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> I think we’d be best off with a progressive tax on consumption In theory I like the idea of a "tax on consumption", because it suggests a penalty on conspicu

by Joeboy 12y ago

> I think we’d be best off with a progressive tax on consumption In theory I like the idea of a "tax on consumption", because it suggests a penalty on conspicuous consumption and wasteful spending. In practice, taxes on consumption are seen as regressive, ie. they affect the poor more than the rich. Is there a way to tax "bad" consumption, without penalizing people who "consume" a large proportion of their income simply because they don't have much of it? I'm picturing some byzantine tax code system where functionaries make value judgements about the morality of various kinds of goods.

seren 12y ago
Well in theory, you could have a progressive tax on consumption, i.e. basic subsistence item have a low VAT, while luxury goods have a higher rate. This is already in application in some countries, but this is rather crude and does not take into account what you are using the item for. For example, electricity to heat your single room apartment has the same tax rate than the one used to heat your Olympic pool when it's freezing outside.
dragonwriter 12y ago
You can tax "bad" consumption, but it ends up with the same kind of complexity as existing income tax with filings and tracking and specific exemptions/deductions/adjustments. As simplicity is one of the big reasons people propose a consumption tax over the existing income tax, almost no one who would want a consumption tax in the first place is interested in such an arrangement. Personally, I'm unconvinced that there is any real practical advantage to consumption taxes, and think a better simplification is the smaller change of having a progressive tax on income without undermining progressivity by favoring capital income. At any target revenue level this enables lower taxes on working people which enables more peoe to become at least small scale capitalists, rather than taxing working people extra to reward those people who have already accumulated or inherited the wealth to live off capital rather than labor.
crdoconnor 12y ago
>In theory I like the idea of a "tax on consumption", because it suggests a penalty on conspicuous consumption and wasteful spending. If you want a penalty on conspicuous consumption then simply levy taxes on items which count as conspicuous consumption - yachts, private jets, houses > $2 million USD, super cars, etc. It would probably not be a huge list and it wouldn't be a complicated rule. You might miss one or two exceptions, but that's okay. It would be a LOT simpler than going the other way - taxing everything consumed in the economy and then making exceptions for conspicuous consumption.
- gyardley 12y ago
  We've done all this before - in the early 1990s, George HW Bush passed a 10% luxury tax on yachts, private planes, furs and a few other high-value items. Maybe expensive cars, I don't remember perfectly. The government figured these measures would bring in X dollars in new revenue. It actually brought in much less, about 0.5X, as the purchasers of luxury goods changed their behavior. After the cost of unemployment benefits to people - thousands in the boat-building industry, among others, lost their jobs - the luxury tax ended up being a net negative for the government. It was repealed a couple of years later. The economy's too complex for us to experiment on without unintended and unanticipated side effects. That doesn't mean we should never experiment with it - as long as we do it cautiously - but we should at least learn some lessons from the experiments we've already conducted.
  - crdoconnor 12y ago
    A) The sales pitch to get rid of the tax was super slick. No denying that. The substance was thin, though. B) Like I said below: the function of a tax is not to bring in revenue, and counting it a success or not because it brought in above "X" amount of revenue is staggeringly dumb. Taxes are there to disincentivize undesirable behavior and clamp down on inflation, not raise funds. Governments sovereign in their own currency are not revenue constrained. C) The effect removing that tax had on jobs was almost negligible. Look at overall unemployment during that time. Didn't budge. >The economy's too complex for us Hm. Apologetics for the ultra-wealthy...
tim333 12y ago
One practical approach is to have a high income tax on large incomes with a tax break for income which is invested rather than spent. There is something a little like that in the UK where you can offset 50% of your investment in startup against your income tax bill. I'm not sure how economically efficient that will prove - a lot of the startups go belly up. You'd probably want the income tax a bit higher than the present 40-45% to keep Piketty happy.
Kalium 12y ago
This is why a tax on capital is both easier and less regressive. It avoids subjective value judgments on what's "good" or "bad" consumption.
- humanrebar 12y ago
  No, it just makes subjective value judgements on what is "good" and "bad" capital. Oversized primary residence? Subsidized. Equivalent amount of money in a retirement account? Subsidized. Equivalent amount of money in a stock? Not subsidized.
  - Kalium 12y ago
    Or you could just tax capital without judging it. That's also possible.
    - humanrebar 12y ago
      I'm skeptical considering that income and spending isn't taxed that way. And existing capital taxes (property taxes, estate taxes) don't work that way.

by Joeboy 12y ago

seren 12y ago

Well in theory, you could have a progressive tax on consumption, i.e. basic subsistence item have a low VAT, while luxury goods have a higher rate. This is already in application in some countries, but this is rather crude and does not take into account what you are using the item for. For example, electricity to heat your single room apartment has the same tax rate than the one used to heat your Olympic pool when it's freezing outside.

dragonwriter 12y ago

You can tax "bad" consumption, but it ends up with the same kind of complexity as existing income tax with filings and tracking and specific exemptions/deductions/adjustments. As simplicity is one of the big reasons people propose a consumption tax over the existing income tax, almost no one who would want a consumption tax in the first place is interested in such an arrangement. Personally, I'm unconvinced that there is any real practical advantage to consumption taxes, and think a better simplification is the smaller change of having a progressive tax on income without undermining progressivity by favoring capital income. At any target revenue level this enables lower taxes on working people which enables more peoe to become at least small scale capitalists, rather than taxing working people extra to reward those people who have already accumulated or inherited the wealth to live off capital rather than labor.

crdoconnor 12y ago

>In theory I like the idea of a "tax on consumption", because it suggests a penalty on conspicuous consumption and wasteful spending. If you want a penalty on conspicuous consumption then simply levy taxes on items which count as conspicuous consumption - yachts, private jets, houses > $2 million USD, super cars, etc. It would probably not be a huge list and it wouldn't be a complicated rule. You might miss one or two exceptions, but that's okay. It would be a LOT simpler than going the other way - taxing everything consumed in the economy and then making exceptions for conspicuous consumption.

gyardley 12y ago
We've done all this before - in the early 1990s, George HW Bush passed a 10% luxury tax on yachts, private planes, furs and a few other high-value items. Maybe expensive cars, I don't remember perfectly. The government figured these measures would bring in X dollars in new revenue. It actually brought in much less, about 0.5X, as the purchasers of luxury goods changed their behavior. After the cost of unemployment benefits to people - thousands in the boat-building industry, among others, lost their jobs - the luxury tax ended up being a net negative for the government. It was repealed a couple of years later. The economy's too complex for us to experiment on without unintended and unanticipated side effects. That doesn't mean we should never experiment with it - as long as we do it cautiously - but we should at least learn some lessons from the experiments we've already conducted.
- crdoconnor 12y ago
  A) The sales pitch to get rid of the tax was super slick. No denying that. The substance was thin, though. B) Like I said below: the function of a tax is not to bring in revenue, and counting it a success or not because it brought in above "X" amount of revenue is staggeringly dumb. Taxes are there to disincentivize undesirable behavior and clamp down on inflation, not raise funds. Governments sovereign in their own currency are not revenue constrained. C) The effect removing that tax had on jobs was almost negligible. Look at overall unemployment during that time. Didn't budge. >The economy's too complex for us Hm. Apologetics for the ultra-wealthy...

tim333 12y ago

One practical approach is to have a high income tax on large incomes with a tax break for income which is invested rather than spent. There is something a little like that in the UK where you can offset 50% of your investment in startup against your income tax bill. I'm not sure how economically efficient that will prove - a lot of the startups go belly up. You'd probably want the income tax a bit higher than the present 40-45% to keep Piketty happy.

Kalium 12y ago

This is why a tax on capital is both easier and less regressive. It avoids subjective value judgments on what's "good" or "bad" consumption.

humanrebar 12y ago
No, it just makes subjective value judgements on what is "good" and "bad" capital. Oversized primary residence? Subsidized. Equivalent amount of money in a retirement account? Subsidized. Equivalent amount of money in a stock? Not subsidized.
- Kalium 12y ago
  Or you could just tax capital without judging it. That's also possible.
  - humanrebar 12y ago
    I'm skeptical considering that income and spending isn't taxed that way. And existing capital taxes (property taxes, estate taxes) don't work that way.