Scott Sumner  

There's only one sensible way to measure economic inequality

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Talking to Mark Krikorian... Econlib in Classes...

Consumption is the bedrock upon which essentially all of economics is built. We assume that all economic activity is aimed at creating consumption (defined broadly to include the value of leisure time, and non-market factors such as clean air.) Of course one could raise objections to this view, but as we'll see if you don't at least start with consumption, you are likely to reach absurd conclusions.

I've been somewhat dismayed to see so many economists debate the economic inequality issue using highly flawed income and wealth data, instead of consumption inequality data. Recently I was listening to an interview with Thomas Piketty when he suddenly said something that caught my attention. He advocated a progressive property tax. That sounds like a great idea, as the consumption value of housing is probably closely correlated with the market value. And then he ruined everything by adding that it should not be levied on the gross value of property, but rather the net value after mortgage debt was subtracted. That defeats the entire purpose of a progressive consumption tax!

Imagine a cop and a nurse live in a modest $350,000 house on Long Island. They are very thrifty, and have paid off their mortgage ahead of time. In a suburb of Dallas an executive lives with his (homemaker) wife in a sprawling $1,500,000 mansion, with a $1.2 million mortgage. The housewife hosts lavish parties for the other ladies in the neighborhood. Which family gets more consumption out of their home? Which family should pay a higher tax? Which family does Piketty think should pay a higher tax?

I don't know of any respectable intellectual argument for Piketty's policy proposal. In the comment section of previous posts I've only run across one argument that is even logical, and it seems so preposterous that it would be laughed at by most voters. The claim is that lack of thrift is a sort of disease. So if twin brothers make identical lifetime wage income, but one consumes that income early in life and the other consumes the exact same income (plus interest) later in life, the thriftier brother should pay a higher tax rate, because the one that blows his income while young on BMWs, parties, travel, motorboats, etc., has a mental illness. They rely on Greg Mankiw's reductio ad absurdum attack on utilitarianism---that tall people like Mankiw and me would have to pay higher taxes because we are born with "good" genes. Except they take it seriously. (Disclosure: I'm both tall and thrifty.) I can't quite tell, but I don't think these people are joking. I wonder what principle Piketty chooses to favor a wealth tax over a progressive consumption tax?

As an aside, in theory total wealth is the present value of consumption--including heirs, charity, etc. So if we could measure wealth accurately (including human capital) a wealth tax should be identical to a consumption tax.

You cannot put the burden of a tax on someone unless you cut into his or her consumption. If the Obama tax increases did not cause Gates and Buffett to tighten their belts, then they paid precisely 0% of that tax increase. Someone else paid, even if they wrote the check. If they invested less due to the tax, then workers might have received lower wages. If they gave less to charity then very poor African's paid the tax. I have no idea who paid, but I'm pretty sure it wasn't Gates and Buffett.

Of course there are plenty of billionaires who splurge on things like 500-foot yachts. Now we are getting somewhere! The labor and materials that went into constructing that yacht could have produced 10,000 cars for average people. That sort of inequality is real. That's what we (should) mean by "economic inequality." That's the way all of us economists were taught, but 99% of us seem to have forgotten what we learned about consumption. Consumption is what you should tax. Of course when we tried to do that a bunch of Democratic politicians who have apparently never heard of Bastiat said the luxury tax was a bad idea because it cost jobs in the yacht making industry. (I'm not joking.) Nor are they willing to cut back on intellectual property protections for companies like Disney.

Revealed preference: They seem more interested in reducing the amount given by Gates and Buffett to charity than the amount David Geffen spends on a 450 foot yachts.

Screen Shot 2014-04-22 at 12.47.33 PM.png
Yes, charity is tax deductible, but for people who give at the end of their lives, capital taxation greatly reduces their resources. Or perhaps the goal is to make relatively poor Chinese consumers pay more for Disney toys so that the profits can be taxed in America and given to teachers unions. Yet many progressives seem to forget that the problem of global inequality is much worse than the comparatively minor issue of American inequality.

Matt Yglesias has a better understanding of the importance of consumption than most economists (and he's not even an economist.)

But the really interesting thing about the sale of the Bucks [for $550 million] is that it challenges a piece of longstanding conventional wisdom among economists. Traditionally, economists have believed that investment income should be taxed at a lower rate than labor income or even not taxed at all. An alternative way of putting it is that the economics profession generally believes that consumption should be taxed rather than income. This is because you want to create incentives for people to defer consumption, save, and invest in building up the country's stock of capital goods. Yet something Thomas Piketty points out in his celebrated new book on wealth inequality around the world is that at the high end the distinction between wealth and consumption tends to break down.

For a normal middle class person, the difference between spending $5,000 on a vacation and putting $5,000 into the stock market to save for retirement is obvious. But while buying a professional basketball team is technically a business investment, it's also the case that owning a pro sports team is pretty fun.


Love that; "Traditionally, economists have believed". Just as traditionally we believed that low rates don't mean easy money, or that zero rates don't prevent central banks from stimulating the economy, or that a demand failure is a monetary policy failure. This really is the new dark ages of economics.

Here's what Yglesias misses. Unequal consumption matters because of opportunity cost---another bedrock of economics. The resources that went into that $200 million yacht could have produced lots of other goodies for average people. But if the psychic benefits of owning a basketball team go to a hedge fund manager, they are denied to one average guy--a problem too trivial to even mention. Yes, there are practical problems with consumption taxes just as with any other taxes. But can't we all agree that we should start with a progressive consumption tax, and then add on a few fixes for the hedge funds managers engaged in dodging taxes? Can't we agree that the vast majority of ordinary people with full time jobs and some money in stock and bond funds should pay zero interest on their investment income? At one time I thought really smart progressives like Yglesias would take that bargain, now I see the left drifting away from economic rationality, to the point where they embrace 90% tax rates on the assumption that the rich are producing relatively little of value, and that their incomes are pure exploitation. That's true in a few cases, but if we go down that road we are essentially throwing in the towel. Admitting we are no better than an oligarchic state like Russia and just need to give up on reform.

I'm not ready to give up yet.

PS. Here's Tyler Cowen:

A more sensible and practicable policy agenda for reducing inequality would include calls for establishing more sovereign wealth funds, which Piketty discusses but does not embrace; for limiting the tax deductions that noncharitable nonprofits can claim; for deregulating urban development and loosening zoning laws, which would encourage more housing construction and make it easier and cheaper to live in cities such as San Francisco and, yes, Paris; for offering more opportunity grants for young people; and for improving education. Creating more value in an economy would do more than wealth redistribution to combat the harmful effects of inequality.
I'm certain that Yglesias also supports the call for less restrictive zoning in California. If we did so, income and wealth would immediately become less equal, as vast capital gains would go to affluent landowners near the coast of California. But consumption would become much more equal, as many more Americans (including me) could enjoy living in the nice climate near the California coastline.

It's all about consumption.

PPS. Anyone who thinks owning the Milwaukee Bucks is "fun" has not been a Bucks fan during recent decades. Back around 1990 they were the 2nd winningest team in the NBA since being founded in 1968. And now . . . don't ask.


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COMMENTS (37 to date)
Norman Pfyster writes:

Wealth is capital by definition (see Adam Smith). If you also define wealth as consumption (by including heirs, you are saying that all capital is ultimately consumed), you are tying yourself in knots. Essentially, you are saying that we should tax ourselves so that our far-distant heirs will have something to consume.

Adam writes:

This has been the exact thought I've had since everyone and their grandmother started writing Piketty reviews. I wonder if you might do a post rounding up all the best available sources of data/studies we have on consumption "inequality" (and the consumption changes over time for the poorest segments)? Would be highly appreciated.

TallDave writes:

Yet something Thomas Piketty points out in his celebrated new book on wealth inequality around the world is that at the high end the distinction between wealth and consumption tends to break down.

De minimis. The first few hundred dollars per year of consumption (marginal dollars) has enormous utility, while the second million of consumption has comparatively very little utility.

Owning Google or Facebook is apparently also "fun" to their founders, else why would they continue to operate their businesses rather than pursuing the enormous opportunities for utility offered by their wealth?

Seems reasonable to view consumption taxes from the framework that an appreciating or income-producing asset is an investment, a depreciating or income-reducing asset is being consumed. Would you tax investment loss (essentially, for the act of destroying future consumption)?

Philo writes:

In Ayn-Randian terms, leftists are "moochers." Their target is anyone who has wealth that they can grab. Of course, they will want a wealth tax!

Shane L writes:

Scott, I wonder if you have read Robert Frank's "The Darwin Economy: Liberty, Competition, and the Common Good"?

He also argues for a consumption tax and the abolition of income tax. Frank compared conspicuous consumption among people with the harmful arms races experienced by some animals. The elk stag, for example, has evolved enormous antlers as part of male competition for mates. Growing larger antlers gives the stag an advantage over rival males, however the species as a whole is harmed by the costs of such huge antlers, such as the risk to mobility in woods.

The individual benefits but it is a benefit relative to others, and the species is disadvantaged in the long run. Frank compared this with the super-rich building gargantuan houses that give little extra satisfaction to the owners, but signal status superiority over other super-rich. The one with the biggest house gets a status boost relative to others, but society benefits little from resources pumped into this instead of investments or something. Frank's proposed consumption tax would, he thought, discourage extreme consumption and encourage investment instead.

(Or something like that, it's been a while since I read it.)

brec writes:
...tall people like Mankiw and I...
A conjunction does not change which case of the pronoun is correct in traditional standard English; where there is doubt, mentally remove the conjunction so that the pronoun in question stands alone: like me, not like I.
Yancey Ward writes:

I thought this was the most illuminating part of this essay (a very good essay throughout!):

You cannot put the burden of a tax on someone unless you cut into his or her consumption. If the Obama tax increases did not cause Gates and Buffett to tighten their belts, then they paid precisely 0% of that tax increase. Someone else paid, even if they (Buffett and Gates) wrote the check. If they invested less due to the tax, then workers might have received lower wages. If they gave less to charity then very poor African's paid the tax. I have no idea who paid, but I'm pretty sure it wasn't Gates and Buffett.

While I believe Sumner greatly over-estimates the efficacy of his monetary economics, this essay was simply brilliant.

Bostonian writes:

"He advocated a progressive property tax. That sounds like a great idea, as the consumption value of housing is probably closely correlated with the market value."

I am surprised to see advocacy for progressive taxes in a libertarian blog. When you allow progressivity, it is easy for politicians to gain votes by promising to raise taxes on only the 1%. Proposing an increase in a flat rate property or sales tax is unpopular, since many people do not want to $1000 more in taxes even if someone 5 times richer pays $5000 more.

Thomas Sewell writes:

Scott,

I'm not clear on how you'd impose a "luxury tax" on yachts without just causing some economic distortion and moving the manufacturing out of the country.

I mean, there's no reason a $200M yacht can't be built and sold in another country, flagged elsewhere, yet provide the exact same utility to a billionaire who wants to ride on it.

So I'd like a clearer picture of that proposal.

That said, the rest of your post was spot on. If we're going to tax anything (as opposed to user-fee type arrangements for paying for government "services"), we should be taxing consumption directly and as uniformly as possible in order to avoid economic distortions.

steve rose writes:


"You cannot put the burden of a tax on someone unless you cut into his or her consumption. ... I have no idea who paid, but I'm pretty sure it wasn't Gates and Buffett."

I'd like to suggest an idea about who pays the tax i.e. forgoes consumption.

When tax money is taken from Gates and given to poor guy who uses it to purchase good X this redirects good X from somewhere to poor guy. From where? The marginal buyer of good X. Rich people are unlikely to be at this margin.

Note the total supply of good X at or below the margin is not increased.

In general, wherever the money comes from the source of the redistributed goods is the relevant margin. This implies that redistributing money from rich to poor does not increase the total supply of goods available to the poor, it just shuffles goods from poor to poor.

Is this correct?

Scott Sumner writes:

Norman, Just because wealth is capital does not imply wealth is not the PV of future consumption.

Adam, Thanks, no time now. I hope to read Piketty next month, and then I'll have more to say.

TallDave, I'm a pragmatist, and thus would have to study that issue much more to have an opinion. I favor erring on the side of treating things as consumption, if it's in doubt.

Shane, Haven't read that book, but have read some of his articles. Some truth in what he says, but I also think he pushes the argument too far. Still, I agree with him on tax policy.

brec, Thanks. I got into some bad writing habits when I was young, and on days I'm rushed (like today) I fall back into them. Or should I say me falls back into them? :)

Bostonian, Friedman and Hayek are arguably the 2 most influential libertarian economists of the 20th century. Both favored some progressive policies. If they aren't true libertarians, then neither am I.

Thanks Yancey.

Thomas, Yes, that is a problem. My preferred approach is to tax consumption via a progressive payroll tax. Of course there is always the danger of the rich moving elsewhere, under any progressive (or proportional) tax.

Steve, I'd have to think about that. There's probably some truth in what you say, but I suspect it's more complicated. It also depends on what else the wealthy would have done with the money.

Eli writes:

It is hard for a layman like me to find data on consumption. Anyone have any advice?

Bostonian writes:

"Bostonian, Friedman and Hayek are arguably the 2 most influential libertarian economists of the 20th century. Both favored some progressive policies. If they aren't true libertarians, then neither am I."

In Massachusetts, referendums to amend the state constitution to permit a progressive income tax rather than the current single rate system have repeatedly lost. Is Sumner more of a redistributionist than the Massachusetts electorate?
If the first $X of income, consumption, or property are excluded from a flat rate tax, the rich will still pay a higher fraction of their income/consumption/wealth than the poor. But the inability in the flat rate tax system to raise the marginal rate of some taxpayers without raising it for all taxpayers is an important check against class warfare that libertarians ought to value.

Joel Aaron Freeman writes:

Scott, you are officially my favorite economist who is not dead.

Jeff writes:
Yet something Thomas Piketty points out in his celebrated new book on wealth inequality around the world is that at the high end the distinction between wealth and consumption tends to break down.

Eh, color me skeptical. Playing for an NBA team is probably even more fun than owning one, and it is highly remunerative, too. Is it fair to say, then, that the distinction between labor and consumption breaks down at the high end, too? Maybe for some occupations (rock star, athlete, movie star, etc.), but not for most. Likewise, I don't think that's true for most kinds of capital, either. If I think of, rather than an NBA team, owning a bunch of restaurant franchises or gas stations worth $550 million or so, that doesn't sound like nearly as much fun. That's probably a lot of work.

Yglesias' main point seems to be that inequality allows rich people to bid up the price of assets that are fixed in supply: NBA franchises, beachfront real estate, etc. Okay, but how many things are there that we really can't make more of, and how much does a lack of them affect our overall utility? And even conceding his point, what would things look like in a world of radically lower inequality? Would I be able to buy an NBA franchise or beach house at an affordable price? Probably not, right? People would find some other margin along which to compete for these assets, if there was really that much demand. IE, instead of having to outbid two very wealthy hedge fund managers for an NBA franchise, me and a large consortium of investors would have to outbid some other large consortium of investors. And with the beachfront property, maybe I can buy a house there, now, at an affordable price, but the downside is the lots are tiny and the beaches are crowded and somewhat dirty.

I guess what I'm trying to say is that in a country like ours with high levels of overall wealth, a decrease in inequality probably doesn't increase anyone's quality of life all that much.

ThomasH writes:

I am skeptical that the "left" is the political force standing in the way of shifting from our current slightly progressive income tax to a progressive consumption tax. I would worry somewhat about the Scrooge McDuck problem (remember him swimming in his piles of cash?) that the rich could "consume" pure ownership tax free. But it' probably a smaller problem than taxing carried interest as a capital gain.

Scott Sumner writes:

Bostonian, I voted to abolish the Massachusetts income tax, as did about 45% of Massachusetts voters. I also voted against the progressive income tax, with the majority. So I'm slightly to the right of the median Mass voter. (Of course I'm to their left on many issues such as drugs and right to die.)

Thomas, I fully support closing those loopholes. Entrepreneurial income should viewed as wage income, unless proven otherwise.

Steve Sailer writes:

No, actually, the less the rich consume, the more wealth they pile up for their heirs to inherit, thus making dynasticism more of an issue in the future and raising the chances of returning to a Jane Austen era when marrying a scion was the best hope for advancement.

Bill Gates and Warren Buffett, who don't spend extravagantly, are quite aware of this and campaign to get their fellow billionaires to promise to give away vast chunks of their money.

Jeremy Goodridge writes:

I don't get the following statement:

"As an aside, in theory total wealth is the present value of consumption--including heirs, charity, etc. So if we could measure wealth accurately (including human capital) a wealth tax should be identical to a consumption tax."

How can TOTAL wealth BE the present value of consumption. Does that mean you are consuming all your wealth each year. Very confused.

Floccina writes:

This is great:

Of course there are plenty of billionaires who splurge on things like 500-foot yachts. Now we are getting somewhere! The labor and materials that went into constructing that yacht could have produced 10,000 cars for average people. That sort of inequality is real. That's what we (should) mean by "economic inequality." That's the way all of us economists were taught, but 99% of us seem to have forgotten what we learned about consumption. Consumption is what you should tax. Of course when we tried to do that a bunch of Democratic politicians who have apparently never heard of Bastiat said the luxury tax was a bad idea because it cost jobs in the yacht making industry. (I'm not joking.) Nor are they willing to cut back on intellectual property protections for companies like Disney.

Revealed preference: They seem more interested in reducing the amount given by Gates and Buffett to charity than the amount David Geffen spends on a 450 foot yachts.

Politicians are sometimes more concerned with helping than with getting votes but it is rare and faced with rationally ignorant and biased electorate this is what happens.

Mike Linksvayer writes:
You cannot put the burden of a tax on someone unless you cut into his or her consumption. If the Obama tax increases did not cause Gates and Buffett to tighten their belts, then they paid precisely 0% of that tax increase.

If one's concern is concentration of wealth leading to concentration of power, one doesn't care about whether the wealthy have to tighten their belts; indeed one might want them not to.

Isn't power a, if not the, major impetus for complaint about inequality?

Mark Gubrud writes:

You have a valid criticism of Piketty's progressive property tax as apparently presented in the interview you listened to. Presumably Piketty's reasoning is that middle-class housing is more likely to be mortgaged while the very rich are more likely to own outright. Your hypothetical executive does not sound super-rich ($1.2M house). If his income is primarily from salary/bonuses rather than capital gains, he is actually a worker.

The flaw in your argument is the well-known fact that the rich do not live hand-to-mouth, they accumulate capital. Their propensity to consume is lower; for the super-rich it is obviously close to zero, whereas for the working class it is unity.

Big yachts are big consumption but they are rare and reflect even (much) bigger fortunes.

Thus consumption taxes place the burden on the working class and not on capital. Is it unreasonable of me to assume that you are well aware of this, and infer that this is why you would favor consumption tax?

Vivian Darkbloom writes:

"I'm not clear on how you'd impose a "luxury tax" on yachts without just causing some economic distortion and moving the manufacturing out of the country.

I mean, there's no reason a $200M yacht can't be built and sold in another country, flagged elsewhere, yet provide the exact same utility to a billionaire who wants to ride on it.

So I'd like a clearer picture of that proposal."


The answer is simple. The tax is imposed on the owner and not the manufacturer, so it would be irrelevant where the ship is built or registered.

Anyone with a journeyman's knowledge of the US Tax Code knows that this is essentially the current framework for individuals: US citizens and lawful permanent residents are taxed on their worldwide *income* irrespective of where earned. We are one of the two countries in the entire world that does that. Changing that to worldwide wealth or consumption is not a big stretch.

Taxation of controlled foreign corporations is a bit more difficult, but that can be dealt with, too, if the yacht is owned by one. Current law taxes US owners on passive foreign investment companies, Subpart F income of controlled foreign corporations, etc. Adding an owner "luxury tax" to the list (or simply eliminating all corporation tax in favor of a look-thru) would certainly be feasible.

EskimoFriend writes:

One persistent problem with the Piketty reviews is that a lot of people reject the premise that there is anything wrong with wealth inequality as he defines it. Instead of coming out and arguing for that directly though, they criticise his arguments as if he made the point they wished he'd made.

You are criticising Piketty because his wealth tax does not tax consumption. It's fine to argue as you do that unequal consumption is the real issue, but it's not really fair to complain that Piketty's policy only targets what it's designed to target.

A progressive tax on the accumulated wealth stored in property seems very likely to make it easier for the poorest to accumulate wealth and harder for those with a lot of wealth to sustain it. That's the point. It's not about consumption, even if you wish it were.

Alan Reynolds writes:

Hasset and Mathur constructed a credible U.S. consumption inequality time series.

I dealt with criticisms of such measures (from Burtless and others) in my working paper at the Cato.org website.


Thomas Boyle writes:

"The labor and materials that went into constructing that yacht could have produced 10,000 cars for average people. That sort of inequality is real."

While that's true, the use of resources is also already captured in the prices of yachts and cars. When you tax that yacht at a higher rate than you would have taxed the cars, you artificially divert more resources into cars, and less into yacht production. That's distortionary, and it has consequences. (Among which are a preference for auto workers over yacht builders - those are not entirely interchangeable - and steel producers over composites suppliers and... To say nothing of changing the motivation of wealth creators for whom owning a large yacht is motivating, and whose activities could supply the wealth to produce many more cars.)

It's also true, as we've seen, that once you allow for more than one tax rate, taxation becomes a matter of political power and inter-group conflict, leading to severe distortion of the political process. That, too, has consequences (probably more severe).

Mark writes:

"The World's Most Exclusive Club" by Bill Simmons, compares owning an NBA franchise to owning a property on "the single best beach in the world, and it can only hold 30 houses."

As bad as the Bucks are, there's no way you can compare being a fan to being an owner.

If you're saying that only the physical resources of a yacht matter, but not the psychic benefits of ownership, then how does that hold up as the economy shifts more towards services and electronic goods? Having available cash gives you an option to consume later, and the option itself has value. Could the $550M spread out among many of the globally poor provided much greater psychic benefit?

There's already a tax on wealth: inflation. But if inflation is very low, then maybe there is positive utility to just having cash available. An emergency savings account not only covers future consumption but provides current peace of mind. Not everyone can afford to build a sufficient one.

I wonder if the bad solutions being offered are just trying to restore a solid leftist position to provide a space in the middle where real solutions might be supported.

Eric Johnson writes:

"When tax money is taken from Gates and given to poor guy who uses it to purchase good X this redirects good X from somewhere to poor guy. From where? The marginal buyer of good X. Rich people are unlikely to be at this margin.

Note the total supply of good X at or below the margin is not increased.

In general, wherever the money comes from the source of the redistributed goods is the relevant margin. This implies that redistributing money from rich to poor does not increase the total supply of goods available to the poor, it just shuffles goods from poor to poor.

Is this correct?"

Only if the supply curve is perfectly vertical.

Alan Reynolds writes:

State and local property taxes are serious and effective taxes on real capital, but also on luxury consumption. Federal excise taxes hit my taste for expensive wine and booze quite effectively Some states have personal property taxes on expensive cars or boats too, which is not too hard to enforce because of registration. Retail sales taxes are somewhat easier to avoid, if they're pushed too high (e.g., shop on eBay & Craigslist).

Just because a tax isn't federal does not mean it isn't a tax.

Taxing people on their declared wealth worked very well to drive French wealth to London and Hong Kong, so Piketty's graph shows less top wealth in France after they started trying to tax wealth. It loses far more in income tax that the small change it appears to raise.

AbsoluteZero writes:

Mark Gubrud said: "... the rich do not live hand-to-mouth, they accumulate capital. Their propensity to consume is lower; for the super-rich it is obviously close to zero, ..."

I'm not sure if their propensity to consume is lower. And I guess "close to zero" means as a percentage of their wealth, not in absolute terms. That may be true, but in absolute terms they spend a lot. I'm obviously not a member of that class, but becasue of what I do I happen to know about some of it indirectly. With no disrespect intended at all, here are a few questions. See if you know the answers without searching.

- You need to go from the US to, say, Tokyo or Hong Kong. For some reason your plane is not available. So you book a similar plane. How much does the trip, one way, cost?
- How much does it take to keep your plane a year? Not the crew, just the plane, even if you don't use it at all. And how much does it take to fly it for one hour?
- You need to go from Hong Kong to Macau for a meeting. Instead of taking the ferry like everybody else, you take a helicopter. How much does that cost?
- You would like to use your own helicopter. How much does it take to ship it to Hong Kong, and back to the US?
- Your daughter goes to school in London. She has a servant. How much does it cost to keep the place where the servant lives? Not your daughter's place, her servant's.

Most people have no idea how much is spent by people of that class just to live. And this doesn't include buying stuff at all. Recall the executive with the 1.5M house in Scott's example. Many members of that class spend many times more than what that executive makes, or his house, every year, just to live.

I don't know exactly how the numbers will work out, how progressive it needs to be, and so on, for taxing only consumption to work, but I believe it would work. I guess some people don't like it because then some people who happen to have a lot and yet don't like to spend any more than normal people will not pay much tax, and will end up with really a lot, and they can then pass it on to their next generation, and so on. But if they don't spend much, and the next generation is also frugal, I'm not sure how that's bad. Somebody mentioned power. I guess bribes in terms of gifts can be a problem, but that is already supposed to be illegal.

Theo writes:

I like income inequality. Almost all the tech that I own would never have been available had it not been for first-adopt conspicuous-consumption types: they enabled the coverage of initial fixed costs and the lower portion of scaling in production. (Must give a shout-out to the porn industry, too.)
I have never owned a new car; why bother when I can get a great technically advanced used car that some rich guy used for a while. I also love used art that was acquired by the rich; it sits in museums and such. The rich have also employed me to build beautiful woodwork. In every city that I have lived the great architecture was created by the rich. I have been rich and I have been poor. Rich is better. But ... .

Anand writes:

One point, regarding charity. Suppose, taxing high income reduces charity on a one-to-one basis. And suppose the extra revenue from govt. taxes is all spent.

This would mean that the private whim of the charity giver has been replaced by whatever the govt. decides to do with the money. In a relatively democratic society, shouldn't the second method of allocating money be given more importance?

Regarding the rest of the post, you make a good point in thinking in terms consumption rather than income.

libertarian jerry writes:

It is amazing the way people are arguing and fighting over who should pay for a leviathan government that spent itself into bankruptcy. The question should not be who pays or what method of collection is used but why do we need these huge taxes in the first place? In essence it is not about how to best finance the state but why do we need the corrupt welfare/warfare state in the first place. As long as people accept the fiction that the proper role and function of government is to solve social/economic problems,both at home and abroad,by using other people's stolen wealth then people will endlessly argue over whose ox should be gored. Basically its not the funding that should be questioned but the spending. Private property is private and should not be subjected to redistribution no matter how small or large a person's wealth. The philosophy of "paying one's fair share" has,throughout history, bankrupted and destroyed nation after nation as it is destroying America today. It is now time for America to dismantle leviathan and the taxes that go to support it before its too late.

Vinca Heart writes:

I love this debate...the funny part though is that this debate will have no impact on tax laws of the 1% (and I doubt any of you are part of the 1%)...that's what I got out of his book...the oligarchy is already in place if we debate it or not..." wealth is so concentrated that a large segment of society is virtually unaware of it...". For me the most shocking part was this:" ...60% of national income went to the 1% from 1977-2007..." and this one " ... the poorest 20% of Americans pay 11%+ while the 1% pays 5.6%..." societies never do well when extremes of money inequality is present...

Michael Moran writes:

One of my father's partners once said, "I don't want to be a rich man, I want to live like a rich man."

When we are taxing consumption, how do we tax the President and other government "servants" who take lavish trips (along with their family that also takes lavish trips) at taxpayer expense?

Cloud writes:

It is interesting to see ppl call consumption tax as indirect tax after this post.



http://www.ft.com/cms/s/0/d1957616-cdf4-11e3-9dfd-00144feabdc0.html

Mike writes:

"Can't we agree that the vast majority of ordinary people with full time jobs and some money in stock and bond funds should pay zero interest on their investment income?"
Don't you mean "... should be zero tax on their..." ?

@Jeremy Goodridge: it is the present value of all future consumption, not just this year's.

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