Stuart Buck cites a townhall.com editorial by Bruce Bartlett arguing that consumption taxes are not regressive. Bartlett essentially parrots the logic of chapter 5 of the Economic Report of the President:

Liberals also make the mistake of assuming that a consumption-based tax system is regressive — taking more out of the pockets of the poor than the rich. In fact, over one’s lifetime, consumption is roughly proportional to income, because over a lifetime we eventually consume all our income [emphasis mine]. Thus, a tax on consumption will also be roughly proportional — taking the same percentage from all taxpayers.

Of course it’s not true that all income is consumed over a lifetime. Those with estates to pass on when they die don’t consume all of their income. Not surprisingly, the advocates of the consumption tax are the same people who argue against estate taxes.

AB


P.S. Stuart Buck also asks why we can’t create progressivity by making the sales tax an increasing function of the sales price. This is the logic of luxury taxes. But setting the tax rate as an increasing function of the sales price is a recipe for substantial economic distortions. For example, firms would simply unbundle sales to qualify for lower rates (but since firms currently do bundle sales–e.g., tires come with the car–we can infer that bundling is valued by consumers). More generally, this penalizes things in the economy that are intrinsically expensive, like housing, in favor of things that are intrinsically inexpensive, another distortion. Maybe we could make a different increasing tax rate for every good so that a Mercedes is taxed at 30% and a Ford at 18%, but housing is only taxed at 14% for the first $1000, but at 25% after $1000, except that has to be adjusted for regional differences (see State and County Consumption Tax Adjustment Factors in Appendix K-7). It gets complicated quickly, and simplicity is a major part of the case for the consumption tax.

Comments (0) | |