The Jaker

Mostly rational politics, with occasional rants about how a few crazy Republicans are ruining the country.


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Thursday, March 03, 2005
Consumption Tax
So Greenspan is out advocating shifting to a Consumption Tax from our current hybrid income/sales tax system. There are definitely problems with both - our current system taxes work heavily while leaving a lot of non-work income untaxed or taxed at lower rates. Most forms of consumption tax, on the other hand, hurt lower income people because they spend a higher percentage of their earnings - so their taxes would stay roughly the same (taxed on all earnings, taxed on all spending - which are the same numbers) whereas rich people would pay less (taxed on all earnings, taxed on all spending - where spending is lower than earnings because they can afford to save).

The reasoning is that a consumption tax would encourage further savings in a country where our low savings rate creates economic hazards such as the currency / budget crisis that we're experiencing at the moment. We have to borrow something like $30bn a day (too lazy to look up the number) from Japan/Korea in order to keep this country working.

I recently read an interesting proposal for a progressive Consumption Tax from New America Foundation, a left-center think tank. Here's the general idea:
A better alternative would be a progressive consumption tax, levied not on individual purchases but rather on total spending. Each year, taxpayers would calculate their total income, subtract their total savings and pay taxes on the difference. The first, say, $25,000 of consumption would be tax-free, and from there the tax rates would be progressive rather than flat. The more you spent and the less you saved, the higher your tax rate would be.

Phased in gradually, a progressive national consumption tax could replace the entire revenue stream of the payroll tax. And it would be a far better funding stream for Social Security and Medicare, insofar as a consumption tax would encourage exactly what we most need as the retirement of the baby-boom generation approaches: higher rates of personal savings. Over time, higher saving rates would also boost economic growth and living standards.

The Center for American Progress has also done a lot of work on the tax system.
posted by CB @ 9:59 AM  
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