system upside down and move away from income and capital taxes to consumption taxes (with a large rebate for lower income groups), in which case a higher gas tax would make perfect sense. There used to be, in the early 1990s, a lot of conversation between conservatives and environmentalists about this grand swap, but no more. I suspect that the left’s attachment to the idea of progressive income taxation and redistribution trumps their interest in higher consumption taxes.

Steve H.,

Does this mean you’d support something like the fair tax, one of whose proponents is a friend of responsibility, but not so obviously of virtue? (Hint: I listen to him for about 15 minutes a day, on my way to work.)

We can have a grand debate and deadlock, or we can take a responsible step now, as Mr. Knippenberg suggests. In addition to the argument he makes so well, higher gas taxes make sense on both environmental and national security grounds as well.

I must confess to not having followed the fair tax guys, though I know it has been a big sensation. My answer is a tentative yes, from my partial knowledge. Really, any of the schemes to abolish the IRS and move to a more transparent and consistent tax system would be better. One thing that economists across the political spectrum are nearly unanimous about is the superiority of consumption to income taxes and taxes on capital. (Even Lester Thurow has long thought this.) The great fear is that we’ll end up with a VAT style consumtion tax on top of our current income tax. That’s one reason why I’d be against just a gas tax increase in isolation.

I have a couple of questions about a consumption tax. I will admit at the outset that I love Income Taxes, but would be willing to let them go if a better system could be found. I think the current income tax system is a pretty wasteful to collect revenue.

1. Would the tax rate be the same for businesses and individuals? If not, how would sole proprieterships be distinguished from corporations (like should a sandwich bought by a sole proprietership for personal consumption be taxed at the personal rate, or the business rate?) If they are to be the same, then how does Congress prevent corporations from buying everything for top executives, so executives pay no tax whatsoever, and shareholders are paying their own consumption tax, and the consumption tax of executives?

2. What is to prevent a significant black market from appearing? Everyone reads stories about how high tobacco taxes has created a black market in cigrettes, why would not other people create a black market? Flea markets provide an easy way to do this.

3. Would bartering be considered consumption? Lots of rich people used to join bartering clubs, a lawyer would do work for a doctor, etc. The IRS had to outlaw them, and pursued several people. I imagine this would be much harder to combat with a sales tax sort of system.

4. What is to prevent lobbies from getting Congress to change tax rates for certain goods bought? Why wouldn’t Ford and GM lobby to make cars 5%, and then Dell lobby to make computers 10%. The beauty with an income tax is that lobbying will only go so far, most people will have to pay in the end. I think if you had a sales tax then you would have different rates and no rates for different goods.

I would appreciate any thoughts people have on consumption taxes, other than, "it is good" (that is a bit conclusory).

Sparks,

These two articles don’t cover all the questions you asked, but should suffice as a start.

Friedman - Marketwatch

The Concise Encyclopedia of Economics

Here’s another article as well. Hopefully it answers your concerns about Black Markets. Here is an excerpt.

Keep in mind that it is not necessary to tax consumption directly, through sales or excise taxes, to have a consumption tax system. Since there are only two things that can be done with income—either save it or spend it—eliminating taxes on saving necessarily shifts the tax burden onto consumption. If there were no taxes at all on saving, we would have a consumption tax system, even if there were no direct taxes on sales.

NCPA

Let the economists note that Mr. Knippenberg’s argument for higher taxes on gasoline was not an economic argument. Economic principles do not touch it, though they can tell us its economic effects. Though it would not get us comprehensive tax reform, the economic effects would be good for the environment and for national security.

Lincoln Hawk:

Thank you for the links. I read over the pieces. In the last link the author argued that a consumption tax is not regressive because people usually consume all of their income over their lives. He does not seem to be considering the time value of money. Here are a couple of more observations about the consumption tax:

1. Would charitable contributions be "consumption"? There is some element of consumption in such contributions (good feelings, name recognition, pleasure for supporting a cause one agrees with). Also, would giving gifts to people be consumption, so gifts could potentially be subject to a consumption tax and a gift tax? Under income taxes, giving gifts usually does not result in taxation for the donor, unless income is assigned or something of that nature. Finally, if gifts and the like are taxed, how would gifts that take effect in the future (say remainder interests) be taxed? The consumption occurs when the gift is made, and deferring taxation would seem to be a problem.

2. I seriously doubt that the consumption tax will ever become reality for one simple reason: Seniors. I find it hard to believe that an administration that passed the drug bill due to senior complaints will not cave in to them regarding a consumption tax.

Seniors pay little in taxes right now because social security is not considered income unless a supplemental source of income exists for the senior and that supplemental income is substantial. Even then, only 25% to 75% (maybe 100% in some wild cases) of total social security benefits paid are included in income. Seniors are also partially behind the Blackwell desire to change school funding from property taxes (which seniors pay) to income taxes (which seniors will pay very little). A consumption tax might be a nice dream, but the rates would be changed for various goods, seniors would be exempted, and it would raise such little revenue that both it and the income tax would exist and the tax burden would be even higher for everyone.

"The demand for federal spending by current voters declines with the amount of this spending that is financed by current taxes.” This is true, ceteris paribus. But I hardly see how increased gasoline taxes would solve things or be patriotic...At the same time I agree with Mr. Hayward about prefering consumption taxes. But I think there is no way to avoid the problem of "a VAT style consumption tax on top of our current income tax." So what is the solution? Repeal the federal gasoline tax...and all federal taxes on consumption... at the same time let all states become like Texas (no income tax...how can Sparks be from Ohio and like the income tax?) Let the states charge consumption taxes and let the federal government tax income only. At least this would clarify the bondaries between the states and the federal gov.