A PROGRESSIVE Consumption Tax ???

In general, one of the great advantages of a graduated income tax system is its fairness: the more one earns, the more one pays.

In general, one of the great advantages of a graduated income tax system is its fairness: the more one earns, the more one pays.

In general, one of the great advantages of a graduated income tax system is its fairness: the more one earns, the more one pays.

In general, one of the great advantages of a graduated income tax system is its fairness: the more one earns, the more one pays.

By contrast, the general problem with a consumption tax – often known as a value-added tax, or VAT – is that it unfairly penalizes poor people, who spend almost all of their income,

and therefore pay a much greater proportion of a uniform consumption tax than more wealthy people do. [br]

It’s precisely this contrast that makes the following article from the New York Times by Cornell professor Robert Frank so intriguing:

he appears to have come up with an idea for a consumption tax that not only

a) embodies the principle of fairness of the graduated income tax, but also

b) seems particularly well-suited to the current political fiscal dilemma of the United States,

where, as he notes, the predictably IN-sufficient initial Obama stimulus seems unlikely to be increased any time soon,

given the 1937-like return of “deficit hawk”-ishness in Congress and elsewhere in Washington at the worst possible moment.

[quote]

LAST year’s stimulus spending is running out, yet unemployment stays stubbornly near 10 percent.

And as state and local governments keep cutting their budgets, the economy desperately needs an additional spending boost.

Concerned about growing federal deficits, however, many in Congress appear reluctant to act.

Their worries are misguided.

Yes, deficits are bad, but protracted unemployment is far worse.

Still, it seems unlikely that additional stimulus legislation can attract the supermajority now required to clear the Senate. And even without such legislation, huge budget deficits loom for years.

In the long run, these deficits will impoverish our grandchildren, just as the deficit hawks assert.

But an effective remedy is at hand.

A simple revision to current tax policy could spur an immediate burst of nongovernment spending that would help restore full employment without adding to the deficit.

And this same revision would simultaneously create a relatively painless new revenue stream that would help balance future budgets.

What I have in mind is a surtax on extremely high levels of consumption.

It would be enacted right away, but not take effect until unemployment again fell below 6 percent.

More than 99 percent of households would be exempt from this tax, which would be levied only on families earning more than $1 million who consume more than $500,000 annually….

A progressive consumption surtax would produce immediate, off-budget economic stimulus by giving wealthy families powerful incentives to accelerate future spending.

For example, a family that had been planning to build a new wing onto its mansion, or buy a yacht, would want to make those purchases now rather than be taxed on them later….

Once it took effect, of course, a progressive consumption surtax would discourage luxury spending.

Would that cause job losses down the road? No, because employment depends on total spending, not just consumption spending….

More than a decade ago, shortly after the publication of my article advocating replacement of the income tax with a progressive consumption tax, I received a warm letter from Milton Friedman, the late Nobel laureate, who was the patron saint of small-government conservatism …

University of Delaware economists Larry Seidman and Ken Lewis estimate that a progressive consumption tax could generate $50 billion or more in additional revenue annually.

Such a tax would not cause painful sacrifices because, beyond a certain point, additional consumption serves needs that are almost completely determined 

[/quote]

by what the brilliant sociological economist Thostein Veblen called “conspicuous consumption”:

that is, consumption simply to show others of the same income level that YOU have more money to throw away than they do ;-).