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.

[lewislynn]

Instead of making up crap about multiple accounts, why don't you use your head and answer my question?

Because he doesn't know the answer to any of the questions....I do. That and the fact I'm right is what ticks him off and why he stalks me. Even, like a typical coward, behind my back.

[GulliverSwift]

The effect would be to reduce political support for the program and work incentives at the same time.

What's wrong with that? Who ever said the gov should be in the retirement racket anyway?

[GulliverSwift]

excellent post

[lewislynn]

From a business standpoint, when I read paragraphs (1), (2), (3), and (4) of 'Transition Matters' all I see are "compliance costs".

[Remember_Salamis]

I ave to say that you're a much more constructive ctitic than lewislynn. You actually ask legitimate questions rather than just propagandize and refuse to answer any valid counterarguments to you own claims.

But, I do disagree with you.

Like this post:

Sure, you can change all the "wills" to "maybes", but there are never 100% guarantees in ANYTHING, yet we still state that (a) will cause (b), which may inturn trigger (c).

These estimates are based on the SOLID, I repeat, SOLID, supply-side economic theory from such great economists as Milton Friedman and Laffer. In fact, most of it even complies with Keynesian economic theory. Yet, current Democratic rhetoric conflicts even Keyneian economic theory, most of which has been debunked. Like the President first tax cut in '01. That was a Keynesian tax cut: recession hits, cut taxes and stimulate spending. Yet, Dems vehemently opposed it. His second tax cut was a supply-side tax cut: cut inhibitors of investment, increase capital stock, and watch the economy mushroom.

[Remember_Salamis]

You're a true Patriot Paisano: "The NRST will never PASS for to do so would mean a MAJOR decrease in Congressional POWER. It's too hard, why try?"

"The sun never sets on the british empire. It's too hard, why try?"

"The Germans and Japanese are unstoppable. It's too hard, why try?"

[GSlob]

"If we are going to replace some tax with a progressive consumption tax..."
Progressive tax (in the sense of contibuting to social progress versus a tax on progressively increasing scale) is a bad pun, not even an oxymoron.
Taxes are (ideally) payment for social services received. Social engineering supported by taxes (transfer payments) is a social misservice. Most social progress happened without governmental (tax supported) interference, when the user of social services, (or of anything else) paid, and the non-user did not have to. Hence a progressive tax is socially regressive, and vice versa. (Actually, can be used as a tagline)

[remember]

The Reagan tax rate cuts being a prime example of not only of economic growth from marginal tax rate decreases, but a characteristic growth in government revenue collections that go with growing economies.

The Reagan tax cuts is a flawed example.

LOL, your */~rdavis whoever he is, constructs a strawman, and does a lousy job of analysis. The base issue is one of tax avoidence behavior which increases with increasing marginal rates, and decreases with decreasing marginal rates.

If it's such a lousy analysis, then you should have no trouble pointing out specifically which numbers and/or conclusions are incorrect. The fact is, I have presented this analysis to numerous supply-siders and none have yet contradicted anything specific in it. So please, take your best shot.

The fact is, I am yet to see any reputable supply-sider stand by the claim that tax cuts cause government revenues to increase by more than they would otherwise. In fact, they all seem to say otherwise. For example, following is an excerpt from the CATO Policy Analysis titled "Supply Tax Cuts and the Truth About the Reagan Economic Record", co-written by Stephen Moore and online at http://www.cato.org/pubs/pas/pa-261.html:

Fable 1: The Reagan Administration Relied on "Pie-in-the-Sky" Predictions That Tax Rate Cuts Would Pay for Themselves

Supply-siders predicted their tax cuts would pay for themselves. This was nonsense from day one, because the credible evidence overwhelmingly indicates that revenue feedbacks from tax cuts is 35 cents per dollar, at most. Are we really gullible enough to accept a free dinner while still suffering the indigestion from our "free" lunch? [23]

This is one of the great enduring myths of Reaganomics: that the White House relied on wild supply-side assumptions regarding the revenue impact of the tax cuts. The Reagan administration never assumed that the tax cuts would pay for themselves. In fact, "America's New Beginning: A Program for Economic Recovery," the White House budget plan released on February 18, 1981, included a table entitled "Direct Revenue Effects of Proposed Tax Reductions." [24] That table predicted a huge $700 billion revenue loss from the tax cuts through 1986, as shown in Table 4.

Table 4 

Reagan Administration's Scoring of the 1981 Tax Cut--Revenue Impact, in Billions of Dollars  

1981   1982   1983   1984   1985   1986  1981-86
---- ------ ------ ------ ------ ------ --------
-8.8  -53.9 -100.0 -148.1 -185.7 -221.7   -718.2 

Source: Office of the President, "America's New Beginning: A Program for Economic Recovery,"
February 18, 1981, p. 16. 

So, once again, if you can find any specific problem with the numbers or conclusions in my analysis at http://home.att.net/~rdavis2/taxcuts.html, please post it.

[remember]

"The increases in marginal tax rates imposed by the Clinton administration and Congress are likely to raise little or no additional revenue." Martin Feldstein - 1993

Well that prediction didn't turn out too well, now did it. Thank you for the beautiful example of how wrong economists can be when they try to predict the future. (Beside the fact he doesn't seem to understand what Laffer was saying with the Laffer Curve. He said raising the tax rate could raise or lower revenues depending on where you are on the curve.)

You're right, that prediction didn't turn out too well. It can be most quickly illustrated in the following graph:

Note the sharp rise in revenues from 1993 to 2000. Then compare that to the even steeper drop in revenues from 2000 to 2004. You can also see that, as a percent of GDP, revenues did drop during the eighties. The actual numbers can be seen at http://home.att.net/~rdavis2/def05.html.

[Remember_Salamis]

And that's why the cynical view of the Reagan Administration from Libertarians like the CATO Institute is that "The only reason the Reagan cut taxes was to control spending." In other words, he cut taxes, created a defecit (knowing full well that they don't really matter in the short-term), and watched Dems say that Defecits will make the sky fall. He then challenged them to do something about it: cut/control spending. And it worked, with non-defense spending being controlled.

Is the same thing going on right now? Maybe. But we're not even arguing for a suppl-side tax cut. We want Fundamental Tax Reform.

[phil_will1]

"Because he doesn't know the answer to any of the questions....I do."

If you know the answers, why do you ask others?

Speaking of cowardly, you really think it takes courage to post under multiple logins and then whine to the moderator when you are called on it?

BTW, whatever happened to LiberalLarry?

[Remember_Salamis]

I can actually see a distinct difference between the writing styles of lewislynn, which is pure propaganda, and yournightmare, which are at least grounded in reality. I'm not 100% convinced they're the same person anymore.

[Principled]

What's the confusion? It isn't so much a credit as a REFUND of taxes double paid....

[ancient_geezer]

So, once again, if you can find any specific problem with the numbers or conclusions in my analysis at http://home.att.net/~rdavis2/taxcuts.html, please post it.

As regards my statement of the effect of tax cuts on economic growth which NY took exception to and used your analysis as being a refutation, and why I call that reference a "stawman" and lousy job of analysis.

"The Reagan tax rate cuts being a prime example of not only of economic growth from marginal tax rate decreases, but a characteristic growth in government revenue collections that go with growing economies."

 

I bring your attention to real per-worker gdp of 1986-2000, compared to real per-worker gdp 1960-1986.

The reagan Economic Recovery Tax Reform Act PL 99-514 brought highest marginal rate down to 28% in 1986 among other specific changes in tax law favoring investment over consumption. Note the subsequent growth in per-worker GDP (as an example of increased productivity and economic growth arising from decrease in marginal tax rates to which my statement was directed.)

The strawman, is one constructed of analyzing total revenue reciepts with regard to decreased rates. My point was concerning economic growth, and the ability of a growing economy to in turn support government revenues in the face of substantially lower marginal tax rates.

I note specifically that your analysis does not look at income reporting of the higher income groups, as concequence of the change in tax avoidence behaviour that goes with rate reductions and more investment friendly tax system.

[ancient_geezer]

What's the confusion? It isn't so much a credit as a REFUND of taxes double paid....

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

Your Nightmare: "How much is this credit going to cost?"

[Principled]

He is one of the "neo-detractors"... ie a liberal who finally recognizes that this HR 25 would make government smaller.

HE HEH HEH what will the libs do when any tax increase has to affect EVERY SINGLE individual!? And what will they do when every tax decrease is enjoyed by every single individual?

I bet I'm about to be called names!!! he he he

[Final Authority]

With respect to 66, many of the co-sponsors of a sales tax may have other interests that those of the sponsors of the so-called FairTax legislation. We have already read right here on this thread that there is interest in a sales tax to replace the payroll tax. This is what I am talking about. Once the sales tax bogey is let out of Pandora's box, so-to-speak, nothing you desire and certainly nothing I want will ever be realized. My solution, no sales tax, unless there is certainty that it is only a replacement tax. Since that will never happen, then, no sales tax, period.

[Your Nightmare]

The fact that you phrased your question thusly tells a grat deal about your philosophy of government. It doesn't 'cost' anybody anything, unless you are thinking in the paradigm of government programs.

We are talking about a government revenue program, so yes we are thinking in the paradigm of government programs. 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.


I question your conservatism. Last time I checked, conservatives were in favor of reduced government. You're a troll and you probably don't even know it. I'll add you to the list of phony big government apologists who infest this site.

I'm all for reducing the size of government, but what makes you think reducing revenue reduces the size of government? True conservatives believe in paying their bills, not cutting taxes while increasing spending and going even further into debt.

[Final Authority]

Again, with respect to 66, I never said anything about economists and economic impact and predictions of such. Please do not apply thoughts or words to my replies, rather, work to read and understand my words and thoughts. We will be better for it.

[Principled]

You do, of course, know that there is nothing preventing Congress from imposing a sales tax on us right now...don't you?

All it would take is a vote in Congress. They have the power to lay and collect taxes per the Constitution.

Of course if the Constitution were amended to make the taxation of any kind of income unconstitutional, then Congress couldn't tax any kind of income without first re-amending the constitution.

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?

When the Fair Tax is passed, there will be no more withholding.
When the Fair Tax is passed, there will be no more payroll tax.
When the Fair Tax is passed, there will be no more death tax.
When the Fair Tax is passed, there will be no more marriage penalty.
When the Fair Tax is passed, there will be no more IRS.
When the Fair Tax is passed, there will be no more individual filing tax forms.
When the Fair Tax is passed, there will be no more individuals being harassed, intimidated, and jailed for innocently making errors on arbitrary and pericious IRS rules and laws.
When the Fair Tax is passed, individuals will receive their paycheck free of any federal deductions!
What's the downside?.... you worried we may end up with something as horrible as we ALREADY HAVE?