Would consumption taxes be better for growth?
In Pick your taxation poison (reprinted below), I ask a simple question: What should we punish?
Taxation may not be intended as punishment, but that’s a bit how it feels. Tax income and it’s tantamount to punishing work. Tax dividends and it’s punishing investment. There is a real moral question involved with taxation—it is the act of taking, by force, something that belongs to someone. That should be done in the least invasive, least punishing way possible. There is also the fact that what we tax, we get less of. So what is the best thing to get less of? Investment? Work? Property ownership? Trade? Or consumption? Taxing consumption is moral in another way—it is voluntary. You choose when to pay the tax, and how much.
But there is also the effectiveness question. What form of taxation has the least negative impact on the economy? Some Swedish economists argue that consumption taxes are the least damaging to growth. Their contention is reinforced by a study form the OECD, the abstract of which begins . . .
This paper investigates the design of tax structures to promote economic growth. It suggests a “tax and growth” ranking of taxes, confirming results from earlier literature but providing a more detailed disaggregation of taxes. Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption. The paper breaks new ground by using data on industrial sectors and individual firms to show how re- designing taxation within each of the broad tax categories could in some cases ensure sizeable efficiency gains. For example, reduced rates of corporate tax for small firms do not seem to enhance growth, and high top marginal rates of personal income tax can reduce productivity growth by reducing entrepreneurial activity. While the paper focuses on how taxes affect growth, it recognises that practical tax reform requires a balance between the aims of efficiency, equity, simplicity and revenue raising.
Compelling, though perhaps not dispositive.
In this inspirational video, the FAIR Tax people offer a moving call to arms for the kind of taxation they believe would be most benefitical to economic growth and jobs. Citing big events like the moon landing and the fall of the Berlin Wall, they make the case that big things, even seemingly unthinkable things like the FAIR Tax, are possible.
In tax discussions in recent years, I have noticed that the conservative movement seems to be forming into two schools of thought: those who seek to flatten the income tax to a single rate (flat tax) and those who seek to abolish taxation of income in favor of taxation of consumption (fair tax). I have heard both sides make strong arguments.
Either one, it seems to me, would be preferable to what we have now. Certainly a large-scale consumption tax would have to be balanced by a repeal of the 16th Amendment. The dangers of leaving the door open to politicians to tax both income AND consumption at the federal level are too great. I know that Sweden (which is not a socialist country, by the way) has made a consumption tax work for them. But I have also heard proponents of the flat tax make the case that the fair tax’s details are very devilish.
I do not yet have a confirmed and unalterable opinion on the matter, but from a 36,000-foot viewpoint, here’s a thought I have been having lately:
Taxation always punishes something, right?
–labor and income
–investment and profit
It’s unfortunate that we have to punish something, but that is basically what taxation does. We do need some taxes as part of the social contract, so we have to decide what to punish. We also know that, generally speaking, if you tax something you get less of it (and if you subsidize something, you get more of it). So which should it be?
Do we want to punish labor? People will still work, of course, but some will work less and others will find ways of making income that aren’t taxable.
Do we want to punish investment? Does that not put economic growth, and thus jobs, at risk?
Is it wise to punish saving? Does that not drive people to save less? That doesn’t seem like a good thing.
Taxing trade means tariffs and the like. There has been more than one analysis that suggests that high taxation barriers to international trade have led in the past to international conflict and even war.
Is it right to punish commerce and consumption? Like the freedom to earn income, the ability to engage in commerce is a natural right of a free people. Is it right to levy a tax upon it?
This is not an economic analysis—this is a philosophical question. We have to punish something. What should it be? Which is the least bad choice? Which would produce the greatest revenue with the least impact to the people? Which is right for society? Which is the least unethical and punishing?
The middle choices—investment, savings, and trade—might not produce enough revenue to be viable alone. So we’re probably left, as the debate between Flat and Fair seems to indicate, between punishing labor/income or commerce/consumption.
Taxing labor feels a bit like a kind of slavery. For half the year, you labor for someone else—until May or June or July or worse, depending on your tax bracket. That’s pretty scary.
On the other hand, taxing commerce and consumption is applying a tax to something that free people should be naturally free to do. That doesn’t feel right either.
Which is worse? I must confess that recently, the idea of taxing consumption has seemed like the lesser of two evils, but my thinking is still very fresh, and I have not picked a camp, not by any means.
I want to think about this from a philosophical and ethical standpoint, and not just an economic one. And I very much welcome the debate and discussion that must naturally ensue from such an inquiry.