tag:blogger.com,1999:blog-582368152716771238.post678353671227565336..comments2024-03-28T02:34:12.891-05:00Comments on The Grumpy Economist: A first step to progressive consumption taxesJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger54125tag:blogger.com,1999:blog-582368152716771238.post-77906418849256788042017-03-09T05:55:12.106-06:002017-03-09T05:55:12.106-06:00Yes I think Roth IRAs are the solution, with no re...Yes I think Roth IRAs are the solution, with no rebates from the government. If I want to contribute $1M to my IRA but have no income from a job, I would put the funds into my Roth. Subsequent withdrawals are tax free. <br /><br />If desired, if I have earnings in the future, I could then withdraw from the Roth, deposit in the regular IRA, and deduct from my taxes.Gideon Magnusnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83135644851117291812017-03-08T19:28:25.383-06:002017-03-08T19:28:25.383-06:00The main question to be resolved is what to do in ...The main question to be resolved is what to do in case IRA contributions exceed income? Should people get a rebate from the government?<br /><br />With a flat tax rate everything is simple. For example: Suppose I have save for a couple of years and accumulate $1 million in my IRA. Now I want to withdraw those funds and buy a house (for $1M). Suppose the interest rate is 5% and the tax rate is 10%. My tax liability is then $100,000. One year later, the house is still worth $1M, and I sell it, and deposit the funds in my IRA. As a result, I should receive $100,000 from the government. Note that I have paid taxes over the consumption (imputed rent) of $50,000, i.e. $5,000, since I am effectively lending the government $100,000 for a year at a zero interest rate.<br /><br />If the tax schedule is progressive, things are more complicated. Presumably, $1 million of consumption would imply a high consumption tax. People would be induced to finance durable goods consumption through debt (e.g. get a mortgage). But we are still left with the question, what should the tax rebate be for a deposit of $1 million back into my IRA?<br /><br />Of course, the simplest answer is to combine a flat tax with a refundable tax credit, in other words, universal basic income. But this is somewhat utopian. <br /><br />Perhaps having Roth IRAs with unlimited post-tax contributions but tax-free withdrawals is part of the answer?Gideon Magnusnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72505394914709679222016-10-24T18:03:02.287-05:002016-10-24T18:03:02.287-05:00This comment has been removed by the author.Anonymoushttps://www.blogger.com/profile/03507521481771304288noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-34143100520015553412016-10-24T18:01:57.171-05:002016-10-24T18:01:57.171-05:00Broad consumption taxes are great, but I'm tro...Broad consumption taxes are great, but I'm troubled by the tax-free income from savings idea as a means to introduce this, and achieve progressiveness. The idea that income from savings and labour are ultimately distinguishable seems to be dubious at best. Some friends and I own a bar/cafe, which we built with savings/borrowings, and a lot of blood sweat and tears of our own, (yes we scrubbed walls, built furniture, everything that didn't need a license), and some of us still work in it while it's operating. So we saved some labour, and some money, to invest. We also work there, or some of us do, and how well/much we pay ourselves now is directly connected to how much we record as 'profit' from our company, which we distribute through shareholdings. Is our income now 100% from savings, or labour, or somewhere in between?<br /><br />The more I think about it, the more I think that this isn't a peculiar case-study that just needs more guidelines to satisfy. In every small-business and start-up (which can become big business), the entrepreneur's labour and capital are both essential ingredients that need to be poured into the crucible, often in lumpy and unpredictable volumes. Hopefully one day a steady-ish flow of profits comes out. But I think the idea that incomes become cleanly distinguishable between income from capital (savings) or labour is an approximation of reality which only emerges as realistic in medium-large, well established companies. And even then, the remuneration for management or involved owners blurs the lines again. (Or rather, shows how the lines are quite artificial in the first place)<br /><br />Of course, the approximations we derive from those larger companies seems have become orthodox terms used by economists to describe and divide flows in the economy. (Sadly. It puzzles me why are so few economists are entrepreneurs.) But I think it's dangerous to prescribe policy with terms that are actually approximations that only hold well for larger established firms. The formation process is key, and we could start driving all sorts of distortions at the 'crucible' stage of business formation when labour and capital are necessarily and deliberately intertwined.<br /><br />Should all our chefs quit their jobs, pour their 'savings' into capitalising small 'catering companies' with appropriate capital equipment (knives, aprons) which restaurants like my own them commission to 'cater' in our own premises? The free-market, small government guy in me says 'why would you, but why not?' Declaring income from savings tax-free gives the chef a reason why, and the government a reason why not, since such businesses would have a spectacular return to capital, depending on the cost of 'labour' that the owner charged.<br /><br />Inviting the government to come in and arbitrate just how valuable the time of a small-business owner is, and measure how much they put in, sounds like a disaster that brings over-regulation and bureaucracy to a whole new level. Government will have to systematically monitor and count entrepreneurs expenditure of minutes, as well as dollars.<br /><br />So unless you can remove the distortion by not taxing any income of any form (possible, but long shot) I don't think it's a good idea to create such a gulf between the way we tax income from savings and labour.Anonymoushttps://www.blogger.com/profile/03507521481771304288noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73195494757965867562016-10-23T13:38:18.097-05:002016-10-23T13:38:18.097-05:00John,
"What Frank left out is the alternativ...John,<br /><br />"What Frank left out is the alternative -- use the proceeds of a flat consumption tax to transfer income as you wish. Write checks to voters."<br /><br />I didn't leave it out. I simply don't agree that a consumption tax (either progressive or flat) is the right approach to either achieve simplicity in the tax code or to maximize productivity or real economic growth.<br /><br />I don't agree that financial contracts - as an income generating and transferrable good - should be exempt from taxation. I believe this because the federal government provides legal services to those holders of financial contracts (fraud protection as an example) and as such those holders should be subject to taxation.<br /><br />If you want to eliminate taxation on financial contracts (stocks, bonds, etc.), that's fine. Then I would also expect you to promote the elimination of legal protections for holders of financial contracts including<br /><br />U. S. Bankruptcy Law<br />https://en.wikipedia.org/wiki/Title_11_of_the_United_States_Code<br /><br />As well as the Securities and Exchange commission and the acts that it is required to enforce:<br /><br />https://en.wikipedia.org/wiki/Securities_Act_of_1933<br />https://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1934<br />https://en.wikipedia.org/wiki/Trust_Indenture_Act_of_1939<br />https://en.wikipedia.org/wiki/Investment_Company_Act_of_1940<br />https://en.wikipedia.org/wiki/Investment_Advisers_Act_of_1940<br />https://en.wikipedia.org/wiki/Sarbanes–Oxley_Act<br />https://en.wikipedia.org/wiki/Dodd–Frank_Wall_Street_Reform_and_Consumer_Protection_Act<br /><br />Under a consumption tax I would also eliminate patent, trademark, copyright, and trade secret protections if the transfer / sale of those goods will be excluded from taxation under a VAT:<br /><br />Patent law<br />https://en.wikipedia.org/wiki/Title_35_of_the_United_States_Code<br /><br />Copyright Law<br />https://en.wikipedia.org/wiki/Title_17_of_the_United_States_Code<br /><br />Trademark Law<br />https://en.wikipedia.org/wiki/Title_15_of_the_United_States_Code<br /><br />Trade Secrets Law<br />https://en.wikipedia.org/wiki/Title_18_of_the_United_States_Code<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89866664681249388632016-10-23T12:34:23.047-05:002016-10-23T12:34:23.047-05:00Thanks Frank. I was hoping someone else would come...Thanks Frank. I was hoping someone else would come to help poor Anonymous. It's important, as most VATs and sales taxes try to be progressive by guessing what poor people buy and lowering the tax rates. But mucking with prices is always a terrible way to transfer income. <br /><br />And we do it already and will probably continue to do so. Food stamps, for example, subsidize food for poor people (50 million now). Let's not double down on the subsidies for food. <br /><br />What Frank left out is the alternative -- use the proceeds of a flat consumption tax to transfer income as you wish. Write checks to voters. The government is pretty good at that. How much is a discussion for another day. Here, we're talking about the mechanism. And on budget transfers are a better mechanism than a complex set of good specific sales taxes. <br /><br />John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-11787157115705671362016-10-23T11:13:17.770-05:002016-10-23T11:13:17.770-05:00Anonymous,
"I didn't have time to read a...Anonymous,<br /><br />"I didn't have time to read all comments, but maybe a simple way to make a consumption tax system progressive would be to exempt food from the sales/VAT tax."<br /><br />So taxes should be assessed equally on $1000 suits and $30 pairs of jeans?<br />So taxes should be assessed equally on $250 tickets to the opera and $10 tickets to the movie theatre?<br />So taxes should be assessed equally on a $250,000 sports car and a $25,000 four door sedan?<br /><br />This is the whole problem with a progressive sales / VAT tax.<br /><br />You start arguing over what types of goods a poor person would buy and which a rich person would buy.<br /><br />You also start arguing over whether a rich person buying 100 pairs of $30 jeans should be taxed the same if they buy three $1000 suits.<br /><br />This leads you down the path of a tax code more complex than what we have now.<br /><br />The false assumption is that a VAT or national sales tax is in and of itself simpler or less complex than an income tax.<br /><br />If you want a simple tax system, then fine - eliminate the distinction between corporate, personal, and investment income and go to a single rate flat income tax. Otherwise, you are just re-arranging the furniture.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-34699819451467449932016-10-20T12:00:35.712-05:002016-10-20T12:00:35.712-05:00I didn't have time to read all comments, but m...I didn't have time to read all comments, but maybe a simple way to make a consumption tax system progressive would be to exempt food from the sales/VAT tax. Its although rich people can eat more, I doubt they would eat 100x more than poor people, if one exempts food in markets and supermarkets, not restaurant food...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70073089983573758222016-10-11T11:55:00.037-05:002016-10-11T11:55:00.037-05:00Steve Landsburg has discussed this extensively as ...Steve Landsburg has discussed this extensively as well. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26904349840325178022016-10-11T10:49:50.409-05:002016-10-11T10:49:50.409-05:00I would take it the other way to solve our retirem...I would take it the other way to solve our retirement savings issue: lower taxes on IRA/401K withdrawals to a maximum of 10% for the first $3mil (or $5mil), indexed for inflation. Then you could actually means test Social Security as a significantly higher number of people would be able to retire without Social Security. Ned Brineshttps://www.blogger.com/profile/15690278876389201237noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-47475943129891743212016-10-09T10:30:43.147-05:002016-10-09T10:30:43.147-05:00Bob,
"A flat rate consumption tax has the ad...Bob,<br /><br />"A flat rate consumption tax has the advantage that everyone pays it at retail. This gives everyone an incentive to limit Government."<br /><br />Limit Government in what sense and who is everyone?<br /><br />1. Spending? - Government can borrow instead of direct taxation<br />2. Regulation? - A government can institute a myriad of regulations while collecting little in tax revenue<br />3. Other???FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89265488462602744542016-10-09T09:54:00.591-05:002016-10-09T09:54:00.591-05:00John,
"Good point. And it's a point in f...John,<br /><br />"Good point. And it's a point in favor of separating the tax code from the rates. The government should be able to renegotiate the rates without renegotiating the whole tax code."<br /><br />Considering that the rates and the whole tax code are determined by the same group of people (Congress), I don't see how you separate them unless you delegate one set of responsibilities to a 3rd party insulated from the political pressures of Congress.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40410849994237521642016-10-08T08:27:11.711-05:002016-10-08T08:27:11.711-05:00VAT is absurdly simple to administer in comparison...VAT is absurdly simple to administer in comparison to the myriad of capital, income, city, payroll, insurance, imports, estates, gifts, interest, excise, property, healthcare, and corporate taxes. Not to mention duties, licensing, tourist......<br /><br />VAT can normally be accomplished without an accountant for most small businesses. Not so with the others.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5777032022231912222016-10-08T08:19:41.717-05:002016-10-08T08:19:41.717-05:00It would be far more transparent for govt (state &...It would be far more transparent for govt (state & fed) to charge only a VAT of 30-50% (plus a few specific service taxes, pollution taxes etc), and drop every single other tax out there.<br /><br />And it would be far more palatable to people to pay 40% VAT if all taxes on income, capital, and wealth were outlawed altogether (enshrined the constitution sort of outlawed). If you disagree then that really just showing govt spending is absurd and we should all advocate a hard limit on govt. spending (in hell or high-water kind of limit).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-33841438225932283742016-10-07T20:02:59.634-05:002016-10-07T20:02:59.634-05:00It looks the Government is currently spending abou...It looks the Government is currently spending about 34% of the GDP. I don't think you can tax food or medications at this rate. Also, the GDP includes Government spending (I don't think you can tax that). So to keep the Federal Government running, you would need in my estimation VAT rate of at least 40-45% or maybe more. Assuming the states do the same, I think the VAT rate (Fed + states) needed would be about 50%. To make it progressive, the checks would have to go to less affluent every month, otherwise they could quickly run out of money. Therefore, I do not think VAT as the only tax is a plausible solution.rafalhttps://www.blogger.com/profile/03627684458558457142noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39276359363804316542016-10-07T18:02:43.461-05:002016-10-07T18:02:43.461-05:00"no tax forms"
Dreams are free. I work..."no tax forms"<br /><br />Dreams are free. I work for a company that does about five million dollars per year in revenue. Tracking the Canadian VAT (the GST/HST) is as much book keeping work as tracking income and expenses and we have to file a monthly tax return. Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87674021567700195962016-10-07T15:34:16.801-05:002016-10-07T15:34:16.801-05:00A flat rate consumption tax has the advantage that...A flat rate consumption tax has the advantage that everyone pays it at retail. This gives everyone an incentive to limit Government. You might counter that if the Government redistributes, that will remove the apparent incentive. However, that presumes a level of understanding by voters that may not be lacking. My preference is for a flat rate VAT with no Government redistribution. Leave the latter to Charities. If you counter that charity will not provide enough, my counter is that that is the message - Do advocate theft or not?Bob Fergusonnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72322458528049327272016-10-07T15:25:24.143-05:002016-10-07T15:25:24.143-05:00Boomer,
And there is also no with holding when a ...Boomer,<br /><br />And there is also no with holding when a consumption tax is used. And so any progressiveness regarding low income or over consumption would be done through end of year adjustments. This could put a huge end of year strain on the U. S. Treasury.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-15261250792772973592016-10-07T13:09:21.039-05:002016-10-07T13:09:21.039-05:00Glad you liked it, but my point was far deeper.
C...Glad you liked it, but my point was far deeper.<br /><br />Can Congress be trusted to make appropriate effective real time changes in tax policy (whether it be an income or consumption tax) through multiple business cycles?<br /><br />My analogy is the Federal Reserve. Can Congress be trusted to make real time changes in monetary / credit policy through multiple business cycles? <br /><br />Obviously not or we would still be using U. S. Treasury currency instead of Federal Reserve Notes.<br /><br />If Congress can't get monetary policy right all the time, every time, why do you believe they can get tax policy right?<br /><br />And it really has nothing to do with the intelligence / lack there of for individual members of Congress. It has to do with:<br /><br />1. Expediency - the Central Bank can agree to interest rate changes over a one hour meeting and implement them shortly after. It can takes months / years before a bill can be passed by both Houses of Congress.<br /><br />Care to wait around for 18 months while Congress deliberates on the new VAT tax rate that won't take effect until 2 years from now?<br /><br />2. Accumen - The Fed is staffed with people who for the most part are economists by trade. Congressmen and Congresswomen for the most part come from the legal profession and are not in a good position to argue the pros and cons of economic policies (including tax policy).<br /><br />3. Short terminism - Congressmen and women are under the pressure of running for office every 2-4 years and so lack the incentives to focus on long term objectives.<br /><br />We can debate the pros / cons of an income vs. consumption tax till we are blue in the face but I think this misses the bigger picture - <br /><br />How should tax policy be adjusted for changes in the business cycle and who should be responsible for those adjustments?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-78811001040903987082016-10-07T12:21:22.079-05:002016-10-07T12:21:22.079-05:00Good point. And it's a point in favor of separ...Good point. And it's a point in favor of separating the tax code from the rates. The government should be able to renegotiate the rates without renegotiating the whole tax code. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87853633779434298852016-10-07T12:18:16.713-05:002016-10-07T12:18:16.713-05:00I think the main advantage to a consumption tax is...I think the main advantage to a consumption tax is ease of collection -- no tax forms or tax accountants. This advantage wouldn't exist with unlimited IRAs, even if the economic effect is the same.Aging boomerhttps://www.blogger.com/profile/12071714993117207030noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-74182308146124026032016-10-07T10:51:05.443-05:002016-10-07T10:51:05.443-05:00Alan,
Read the statement by William Gale. He sta...Alan,<br /><br />Read the statement by William Gale. He states that a consumption tax is equivalent to an income tax where IRA contributions are unlimited and untaxed at any point (if I understand him correctly).<br /><br />A true consumption tax would assess taxes on consumption goods no matter the means by which the money is obtained to buy the goods.<br /><br />An income tax with unlimited tax free IRA contributions and withdraws only taxes income that is spent on goods, not borrowed money that is spent on goods.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83484370002044942812016-10-07T07:39:52.808-05:002016-10-07T07:39:52.808-05:00Wouldn't your credit card be charges for $30,0...Wouldn't your credit card be charges for $30,000 plus tax?Alanhttps://www.blogger.com/profile/10108220177800240150noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79032519445091902032016-10-07T05:27:33.813-05:002016-10-07T05:27:33.813-05:00Estonia has turned their enterprise tax into a con...Estonia has turned their enterprise tax into a consumption tax, putting it on a cash paid out basis. This created very strong business savings for a number of years. Since all legal persons were taxed the same, on a flat deferred basis, they also adopted a fringe benefit tax to discourage using these entities as a personal slush fund. This avoids the OVER mediation that would result in huge IRA balances, but really there is no good way to raise a large percent of GDP.Jim Hasshttps://www.blogger.com/profile/09827035709880926814noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-64571881310871837132016-10-07T03:44:39.854-05:002016-10-07T03:44:39.854-05:00A VAT (Value Added Tax) isn't a sales tax as w...A VAT (Value Added Tax) isn't a sales tax as we know it in the U.S.. It is far more administratively complex with the VAT being assessed at each stage of production and the final consumer paying the full amount. It is subject to significant manipulation, e.g., intermediate stages of production pay the tax immediately--the baker pays the VAT on flour---but then reclaims his payment when the wholesaler buys the baker's bread and pays his (the wholesaler's) VAT to the baker. It's easy to see how five or more intermediary steps finally work up to the consumer buying the loaf of bread and paying the 20% VAT. European countries all have VAT's as well as every other type of tax and it's easy to see how the U.S. would slide down that same path. I vote for no new tax innovations. Period! Eliminate itemized deductions and lower the current income tax rates. Anonymoushttps://www.blogger.com/profile/12439755447645640909noreply@blogger.com