California Consumption Tax Gambit?
As a few loyal readers may recall, this blog was started largely in response to serious discussion in the 2002 Economic Report of the President of phasing out income taxes in favor of consumption taxes (see the “Consumption Taxes, parts 1, 2, 3, 4, 5” in the sidebar). I’ve since wandered a bit, but allconsumptiontaxesallthetime.blogspot.com doesn’t seem like a great way to generate traffic. Anyway, unless implemented very carefully, as something much more refined than a national sales tax, a consumption tax would be an extremely regressive form of taxation. Why? The poor, almost by definition, consume most of their income and therefore would pay taxes on all their income. As wealth and income rise, less of income is devoted to consumption, so under a consumption tax, the wealthy pay less of their income in taxes.
Why the flashback? At his new home, CalPundit has a report on the politics surrounding the state’s massive budget deficit. In a nutshell, Democrats can’t increase taxes without a 2/3 majority, which they lack. Republicans are adamantly opposing tax increases, in spite of the $35b shortfall (see my earlier post on state deficits here). But the Democrats don’t need a super-majority to implement fee increases (Kevin defines a fee for us: “[it’s a tax] that goes toward mitigating things that harm the health of Californians.” Well and good, but where it gets interesting is when Kevin speculates that this might be a bit of brinksmanship on the part of Democrats:
Are the Democrats serious? Or are they just trying to propose something so horrific that Republicans have no choice except to buckle under and get down to serious negotiating?
To which I’d add, “or is this giving Republicans exactly what they want?” In fairness, I think the typical California Republican is more moderate than the average Republican, so in this instance he might be right. But it’s a bit risky to assume that Repblicans would, given a choice between progressive (or at least neutral) income taxes versus regressive consumption taxes, be horrified by the latter and opt for the former.