A consumption tax does have the advantage of being relatively value-neutral so you don't get distortions like subsidies for making certain purchases.
The difficulty is always in the transition or implementation scheme. Much like UBI sounds like a great idea until it's clear it will be *in addition to* the existing welfare state because the government unions aren't going to let you fire all the people administering those programs, a consumption tax sounds great in theory but in practice it is likely to be an addition to rather than replacement for our existing tax regime and if implemented as a VAT its operation is opaque and not easily understood.
Income or consumption taxes could equally finance a welfare state. In the immediate run I'd favor substituting a VAT for the tax on wage income that funds retirement and health insurance benefits and subsidies, and unemployment insurance. A revenue neutral increase in deductions for retirement savings with say higher marginal rates would push the structure toward taxing consumption more then saving.
> I would not say that consumption is a bad thing. But it is less virtuous than work, thrift and risk-taking investment.
Why bring virtue into it at all? It would be silly to say someone who spends an hour painstakingly sweeping a floor instead of ten minutes using a vacuum is being virtuous. Or to celebrate the thrift of the 80 year old who goes hungry to stuff an extra couple bucks under their mattress. There's nothing fundamentally virtuous or vicious about these things.
Better to think in terms of utility. Consumption is the economic activity from which we derive utility. All the others (work, saving, and investment) force us to forego utility in the hope of gaining more down the road.
Taxing consumption, then, is better, because it's the most inelastic. People already want to consume (and usually too much), so throwing up an obstacle to something they want to do is, on the whole, somewhat beneficial. We already don't enjoy work, saving, and investment, and taxing these things creates a further disincentive.
Note that this has to bring in some behavioral econ assumptions, about whether people are reasonable in their future-discounting inclinations. Generally they aren't (10 utiles now are treated as much more valuable than 10 utiles tomorrow), which means taxing consumption is indeed going to have a positive effect. Taxing the consumption of the paranoid 80-year-old in your example would not be beneficial, though. It would only make them exaggerate their pathology further!
Not among...the Single Land Tax is easily the least bad tax.
It is the only tax that I can support morally. All other taxation is theft. A tax on unimproved land falls literally into the "you didn't create that" category.
Rather than higher income taxes, I'd certainly favor more progressive real estate taxes and less gov't spending and less deficit, but it ain't likely now or in the near future.
Tho I can imagine, as BlackRock and other companies buy more real estate, that some additional property tax and/or land value tax on company owned housing is popularized by some group and then some politicians.
But land value tax rather than property tax, as Henry George advocated, seems in practice to be far less popular, and property taxes also remain quite unpopular.
Governments where all power is concentrated* selected by voting + universal suffrage + redistributive tax system = Giant slush-fund for the elected/would-be elected to use to bribe the electors for their votes + elections which are auctions wherein the electors sell their votes to the highest bidders.
The behaviour being taxed is bribery and corruption.
*This is the polar opposite of democracy where power is distributed equally among all in society so no person or group can use it to impose their will on others. Democratic Government is an oxymoron.
Curious that governments are quite willing to tax tobacco at exorbitant levels in the name of public health, but have not touched alcohol taxes for decades. Alcohol contributes mightily to death and injury....both to the drinker and to others near and far. No traffic deaths are attributed to tobacco, but thousands are attributed to alcohol. No cases of spousal or child abuse arise from tobacco, but drinking is a major contributor.
Why the difference in taxation? Why is smoking stigmatized and not drinking?
But bad behavior is popular, thus there's a popular push to keep the taxes on it low.
Sin taxes, on alcohol & cigarettes (& rec drugs?) & gambling are less socially bad than other taxes, but the poor pay far more of their non-food income in such taxes already. They're often poor BECAUSE of their indulging in the "sins", aka "sub-optimal actions", which are being taxed. Too high a tax is both unpopular and turns those who indulge too much to look for cheaper, illegal alternatives.
Taxing consumption is better long term, for the future, but has similar problems. Only taxing "the rich" is popular - often too popular, based on the lousy zero-sum idea that the rich have immorally gotten that way thru uncaring greed.
And then cutting taxes to increase company investment, then employment and/or productivity gets somewhat dishonestly labeled (by e.g.Thomas L. Hutcheson) as "upward redistribution". There is clear and negative envy about the rich, and wanting them to do badly or suffer extra taxes because they were successful in the past is not good.
Still, income inequality is a real problem when the bottom 20% or 40% or median 50% income level is not rising. We need a better metric than gini co-efficient to track it. I'd prefer a top over bottom ratio that becomes known, and used to try policies to reduce it. Top 90% or 99% (10% or 1%) over the 40% or 20% (quintile boundary less than median 50%).
Thus, while I mildly oppose a carbon tax, I prefer it to boondoggle gov't spending, mostly to friendly (ie donating) companies for green tech. A carbon tax would likely be far more popular if it was graduated, so those who use a LOT pay at a higher rate.
But nobody should be climate alarmed into supporting any tax or gov't program until the UN and most government agencies switch to on-line Zoom meetings, without the need for CO2 polluting jet set meetings and conferences. Especially any and every "climate change" conference. Kids need in-person schools far more than bureaucrats need face-to-face meetings. Many companies are doing fine, meeting wise, on-line rather than f2f.
Taxing the rich is also based on the idea that some part of income is due to luck, some part on the idea of declining marginal value of income (or consumption) and some on the fact that deficits are taxes on invest and at least some of the income of "the rich" is consumption, so reducing the deficit that way shifts resources toward investment.
Diminishing marginal utility, plus the fact that a small number of people create huge amounts of value for society, means tax rates on those with very high incomes should be lower: it takes larger and larger incentives to keep them working (and producing massive value for the rest of us).
I agree this is a factor that shouldn't be ignored, but it could easily be outweighed by the utility gains due to redistribution depending on how big those are. It also shouldn't be ignored that among the small number who create the greatest amounts of value in society are many (Einstein, MLK) who aren't acting on incentives that are at all related to their income.
Even if one accepts the assumptions of that debatable framework, one can still make a key disctinction between earned income that is saved and invested on the one hand, vs spent and consumed on the other, such that it doesn't make sense even in that framework to levy the same tax regardless of what the person decides to do. So one still concludes that its better to tax behavior instead of people.
Surely the conclusion to draw would be that it doesn't make sense to levy the same tax regardless of decisions, and it also doesn't make sense to levy the same tax regardless of income/wealth. So both should factor into the total amount of tax someone pays, as is currently the case (although of course we're very far from an optimal balance).
Economists also favor taxing things with very inelastic supply or demand, because then the taxes have low distortions (basically, the collect revenue without distorting behavior). Most famously this includes taxing land and staple goods, but the arguments apply to taxing sillier things like height.
I think that does not reflect the modern conception of externalities. An externality is not a purely bad thing. The purpose of a Pigovian tax is to equate the social and private costs of an externality, not to reduce the quantity of externalities to zero. If an externality is supplied very inelasticly, that probably means there is great value in producing that externality. So discouraging that externality to zero is very costly to aggregate welfare. Instead, the efficient choice isn't to hope for more elastic supply but to set the taxes on externalities to match the wedge between social and private costs, even if that means there is a large quantity of externalities produced at that price. Once you've done that, the actual elasticity doesn't matter.
I completely agree. There is and optimal level of any pollutant that is not necessarily zero. Specifically, with a tax on net emissions of CO2 I think the long run will be negative net (we will overshot the optimum CO2 concentration level) but with lots of fossil fuel bine burned and more than offset by CO2 capture and sequestration.
Clearly business income should not be taxed at all. Business income is the income of the owners and it is they who should be taxed at their individual tax rates. That is the fairness argument but the fact that business income taxation is fiddled with exceptions and special treatment that eliminating it would improve allocative efficiency of investment.
A consumption tax does have the advantage of being relatively value-neutral so you don't get distortions like subsidies for making certain purchases.
The difficulty is always in the transition or implementation scheme. Much like UBI sounds like a great idea until it's clear it will be *in addition to* the existing welfare state because the government unions aren't going to let you fire all the people administering those programs, a consumption tax sounds great in theory but in practice it is likely to be an addition to rather than replacement for our existing tax regime and if implemented as a VAT its operation is opaque and not easily understood.
Income or consumption taxes could equally finance a welfare state. In the immediate run I'd favor substituting a VAT for the tax on wage income that funds retirement and health insurance benefits and subsidies, and unemployment insurance. A revenue neutral increase in deductions for retirement savings with say higher marginal rates would push the structure toward taxing consumption more then saving.
+1
Think about how much energy gets spent on talking about the gas tax.
> I would not say that consumption is a bad thing. But it is less virtuous than work, thrift and risk-taking investment.
Why bring virtue into it at all? It would be silly to say someone who spends an hour painstakingly sweeping a floor instead of ten minutes using a vacuum is being virtuous. Or to celebrate the thrift of the 80 year old who goes hungry to stuff an extra couple bucks under their mattress. There's nothing fundamentally virtuous or vicious about these things.
Better to think in terms of utility. Consumption is the economic activity from which we derive utility. All the others (work, saving, and investment) force us to forego utility in the hope of gaining more down the road.
Taxing consumption, then, is better, because it's the most inelastic. People already want to consume (and usually too much), so throwing up an obstacle to something they want to do is, on the whole, somewhat beneficial. We already don't enjoy work, saving, and investment, and taxing these things creates a further disincentive.
Note that this has to bring in some behavioral econ assumptions, about whether people are reasonable in their future-discounting inclinations. Generally they aren't (10 utiles now are treated as much more valuable than 10 utiles tomorrow), which means taxing consumption is indeed going to have a positive effect. Taxing the consumption of the paranoid 80-year-old in your example would not be beneficial, though. It would only make them exaggerate their pathology further!
I'm a growing fan of Georgian Land Value Taxes - what behavior do you see that taxing?
Owning the naturally limited amount of land; it is zero-sum, the more Bill Gates owns, the less for all other owners. Or even "land in Manhattan".
Land Value Taxes are among the least bad taxes, tho also not so easy.
Not among...the Single Land Tax is easily the least bad tax.
It is the only tax that I can support morally. All other taxation is theft. A tax on unimproved land falls literally into the "you didn't create that" category.
Not so easy? In the US, at the federal level, maybe, but at the local level, most real estate incurs ad valorem tax.
Rather than higher income taxes, I'd certainly favor more progressive real estate taxes and less gov't spending and less deficit, but it ain't likely now or in the near future.
Tho I can imagine, as BlackRock and other companies buy more real estate, that some additional property tax and/or land value tax on company owned housing is popularized by some group and then some politicians.
But land value tax rather than property tax, as Henry George advocated, seems in practice to be far less popular, and property taxes also remain quite unpopular.
Governments where all power is concentrated* selected by voting + universal suffrage + redistributive tax system = Giant slush-fund for the elected/would-be elected to use to bribe the electors for their votes + elections which are auctions wherein the electors sell their votes to the highest bidders.
The behaviour being taxed is bribery and corruption.
*This is the polar opposite of democracy where power is distributed equally among all in society so no person or group can use it to impose their will on others. Democratic Government is an oxymoron.
Curious that governments are quite willing to tax tobacco at exorbitant levels in the name of public health, but have not touched alcohol taxes for decades. Alcohol contributes mightily to death and injury....both to the drinker and to others near and far. No traffic deaths are attributed to tobacco, but thousands are attributed to alcohol. No cases of spousal or child abuse arise from tobacco, but drinking is a major contributor.
Why the difference in taxation? Why is smoking stigmatized and not drinking?
Yes taxes are an incentive for certain kinds of behavior but they also alter after tax incomes. Both effects need to be kept in mind.
But bad behavior is popular, thus there's a popular push to keep the taxes on it low.
Sin taxes, on alcohol & cigarettes (& rec drugs?) & gambling are less socially bad than other taxes, but the poor pay far more of their non-food income in such taxes already. They're often poor BECAUSE of their indulging in the "sins", aka "sub-optimal actions", which are being taxed. Too high a tax is both unpopular and turns those who indulge too much to look for cheaper, illegal alternatives.
Taxing consumption is better long term, for the future, but has similar problems. Only taxing "the rich" is popular - often too popular, based on the lousy zero-sum idea that the rich have immorally gotten that way thru uncaring greed.
And then cutting taxes to increase company investment, then employment and/or productivity gets somewhat dishonestly labeled (by e.g.Thomas L. Hutcheson) as "upward redistribution". There is clear and negative envy about the rich, and wanting them to do badly or suffer extra taxes because they were successful in the past is not good.
Still, income inequality is a real problem when the bottom 20% or 40% or median 50% income level is not rising. We need a better metric than gini co-efficient to track it. I'd prefer a top over bottom ratio that becomes known, and used to try policies to reduce it. Top 90% or 99% (10% or 1%) over the 40% or 20% (quintile boundary less than median 50%).
Thus, while I mildly oppose a carbon tax, I prefer it to boondoggle gov't spending, mostly to friendly (ie donating) companies for green tech. A carbon tax would likely be far more popular if it was graduated, so those who use a LOT pay at a higher rate.
But nobody should be climate alarmed into supporting any tax or gov't program until the UN and most government agencies switch to on-line Zoom meetings, without the need for CO2 polluting jet set meetings and conferences. Especially any and every "climate change" conference. Kids need in-person schools far more than bureaucrats need face-to-face meetings. Many companies are doing fine, meeting wise, on-line rather than f2f.
Taxing the rich is also based on the idea that some part of income is due to luck, some part on the idea of declining marginal value of income (or consumption) and some on the fact that deficits are taxes on invest and at least some of the income of "the rich" is consumption, so reducing the deficit that way shifts resources toward investment.
Doesn't diminishing marginal returns (of utility from money) mean that economists should focus on both these things?
Diminishing marginal utility, plus the fact that a small number of people create huge amounts of value for society, means tax rates on those with very high incomes should be lower: it takes larger and larger incentives to keep them working (and producing massive value for the rest of us).
I agree this is a factor that shouldn't be ignored, but it could easily be outweighed by the utility gains due to redistribution depending on how big those are. It also shouldn't be ignored that among the small number who create the greatest amounts of value in society are many (Einstein, MLK) who aren't acting on incentives that are at all related to their income.
Even if one accepts the assumptions of that debatable framework, one can still make a key disctinction between earned income that is saved and invested on the one hand, vs spent and consumed on the other, such that it doesn't make sense even in that framework to levy the same tax regardless of what the person decides to do. So one still concludes that its better to tax behavior instead of people.
Surely the conclusion to draw would be that it doesn't make sense to levy the same tax regardless of decisions, and it also doesn't make sense to levy the same tax regardless of income/wealth. So both should factor into the total amount of tax someone pays, as is currently the case (although of course we're very far from an optimal balance).
Economists also favor taxing things with very inelastic supply or demand, because then the taxes have low distortions (basically, the collect revenue without distorting behavior). Most famously this includes taxing land and staple goods, but the arguments apply to taxing sillier things like height.
Economist also favor taxing negative externalities. There the greater the elasticity, the better.
I think that does not reflect the modern conception of externalities. An externality is not a purely bad thing. The purpose of a Pigovian tax is to equate the social and private costs of an externality, not to reduce the quantity of externalities to zero. If an externality is supplied very inelasticly, that probably means there is great value in producing that externality. So discouraging that externality to zero is very costly to aggregate welfare. Instead, the efficient choice isn't to hope for more elastic supply but to set the taxes on externalities to match the wedge between social and private costs, even if that means there is a large quantity of externalities produced at that price. Once you've done that, the actual elasticity doesn't matter.
I completely agree. There is and optimal level of any pollutant that is not necessarily zero. Specifically, with a tax on net emissions of CO2 I think the long run will be negative net (we will overshot the optimum CO2 concentration level) but with lots of fossil fuel bine burned and more than offset by CO2 capture and sequestration.
Clearly business income should not be taxed at all. Business income is the income of the owners and it is they who should be taxed at their individual tax rates. That is the fairness argument but the fact that business income taxation is fiddled with exceptions and special treatment that eliminating it would improve allocative efficiency of investment.