Consumption taxes are not the answer

TownHall.com ^ | Friday, May 28, 2004 | by Bruce Bartlett

[JohnHuang2]

Two tax issues seem to be getting a lot of discussion on the Internet these days. First is a big increase in the gasoline tax in order to discourage oil consumption and make the nation less vulnerable to the OPEC oil cartel. Second is the idea of replacing the Social Security payroll tax with a progressive consumption tax. Both have serious flaws.

The idea that a higher gasoline tax will help our energy situation is ludicrous. All European countries have far higher gasoline taxes, and they are just as vulnerable to increases in the price of oil as we are. If a higher oil price translates into a 50-cent per gallon increase in gasoline prices (net of tax), then the Europeans and we are both going to pay 50 cents more per gallon.

The reason is that oil is an internationally traded commodity. Whether you are importing oil or exporting it, you are going to pay the world price one way or another when you use oil. If you are an oil exporter, you can hold the price of gasoline down for your citizens, but then the nation as a whole pays an opportunity cost equal the foregone profit. In the end, it is no different than an oil importing country using public funds to subsidize the price of gasoline.

The point is that from the point of view of a consumer, it makes no difference whether you live in a country that is self-sufficient in terms of oil or one that is not. When fundamental market forces cause the price of oil to rise, everyone pays. There is no way of insulating yourself except by shifting the cost to someone else.

Raising the gasoline tax may reduce domestic oil consumption, but this will happen only very slowly. It takes time for people to trade-in their gas-guzzling SUV's for fuel efficient Mini Coopers. Leaving aside the loss of welfare for those forced to drive in tiny little cars when they would rather be in something much bigger, let's suppose that the lower demand lowers the world oil price. Unless it goes down by an amount equal to the tax, consumers are still worse off.

In the end, the only beneficiaries of a higher gasoline tax are the government and the road building industry. That is because under current law, revenues from the federal gasoline tax go into the highway trust fund, which is used to build roads, bridges and such. When there are uncommitted funds in this trust fund, Congress tends to treat them like free money that can be used for any stupid pork barrel project as long as it involves transportation.

As a consequence, increases in the gasoline tax don't even reduce the budget deficit except for the minuscule amount of time between when the tax is imposed and the time it takes for Congress to spend it. Of course, the law could be changed to put higher gasoline taxes into general revenues. But the road builders and others who benefit from increased transportation spending will strenuously oppose this. Hence, this is unlikely to occur.

The idea of replacing the payroll tax is similarly unworkable. This system of funding Social Security benefits was created for a specific reason that is still valid. By tying a worker's contributions directly to his benefits, workers tend to view the payroll tax not so much as a tax, but rather as a payroll deduction for his 401(k) plan, life insurance or medical benefits. To the extent that this is the case, the payroll tax is viewed as part of a worker's pay and not a subtraction from it.

Of course, a worker loses the use of his payroll tax deduction. But most get it all back with interest. Indeed, because of the highly progressive nature of the Social Security benefit system, low-income workers get a very high return on their payroll taxes. They get back benefits in retirement that are far greater than the money they paid in. In this respect, the Social Security system reinforces work incentives, rather than being a simplistic "tax on work" that it is often portrayed as.

Replacing the payroll tax with some other broad-based tax that is unconnected to a specific worker's wages breaks the link between contributions and benefits. It will convert Social Security into a pure welfare program, rather than a government pension. The effect would be to reduce political support for the program and work incentives at the same time. Any disincentive effects from the replacement tax would come on top.

If we are going to replace some tax with a progressive consumption tax, it should be the income tax, not the payroll tax. If done properly, this would increase incentives for work, saving and investment that would boost real economic growth.

[Final Authority]

With respect to 59, a lot of words to repeat what you have been saying for a while now. I have read these words before. I guess you may think that repeating the same ideas over and over again will cause some people to, all of a sudden, belive such ideas.

[lewislynn]

Speaking of cowardly, you really think it takes courage to post under multiple logins ..

No, do you know of anyone who's doing that?. No one else does.

The peculiar part is you only accuse my lewislynn screen name of doing it. Why don't you also go around accusing all the other sreen names your twisted mind thinks I'm posting under of being lewislynn?

[ancient_geezer]

Note the sharp rise in revenues from 1993 to 2000.

Note the sharp rise in tax burden as a percentage of GDP, due to climbing tax rates, removal of business deductions and falling outlays acting as an extreme drag on a vibrant economy that ultimately collapsed it into recession by 2000.

Your chart does not provide any insight whatever on what real GDP growth or resulting tax revenues would have been without the dual hit of climbing federal burdens on the economy.

Judging from that chart, I would say the Clinton administration did everything possible to kill the Regean legacy of economic growth.

[Principled]

If it doesn't generate enough revenue, the government goes further into debt. A debt that will eventually cost us all. At some point the bill comes due.

Ever even have the passing thought that when every single individual pays the tax at the same rate that government spending will have downward pressure?

If we all had to decide together, with one voice, what our singular and shared tax burdens would be....don't you think it would be less than our current burden?

Don't you think we'd handle OUR money better than someone else's money?

If it's someone else's money, sure - spend it! If it's my money, hold on - let me see if it's worth it.

[Your Nightmare]

Seems YN has a problem with refunding excess taxes, wants us to pay more taxes to finance refunding excess tax payments.

No, I don't have a problem with the inventory credit - in the context of this bill, it's may be a good idea - I have a problem with your bad math. How many times have you made one of your typical cut-and-paste posts that showed how the 29.87% rate was calculated and went on about how that was all that was needed to generate the same revenue as the current income tax? In all those posts I don't remember this $140+ billion tax credit being accounted for.

Once again the 29.87% rate is shown to be too low. If you want an honest debate about the NRST, stop with the funny math and Enron accounting, come up with the real rate, and lets debate it.

[Final Authority]

With respect to 100, yes, in a perfect world, where legislation is passed exactly as introduced, where all the legislators only act in the best interests of the general population, and where the mechanism to replace a major tax with another without overlap (if there is overlap then severe mischief will happen), then I say, maybe the so-called FairTax is a workable idea.

There are too many ifs and all that is required to make fairtax work as intended goes against the grain of congressional legislation. This is why so-called FairTax is and will be DOA.

[Your Nightmare]

Hey- did you know he Fair Tax plan includes an amendment that would make the taxing of any kind of income uncostitutional?
Did you know the Fair Tax plan also repeals the 16th amendment?

I didn't know that. I don't even think the authors of the bill know that.

[ancient_geezer]

I have read these words before.

Noted.

I guess you may think that repeating the same ideas over and over again will cause some people to, all of a sudden, belive such ideas.

LOL, it is obvious that some horses do not care to drink the water, it doesn't harm however to remind folks of the basic intents of the founders of this nation as a guide to what we should be striving to achieve.

Thank you for making it clear that you do not believe in the founding principles of this nation. From #59:

For the rest of us finding a fairer mode of taxation rather than who pays what is a better guide:

Patrick Henry, Virginia Ratifying Convention June 12, 1788:

• "the oppression arising from taxation, is not from the amount but, from the mode -- a thorough acquaintance with the condition of the people, is necessary to a just distribution of taxes. The whole wisdom of the science of Government, with respect to taxation, consists in selecting the mode of collection which will best accommodate to the convenience of the people."

 

Federalist #12:

• "The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury."

 

[Montesquieu wrote in Spirit of the Laws, XIII,c.14:]

• "A capitation is more natural to slavery; a duty on merchandise is more natural to liberty, by reason it has not so direct a relation to the person."
  --Thomas Jefferson: copied into his Commonplace Book.

 

[Principled]

I didn't know that.

HJR 45. Thomas Loc it.

I don't even think the authors of the bill know that.

ehhh???

[lewislynn]

Hey- did you know he Fair Tax plan includes an amendment that would make the taxing of any kind of income uncostitutional? Did you know the Fair Tax plan also repeals the 16th amendment?

Their plan might, their legislation doesn't.

[Principled]

Easily found - part of the plan...

...concurrent with the repeal of the income tax, a constitutional amendment repealing the 16th Amendment and prohibiting an income tax will be pushed through Congress for ratification by the states.

[Principled]

It's separate legislation. HJR 45. But you knew that.

[Principled]

Only someone who sought to retain the income tax would fight to prevent the plan from being implemented.

Of course, when folks no longer have any withholding, and when folks don't have to pay payroll tax, and folks don't have to worry about April tax bills, and when companies don't have to "contribute" to employees' FICA, and once there's no more individual tax filing, and once there's no more IRS, and once there's no more death tax, and once there's no more taxing of necessities....

once all that crap is gone, who will vote for a pol who wants to re-implement it all?

[lewislynn]

Then they will want to use the enactment of such a tax to make it easy to increase the sales tax rate at will.

You're more right than you know. It's already in their bill.

Here it is:

`(d) OLD-AGE, SURVIVORS AND DISABILITY INSURANCE RATE- The old-age, survivors and disability insurance rate shall be determined by the Social Security Administration. The old-age, survivors and disability insurance rate shall be that sales tax rate which is necessary to raise the same amount of revenue that would have been raised by imposing a 12.4 percent tax on the Social Security wage base (including self-employment income)as determined in accordance with chapter 21 of the Internal Revenue Code most recently in effect prior to the enactment of this Act. The rate shall be determined using actuarially sound methodology and announced at least 6 months prior to the beginning of the Calendar year for which it applies.

`(e) HOSPITAL INSURANCE RATE- The hospital insurance rate shall be determined by the Social Security Administration. The hospital insurance rate shall be that sales tax rate which is necessary to raise the same amount of revenue that would have been raised by imposing a 2.9 percent tax on the Medicare wage base (including self-employment income) as determined in accordance with chapter 21 of the Internal Revenue Code most recently in effect prior to the enactment of this Act. The rate shall be determined using actuarially sound methodology and announced at least 6 months prior to the beginning of the calendar year for which it applies.

`(f) ASSISTANCE- The Secretary shall provide such technical assistance as the Social Security Administration shall require to determine the old-age, survivors and disability insurance rate and the hospital insurance rate.

[lewislynn]

It's separate legislation. HJR 45. But you knew that.

That isn't "the fairtax plan" in any way shape or form...but you knew that.

[Principled]

HA HAH HA you're posing stuff you used to post 3 years ago.

The bill raises enough revenue to pay SS benefits and collect the general revenue. But you knew that.

The rubber meets the road where pols have to vote or not to raise or decrease the rate. The rate which is applied evenly to ALL individuals regardless of income level.

Illegals will have to pay it (only legal residents with SSNs get the rebate). Tourists will have to pay it. Imported goods will have to pay it. OTOH our exporst will leave our shores withOUT tax costs - making them 25% cheaper overseas.

The portion you posted only guarantees that the SS benefits of retirees will be paid.

[lewislynn]

Only someone who sought to retain the income tax would fight to prevent the plan from being implemented.

It's interesting that you see exposing what it really is, is a fight to prevent it.

[Principled]

That isn't "the fairtax plan" in any way shape or form.

Why yes, yes it is. That indeed is the definition of the Fair Tax plan...

eliminate the tax on income - replace with a consumption tax on new (never before taxed) goods and services.

part of that is obviously repealing the 16th and making the taxation of income unconstitional.

[Principled]

Only someone (lewislynn) who sought to retain the income tax would fight to prevent the plan from being implemented.

That's you- you want to retain the income tax, so you're fighting the passage of a bill that eliminates it.

[Your Nightmare]

If it's part of the "plan", why not make the NRST contingent on the repeal of the 16th?