Consumption Taxes in Disguise

Via Matt Yglesias (see Digby as well), I see that consumption taxes are back on the agenda. Here’s Matt, writing about David Brooks’ latest editorial:

The program that Brooks describes sounds reasonable enough, but this bundle of proposals is, in fact, designed to accomplish something rather different. The idea is to shelter from taxation various savings and investment schemes that will provide a minor level of help to average middle class folks. At the same time, however, there will be no caps on the quantity of money that can be thereby sheltered.

By definition, all money is either saved or spent. So if money saved is exempt from taxation, then only money spent is taxed — a consumption tax. If you follow the links under the “Topics” section to the left, you’ll see me argue that consumption taxes, unless very carefully designed, will be regressive. This is because as a household makes more, it spends less income on consumption, so replacing income taxes with consumption taxes benefits the wealthy. Presented as a consumption tax, such a plan would surely be unpopular; presented as a savings-encouragement plan it might sound good, but it’s just a dressed-up consumption tax.