A Consumption Tax Becomes Fashionable Again

Advocates In Action

Most recently, an AEI scholar even invoked Thomas Hobbes as a proponent for such taxation. There is another advocate right here at the Goldwater Institute in Phoenix, AZ. Some may argue a consumption tax would be better than a European style value added tax.

The Counter Arguments Outnumber And Outweigh

I think it is overall a bad idea for many reasons:

·         Taxes have to be paid by those who can afford to pay. Not all consumers earn money to pay for consumption taxes, e.g. retirees, people between jobs or in job training or people who take some time out from working etc. Thus, would exemptions or lower rates on basic consumption etc. be necessary?

·         It may require a constitutional amendment. That is difficult.

·         How do you define consumption? I would imagine it is as thorny as the definition of income for tax purposes. E.g. buying a home vs. renting an apartment, would renting be an act of consumption as currently already sales taxed e.g. in Phoenix, AZ?

·         A consumption tax is regressive unless you introduce tax-free consumption thresholds and/or progressiveness. Anticipate controversy.

·         What will happen to the existing income taxes? Will the income tax be abolished and removed from the constitution? Unlikely! Or will there be high income taxes besides high consumption taxes like in Europe? Not very desirable!

·         If one aim of introducing consumption taxes is to eliminate the corporate income tax, this could be achieved without a consumption tax. Just abolish the corporate income tax. Distributed profits like dividends and the remuneration of company owners or managers are already taxable. Retained profits would be tax-free. Double taxation would finally and simply be eliminated. Low income tax rates would reduce the distortion faced by business owners when they decide whether profits are to be retained or to be distributed.

·         The US is not alone in this world. A massive change in the US tax system like the introduction of a consumption tax will most likely have international implications of which kind I am not sure. However, the introduction of a consumption tax may well require some form of international coordination and new agreements/treaties. Is it worth it?

·         The proponents of consumption taxes claim that it would foster more investment etc. are not convincing at all when compared to a low rate, simple flat income tax.

·         A consumption tax if too high and if introduced while other taxes still apply (e.g. income taxes, property taxes etc.) invites tax evasion, black market and barter exchanges, which might be more difficult to detect than income tax evasion. E.g. high taxes on cigarettes or alcohol.

·         If avoidance of taxation of capital gain or so-called unearned income is a major aim of some proponents of a consumption tax, then this can be achieved by reforming income taxation or just by keeping income tax rates low. Perhaps this is all some consumption tax proponents are after in the end. Why should realized capital gain or unearned income not be taxed? What a detour!

A Low Flat Rate And Simple Income Tax Is The Superior Solution

A flat and low rate income tax levied on a broad base is still the best solution. Get rid of all the loopholes, exemptions, credits, other special provisions etc. to make the tax code as simple as possible. The tax code should not be the playground of social engineers. Taxes should strictly and exclusively be raised for the sole purpose to cover government expenses, nothing else. Social policies are purely to be realized on the expenditure side of government budget. This is would be fair and transparent.