Alan Blinder gives a pretty good lesson.
just remember one simple principle: If we tax Activity A at 15 percent and Activity B at 38 percent, a free-market economy will give us more A and less B. Some of this shifting will represent genuine movements of resources out of B and into A — including those bad investments I just mentioned. The rest will be paper manipulations devised to avoid taxes.
Politicians frame the issue as taxing certain types of people. Economists look at what activities are being taxed.
Blinder argues that taxing capital gains differently from other forms of income creates distortions. You try to change other forms of income into capital gains.
In my view, the tax system will always be taxing the wrong activity as long as it taxes income. Instead, the tax should be on consumption.
When you earn income, you can either spend it on consumption, save it, or give it to charity. The latter two should not generate taxes.
READER COMMENTS
dearieme
Jul 29 2007 at 8:54am
Which would give you huge, sprawling, extravagant, intellectually corrupt charities, wouldn’t it?
Tim Worstall
Jul 29 2007 at 9:04am
The Economist spent most of the 80s arguing for this sort of system.
As long as you tax withdrawals from savings (ie, those that are spent on consumption goods) then it does seem to be the best system possible.
Gabriel
Jul 29 2007 at 9:09am
But charity goes to consumption too, in its vast majority. So you probably want a negative consumption tax or a negative income tax (the consumption-saving decision can be distorted too).
Everyday Economist
Jul 29 2007 at 10:43am
My essential problem is with the use of the “complicated tax code” argument. If it is a simplification of the tax code that matters, then we should move to one rate for everyone (preferably on consumption).
Matt
Jul 29 2007 at 10:45am
I think people should tend to pay for what they use.
What government services to people rely on? If we could answer this we would have a much better idea who is getting free government services. But we cannot anwer this because politicians, first, disguise the accounting in government.
I am still waiting for the economist who actually studied government services and determined who were the winers and losers in abtaiing them.
Andrew
Jul 29 2007 at 11:08am
Matt,
Here’s an attempt from earlier this year to answer your question of which households rely on which government services, and who pays the taxes that fund them:
http://www.taxfoundation.org/news/show/2282.html
Michael Austin
Jul 29 2007 at 1:41pm
“In my view, the tax system will always be taxing the wrong activity as long as it taxes income. Instead, the tax should be on consumption.
When you earn income, you can either spend it on consumption, save it, or give it to charity. The latter two should not generate taxes.”
I always liked the observation that with an income tax you are taxing what you put into the economy and with a consumption tax you are taxing what you take out.
The problem with consumption taxes is, of course, a political one. You are allowing savers to potentially avoid taxation on savings in perpetuity. Although I am philosophically in support of the general idea it seems to be a political non-starter. I would be curious to hear what others would think of the following idea to overcome this problem.
My perfect tax system would look like the following:
Create a flat rate consumption tax that eliminates the income and payroll taxes as well as excise taxes and replace it with a single flat rate consumption tax such as a national sales tax or a value added tax. This would be a workable consumption tax.
To overcome the political problems associated with savings avoiding taxation have an estate tax on untaxed wealth (accumulated savings and associated capital gains but not already taxed inherited wealth) upon death at the same value added rate.
The main objection is the standard objections to death taxes. As long as the tax is tied to the prevailing value added tax rate you would not be performing economic class warfare.
This approach would convert the consumption tax into an income tax but its only an income tax after death. If people are motivated by the accumulation of wealth during one’s lifetime as opposed to taxation to include end of life then this would be behaviorally viewed as a consumption tax during life but an income tax over your entire life.
Of course, the estate tax would be born by the estate beneficiaries but as long as the rate is not confiscatory, the net result for beneficiaries would not be any different than the current income tax system with no estate tax. This would be an improvement over the current system which double taxes some lifetime accumulated wealth which has already been taxed.
This could potentially bridge the political argument of lack of fairness and assure the tax is not confiscatory since the rate would be tied to the value added rate.
quadrupole
Jul 29 2007 at 7:05pm
Arnold,
I disagree with your three way breakdown of ‘consumption, savings, or giving to charity’. There is only a two way breakdown: ‘comsumption and investment’. Giving to charity is generally simply assigning either consumption (if the dollars or spent on programs) or investment (if they go into the endowment) to another entity, and economically speaking should be no different than giving to your brother.
Michael,
I agree with much of what you said, but disagree about taxing estates. That inherited capital represents productive potential: ie, it helps create income. Now we know that capital only captures about 50% of the national income it participates in generating. When you tax that capital, you are in essense transfering a portion of that capital to the government. Almost all of government spending is consumption. So you are in essense consuming productive capital. This means not only that the owner of that capital looses his 50% share of it’s output, but so does the labor that employs that capital to increase it’s productivity. In short: taxing capital not only robs it’s owner of income, but also the people it employs. It makes us all poorer.
Please note, to the degree that the capital generates income, that income is like any other income to the capital owner, and will be taxed when consumed. If liquidated and consumed, it will be taxed.
Consider this example. Imagine I spend $40k a year, and my uncle dies, leaving me $100 million. If I take that money and invest it, and reinvest it’s earnings, why exactly should I have to pay taxes on it? I’m unquestionably putting it to better use than the government will. Let’s say then I decided to take $10 million of it and buy rolexes and yatchs. That $10 million will be taxed as consumption.
Essentially, a consumption tax captures all of the conspicuous consumption that people resent in the rich, while allowing for all the virtuous capital formation to go on unaffected. Keep in mind that 50% or so of all the income generated from the capital invested is captured not by the capital owner, but by labor.
Bruce K. Britton
Jul 29 2007 at 8:12pm
I gather that by having a consumption tax you want to decrease (relatively) the amount of consumption activity that goes on and increase the amount of income-generating activity that goes on. But consumption is what people want to do.
The other things they could do — income generating activity, savings, or giving it to charity — are not much fun compared to consumption. (If people think they are more fun, they can already do them as much as they want; no one is stopping them.)
So you want to increase the things that aren’t fun, and decrease the thing that is fun. You would be decreasing the amount of consumption fun for the people who earn the income, and replacing it with things that might help later generations — savings and investment– or might help people who need charity, but neither of these would help the people who make the income to have more fun.
Let’s take you: if I said to you, ” I want to arrange things so you have less fun.” What would you say to me?
Or suppose I said “I want to arrange things so that you will save more, so as to help other people in the future (who will in the future be far richer than you are now) and give to charity to help people who are far poorer than you are, and are not related to you or personally known to you.” Would you say ” Oh yes sir please sir, thank you very much sir.”
Would you want to do that? No, you don’t want to do it, do you? You want to consume, don’t you? Me too.
And that’s why people don’t want to have a consumption tax: because they want to have more fun, not less fun.
blink
Jul 29 2007 at 8:54pm
I share your preference for a consumption tax, but I am concerned about *changing* tax structures. Leaving aside the (strong) possibility that we simply end up with both an income and a consumption tax, I worry about some distributional effects. Namely, people have paid income tax for several years, deferred consumption, and built up savings we feel a crunch – to them, eliminating the income tax does has no effect, while the new consumption tax implicitly reduces their wealth.
Floccina
Jul 29 2007 at 10:14pm
Inflation is also a big tax on saving and capital gains for that matter.
I am for replacing the income tax with a sales tax or the old model of excise taxes. It leave the IRS fewer people to harass.
I also think that government spending can and should be greatly reduced especially at the federal level.
Thomas B.
Jul 30 2007 at 12:58am
quadrupole: I agree with your response to Arnold, but differ as to the rest.
“…my uncle dies, leaving me $100 million. If I take that money and invest it, and reinvest it’s earnings, … I’m unquestionably putting it to better use than the government will….”
Even supposing you’re right about the government, I’m not sure we get to stop there on the “death tax” question.
Assuming we are not prepared to abolish the government just yet, then there are still some taxes to be paid, and we should wonder whether we should prefer “death taxes” over some other source.
In that case, maybe inheritors are putting money to better use than the government, but are they putting the money to better use than those who worked over their lifetimes to earn $100 million dollars?
I’d prefer a stiff estate tax used to lower taxes upon earnings. Even if we only have the consumption tax left, my hunch is that the inheritance transactions are less valuable to the economy than consumption transactions, and we can happily discourage them.
Michael Austin
Jul 30 2007 at 1:00am
Quadrupole & Blink
I agree with your noble goals but remember, you don’t want the “perfect to be the enemy of the good.” The goal is to get a flat consumption tax that will survive the political process. Once the income tax is eliminated we must be sure there is no way to let it sneak back in. One way would be to pass a constitutional amendment rescinding the amendment which created the income tax (much like rescinding abolition).
Let me reiterate that another objective is to maintain the philosophy of taxing income only once. There would be a transition period where you would deposit funds into a financial intermediary which would submit a 1099 to the IRS, call it an “Asset Exclusion Certificate” which would be used as a deduction against the proceeds from an estate settlement. The same 1099 would be issued to estate beneficiaries for their estate distributions and would be used in their eventual estate settlement. This would assure that all income is taxed only once.
Once again, in my opinion allowing savings and returns on its reinvestment to go untaxed in perpetuity is politically untenable. My proposal allows accumulations to be untaxed while you are alive and only taxed upon your death if not already consumed.
I think a lot of people enjoy amassing discretionary wealth and assuring income security more than ultimately consuming all lifetime earned income as long as one’s basic needs are met. This allows people to accumulate wealth tax free until a final reconciliation at death.
People need to get over the knee-jerk hatred of the estate tax and see it as an important tool for tax policy as long as you can be assured it isn’t going to be used as a weapon in class warfare.
matt m
Jul 30 2007 at 8:55am
Very interesting discussion. I don’t know much about consumption taxes without income taxes, but how would they work for services? For example, is hiring a house cleaner for 2 hours per week untaxed, while purchasing the service from a company is taxable?
reason
Jul 30 2007 at 9:11am
For once I basically agree, so long as expenditure is progressive. Especially with Michael Austin’s point of view.
In my more pessimistic moments however, I am not necessarily convinced though that consumption can be any more easily defined than income can be. Is building your own house consumption or investment? (Or should imputed rental be taxed as consumption?)
This
” I’m unquestionably putting it to better use than the government will.”
is just arrogant silly. Free (inherented) money, can be very easily very badly invested. Even good investors can make bad decisions, but would you go to Paris Hilton for investment advice?
Chris D
Jul 30 2007 at 9:47am
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Yancey Ward
Jul 30 2007 at 9:53am
Taxing estates in the realm of a consumption tax is like taxing consumption twice-quadrapole’s $100 million gets reduced to $70 million at death, and his heir’s $70 million gets reduced to $49 million when consumed for a net tax of 51% when the stated rate is 30%. This is similar to how the income tax of today, combined with the estate tax, taxes income twice.
The goal of all saving is to consume more in the future. Any inheritance will eventually be used for consumption, or will be used as capital to generate income that will be used for consumption. In other words, it is not true that the tax can be avoided in perpetuity unless you believe that a person or his descendents plan to never consume; and even then, as quadrapole has pointed out, the capital they employ provides income to the people who work it, and they will consume.
Dan Weber
Jul 30 2007 at 10:06am
But with deferred taxes they can accumulate such a significant portion that the majority is never taxed. Like an endowment.
You can say to that “so?” And that’s a fair question. But it’s important because of the political reality we live in.
Because even if they don’t say it, one of the biggest fears that estate-tax-proponents have is the rise of an aristrocracy. You can call it something else if you wish (like “class warfare”) but it’s still among the concerns that must be addressed if you wish the idea to gain traction. Ignoring it doesn’t make it go away.
(Some other people like the estate tax because they never met a tax they didn’t like.)
Floccina
Jul 30 2007 at 10:38am
A guy I know once said that it makes sence to fund courts/police and national defence which are both defence of property on property taxes and every thing else on excise taxs. An example of a sensible excise tax would be roads funded through fuel taxes. A carbon tax could fund atmospheric co2 removal and sequestration.
Floccina
Jul 30 2007 at 10:54am
Another point is the capital gains of corporations have there genesis in earnings and so one could see the tax rate that these partnerships are paying as the 15% capital gains tax plus the corporate tax rate (paid buy the corps in the porfolio). The problem is that multiples for stocks (PE ratios) have been rising and so people do not see it this way today but consider if a corporation buys back stocks or retains earnings in an effort to increase capital gains they do it with after corportate tax money.
Yancey Ward
Jul 30 2007 at 10:58am
Dan Weber,
Fair enough, but then the estate tax should be a per capita distribution to each citizen. My vision for such a tax is that everyone who wants to can accumulate an endowment of capital. As quadropole wrote, the government is a lousy investor, and it is also a lousy consumer, and I don’t want productive capital liquidated to it’s hands. What revenue to government takes should be the result of the consumption decisions of the aggregate population.
8
Jul 30 2007 at 11:48am
Namely, people have paid income tax for several years, deferred consumption, and built up savings we feel a crunch – to them, eliminating the income tax does has no effect, while the new consumption tax implicitly reduces their wealth.
SS is going to be cut one way or another.
If you don’t consume your wealth, how will anyone know you have it? I think the real political issue won’t be from people who live like hobos and bag ladies and die with $100 million fortunes. It will be the fact that the tax system will magnify the differences between the ants and the grasshoppers.
I also don’t understand how one can have deferred taxes with a consumption tax. How do you defer retail sales taxes and gasoline excise taxes? What kind of twisted system are you envisioning?
TDL
Jul 30 2007 at 12:45pm
I am somewhat surprised at the ignorance on how the inheritance tax actually works. The Paris Hilton’s of the world will always inherit 100% of their estates (and often are severely constricted until their mid to late 30’s in how they can access and use their inheritance depending on how their trusts are set-up.) The very wealthy have their estates protected by life insurance and trusts; those estates are rarely broken up (so the anti-aristocracy crowd is wrong when it comes to the reality of the situation.) Those who are affected are those who are less financially savvy and have spent their entire lives building a family business only have it destroyed upon their death.
Furthermore, much of the discussion on this thread strikes me as people wanting their value sets imposed on others through the tax system. This debate seems like social engineering to me, with “consumption tax” being dressed up as an economically rational preference.
Regards,
TDL
spencer
Jul 30 2007 at 1:00pm
Could you explain to me why it is not a major inconsistency that libertarians /conservatives argue strenuously that the US system is far superior to the European systems and generates much better results yet on the other hand advocate discarding the US tax system in favor of implementing a European tax system of taxing consumption heavily and capital lightly?
If the US has stronger investments than the Europeans why do you want to copy their tax system?
8
Jul 30 2007 at 1:06pm
Europe remains competitive because it taxes capital lightly and consumption heavily. If the U.S. maintains the same tax burden but shifts the cost from capital to consumption, it will increase growth.
Michael Austin
Jul 30 2007 at 2:30pm
Response to Yancey Ward:
I believe there is a basic misunderstanding here. My argument is income should never be taxed more than once. Setting up a system to assure this via estate taxes perhaps would be better illustrated using your example. You state:
“Taxing estates in the realm of a consumption tax is like taxing consumption twice-quadrapole’s $100 million gets reduced to $70 million at death, and his heir’s $70 million gets reduced to $49 million when consumed for a net tax of 51% when the stated rate is 30%. This is similar to how the income tax of today, combined with the estate tax, taxes income twice.”
Let’s assume the $100 million was originally $50 million in savings which accumulated $50 million in returns. The fact that it is a residual in the estate shows that it was not consumed. However, the original $50 million should not be taxed and would be protected by a 1099 Asset Exclusion Certificate. The untaxed accumulated return of $50 million would be taxed at $15 million (in your example of a 30% rate). The estate beneficiary would receive $85 million after-tax and an $85 million 1099 Asset Exclusion Certificate to protect the distribution from estate tax upon the beneficiaries death.
As a side-note, the Asset Exclusion Certificate concept could be expanded to allow people to purchase and resell them either in the open market or through the government. If you didn’t want your heirs to pay estate taxes you could buy the AECs from the government at the consumption tax rate so in effect converting those assets into a Roth IRA. If you have too many AECs you can sell them in the open market or back to the government at the consumption tax rate.
Mind you, my point is that a pure consumption tax is better from an economic efficiency point of view but from a practical political point of view an income tax has more public appeal. This proposal provides for a consumption tax world while you are alive and an income tax system when one’s entire life cycle is the point of reference.
Can you see the political rhetoric flying when old money (Paris Hilton) is able to avoid taxes on savings which are never taxed and never consumed and used to perpetuate their perceived undeserved social status.
TGGP
Jul 30 2007 at 2:54pm
Spencer, it is possible there are some European policies are better than American ones. Not invading Iraq, for instance.
TDL
Jul 30 2007 at 4:11pm
Michael,
I would imagine that if savings weren’t taxed, then the savings rate in the U.S. would rise. Isn’t the no savings tax policy in East Asia what is driving the high savings rate?
Regards,
TDL
Michael Austin
Jul 30 2007 at 4:51pm
TDL:
“I would imagine that if savings weren’t taxed, then the savings rate in the U.S. would rise. Isn’t the no savings tax policy in East Asia what is driving the high savings rate?”
Clearly if you raise (lower) the after-tax price of anything you are going to get less (more) of it so the same thing would apply to savings. I suspect the high Asian savings rate is more a cultural thing along with the heavy hand of a less open society.
The savings rate (or lack of it) in the U.S. is very misleading as it is computed in a way which does not fully reflect all the sources and uses of funds. Spending on housing investment, consumer durables, etc. are all treated like spending in NIPA but are really disguised savings. Furthermore, in effect, businesses in which we invest are surrogate savers for their investors via retained earnings, depreciation, and spending on intangibles (training, brand development, etc.) which are not treated as savings but are none the less.
The point I wanted to make in my series of comments was not that in a perfect world we should have consumption tax systems and should avoid estate taxation but rather we live in a world that requires compromise and legislating is more like sausage making than doing right by the world.
What I was trying to do was create a conversation about how a libertarian “half loaf” could possibly be achieved by finding a middle ground with those who don’t share your view of the world. It requires out of the box thinking.
What I proposed (if I understand the economic implications) gets you to a consumption tax while maintaining an income tax over each individual’s life cycle (which I feel is the appropriate time frame vis an infinite lived, dynastic family time frame).
You can have a consumption tax system with all the benefits that entails during your life and an income tax system over your full life-cycle after it no longer matters (after you are dead). What we presently have is a modified progressive income tax during one’s life and an estate tax on the wealthy (including double taxation of already taxed savings) at the end of life so my proposal is no worse than the status quo with the kicker of effectively eliminating (in a bazaar twist) the equivalent of today’s estate tax by instituting an estate tax at the consumption tax rate on untaxed savings and accumulated new wealth.
What think you?
spencer
Jul 30 2007 at 5:37pm
I personally see the question of a consumption tax versus a capital tax as strictly a class warfare question. A consumption tax shifts the tax burden massively from capital to labor or from the affluent to the middle class. It is amazing how libertarians as a group keep arguing that their taxes should be raised so that the really wealthy in this society never have to pay any taxes on their inherited wealth. It is hard to believe that so may people could be convinced to argue against their own self interest.
it so hard to believe that so may pople have b
spencer
Jul 30 2007 at 5:40pm
essentially all of your — including the ones that are entrepreneur –are willing to pay higher taxes so the Bush girls never have to pay any taxes on their inherited wealth.
Has any group of people ever been so mislead?
Mrs. Davis
Jul 30 2007 at 8:45pm
Is the purchase of an existing house consumption or investment?
How about purchasing the parts needed to build a house at Lowe’s?
Yancey Ward
Jul 30 2007 at 9:43pm
Michael Austin,
An interesting idea. I need some time to think it through with concrete examples, but I will post again when I have a clearer head.
Yancey Ward
Jul 30 2007 at 9:45pm
spencer,
You find it surprising that some people live by the principle of what is mine is mine, what is yours is yours? Or that only the ignorant could be free of envy?
However, if progressivity is a requirement in the real world, the tax could be coupled with a standard per capita rebate that would, in effect, become a negative tax at lower income levels/consumption levels, and as you go up the income/consumption scale, the tax bite progressively gets to be greater. This would eventually become a flat tax at some consumption level, but there is no really practical way to assess a consumption tax at an increasing rate as one consumes more without resorting to unacceptable methods of enforcement.
Michael Austin
Jul 31 2007 at 12:53am
Mrs. Davis writes:
“Is the purchase of an existing house consumption or investment?
How about purchasing the parts needed to build a house at Lowe’s?”
Purchase of a new house is consumption, purchase of an existing house is not, purchase of any retail item would be consumption, purchase of garage sale merchandise would not.
Two of the areas of difficulty with pure consumption taxes are housing and medical services. In a pure consumption tax you would apply the tax to rent and implicit rent of owner occupied housing (which is essentially what property tax is if you stop to think about it).
Most people have a problem with taxation of necessities such as medical and housing. If they are excluded the tax rate must be raised on the smaller tax base to raise the same amount of tax.
Allowing an unlimited IRA deduction on invested savings converts our modified income tax system into a modified consumption tax system. A large sales tax rate or a large value added tax system will also produce a pure consumption tax. The permutations are endless as there are a variety of ways to get to a consumption tax. The pros and cons of each method are subject to debate but the economic benefits of consumption over income tax systems are more universally agreed to by economists.
Even though you may have say a 25% consumption tax, that doesn’t mean you raise the after-tax price of all products by 25% since other taxes such as income taxes and payroll taxes are no longer being paid and will flow through to the final product price if the market is competitive.
Of course, pro-market advocates will believe markets are competitive and anti-market advocates will not, producing a source of policy discord!
reason
Jul 31 2007 at 3:57am
Michael Austin
No its not. Talk to some Georgists about this. I thin resource rental/pollution taxes need to be added to the mix and land tax is a resource rental tax.
Dezakin
Jul 31 2007 at 3:43pm
Yep, its pure reverse class warfare, and guaranteed to generate a more complicated tax code to boot; Incredibly politically naive at best. You might note that observation hasn’t show that consumption taxes are any more obviously economically desirable or competitive than income taxes, nor is the argument that a tax on consumption particularly more competitive compelling; Econ 101 illustrates you need both consumption and investment for an economy to grow; Favoring one over another is attempting to reinforce mercantilist policies at your peril (see Japan and their 15 year stagnation)
We should be striving for simplification of the income tax code before any ideological nonsense to stick it to the middle class and poor. Its politically naive to assume that a consumption tax would lead to the elimination of the income tax, instead we’ll have a brand new tax regime that allows leviathan to grow yet larger still.
If I were to design a tax scheme as emperor, I might test taxing only land, as its inherently serving unproductive rent-seeking, as opposed to income or other forms of capital. If I were a powerful politician, I would only seek to remove all the convoluted deductions and tax credits from what ought to be a simple progressive tax.
RobbL
Jul 31 2007 at 4:58pm
Questions for your consumption tax.
1. what about consumption in foreign countries (should I move to the canadian border and do all my shopping in Canada?)
2. what about barter.
3. what about used products? (do we tax things everytime they change hands?)
4. what about consumption for things (supposedly) used in business…like a computer?
5. Would there be a tax on an expensive operation?
6. What about gifts to myself? (can I get my friend in England to buy stuff for me)
7. What about gifts to others? Is this different than giving to charity?
8. What about fines and government fees?
just asking….
Michael Austin
Jul 31 2007 at 7:10pm
RobbL:
By the tone of your questions I’m not sure you really want an answer but I’ll give you the benefit of the doubt so here goes anyway.
If you want a very simple consumption tax just leave the status quo and pass one law allowing unlimited tax deductible IRAs and poof our income tax system becomes a consumption tax system. If you want to completely overhaul the system by scraping the income tax and replacing it with either a national sales tax or a value added tax (both of which are consumption taxes) then I will answer your questions in that context.
Questions for your consumption tax.
1. what about consumption in foreign countries (should I move to the canadian border and do all my shopping in Canada?) -> It might be marginally to your advantage since a VAT or National sales tax rate needed to replace the income tax would be on the order of 25% but remember in Canada you have both a VAT and the GST to contend with which may be about the same.
2. what about barter. -> not subject to the tax
3. what about used products? (do we tax things everytime they change hands?) not subject to the tax any more than your having to pay sales tax on garage sale purchases or existing home sales
4. what about consumption for things (supposedly) used in business…like a computer? -> subject to the tax
5. Would there be a tax on an expensive operation? -> yes, if congress decides to include medical expenditures as consumption
6. What about gifts to myself? (can I get my friend in England to buy stuff for me) -> all consumption would be taxed just like state sales taxation
7. What about gifts to others? Is this different than giving to charity? -> same as state sales taxation
8. What about fines and government fees? probably not but that is up to the enabling legislation
Note: a little back of the envelope analysis may be in order.
People may be getting uneasy about the prospect of paying a 25% tax on top of all purchases. Realize that this tax would replace the income tax system which we can assume is on average about 20% (since federal spending is about 20% of GDP) and payroll taxes which are about 15% on about the first $100,000 of wage and salary income (employer and employee share plus disability insurance). Wages and salaries are about 2/3 of GDP and income taxes and payroll taxes are on the order of 1/3 of gross wages and salaries so right there you have a reduction in cost of business of about 22% (2/3*1/3) which will be passed through as lower prices (of course cynics who don’t believe business is competitive will not believe the savings will be passed on as price reductions).
The after-tax rate of return on investment will dramatically rise with the abolition of income taxes. If you believe business is competitive then prices will further fall to reflect this source of cost savings as businesses compete in the marketplace.
The point is, on average the price of goods and services will be unchanged before and after the change in the tax system. Some products may be more and some may be less but the key is the cost of government must be paid for out of taxes and on average the cost of government embedded in the price of goods and services will be unchanged even though it may be somewhat more or less for individual products.
Comments are closed.