How High Would a National Consumption Tax Need to Be?
“It becomes pretty hard to run when you get up to a rate big enough to replace the income tax, because you’re going to have to have a 40 or 50 percent rate. That’s what scared Bill Archer [the chairman of the House Ways and Means Committee, a fierce advocate of a consumption-tax approach] from ever putting a bill in. He was for it, but he didn’t want anybody to know how high the rate would be. He asked his staff to analyze it, and they came back and they said, ‘Well, if you taxed everything, you could do it at 42 percent.’ He says, ’42? Come on, I was hoping for 10.’ And they said, ‘Well, you’ve gotta tax everything, you understand.’ And he said, ‘Like what?’ And they started going through this, you know, rents and everything. ‘Oh shit!’.”
Is 40%-50% really what you would need? I’ll admit that at first glance it seems implausibly high, but that doesn’t mean it’s wrong. So I went to the Bureau of Economic Analysis web page for some numbers and it turns out that if the goal is to finance the entire federal budget using only consumption taxes, then yes, 40% is reasonable and 50% is not out of the question. Click to see a table with annual GDP, Federal Revenue, and implied Consumption Tax Rates (sorry, my html skills are not yet up to inserting an inline table–it keeps messing up all the formatting in the rest of the blog.
The table shows that to finance the current level of government spending with only consumption tax revenue would require a national sales tax of 30%, assuming (incorrectly) that levying this tax on consumption does not reduce consumption.
Remember, adding a 30% sales tax to a $100 DVD player makes the price to the consumer equal $130, resulting in less DVD players being sold, reducing consumption tax revenue. The estimates in the table are “naive” because they do not factor in this effect. (Conservatives may reply, with some truth, that this also does not factor in the fact that eliminating income taxes increases disposable income, increasing consumption). With apologies to Vermont, add in state and local taxes and it’s really easy to get a total sales tax over 50%.
One more thought: with sales tax rates like these (heck–suppose I’m wrong and a 25% federal tax would do the trick), imagine the size of the black market in consumer goods likely to emerge. Think the IRS is full of jack-booted thugs now? Enforcing a consumption tax won’t probably won’t make the IRS any friendlier. Honest estimates of the requisite size of a conusmption tax must include projections of the size of the black market.
Still to come: why this may be much ado about nothing (hint: Untaxed Social Security Benefits).
P.S. I’m working on eliminating the apparently random font changes.