Robert H. Frank discussed the merits of a consumption tax in Saturday's New York Times. Frank is a professor of economics at Cornell University and a visiting scholar at the Stern School of Business at New York University.
The progressive income tax system is broken and could very well get worse under the Obama administration. (Thank you, Greg Mankiw). Serious academic research should be conducted to explore the economic viability of public policy alternatives. Whether we revise the federal tax code or replace the progressive income tax system with an annual consumption tax on household income/savings ratios as proposed by Frank, or a national sales tax as proposed by Americans for Fair Taxation, we must establish a tax system that creates a fair and balanced correlation between the generation of tax revenue and government spending. After all, if you are what you eat, and not what you earn, then shouldn't you be taxed as such? As usual, the founders offer timeless advice.
The progressive income tax system is broken and could very well get worse under the Obama administration. (Thank you, Greg Mankiw). Serious academic research should be conducted to explore the economic viability of public policy alternatives. Whether we revise the federal tax code or replace the progressive income tax system with an annual consumption tax on household income/savings ratios as proposed by Frank, or a national sales tax as proposed by Americans for Fair Taxation, we must establish a tax system that creates a fair and balanced correlation between the generation of tax revenue and government spending. After all, if you are what you eat, and not what you earn, then shouldn't you be taxed as such? As usual, the founders offer timeless advice.
It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit, which cannot be exceeded without defeating the end proposed — that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.
-Alexander Hamilton, Federalist No. 21
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Hi, my name is Francis. Just happen to come across your blog. I like to think and talk about economics issues too. I'm a supporter for consumption tax and the country that I'm currently studying in-- Singapore has been implementing the consumption taxes (or sales taxes)on all goods gradually to reduce any political repercussions. And it is so far quite successful as both the corporate income tax and personal income tax (progressive, but relatively flat, only 6 tax brackets) have been reduced to less than 20%.
ReplyDeleteI'm wondering about the implementation issues of the consumption tax based on household income/saving ratios by Prof Robert Frank. The practical issue here is how can the tax authority ensure that people do not cheat on their saving/consumption? Will the compliance or monitoring costs be higher than the present tax based on household income?
Nice to meet you, Francis. I think you are absolutely correct in your assessment of the risks associated with implementing a consumption tax on household income/savings ratios. The risks of cheating and the costs of compliance and monitoring could be prohibitory. While I applaud Professor Frank for raising the idea of implementing a federal consumption tax, I believe the tax would be more successful as a national sales tax, preferably in combination with phasing out the progressive income tax and greatly reducing corporate tax rates.
ReplyDeleteI am not an economist, but I do believe that a revenue neutral solution with regard to the generation of tax revenue is possible. Best of luck in your studies and I am glad you are reading my blog.