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.

[ancient_geezer]

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

Sorry, if it's not part of the legislation, it's not part of the plan.

The "plan" to be approved and adopted by Congress with enactement of HR25 according to the text of the legislation:

H.R.25

Fair Tax Act of 2003 (Introduced in House)

http://thomas.loc.gov/cgi-bin/query/z?c108:H.R.25:

---

SEC. 2. CONGRESSIONAL FINDINGS.

(f) FINDINGS RELATING TO REPEAL OF PRESENT FEDERAL TAX SYSTEM- Congress further finds that the 16th amendment to the United States Constitution should be repealed.

 

Implementation of any amendment is through a separate process defined by rules of Congress in accord with the requirements of the Constitution Article five requiring specific joint Resolution of both Houses adopted by 2/3 vote and passed to the states for ratification.

[Badray]

YN is aptly named. Because his particular ox may be gored a bit under the NRST, he wants the rest of us to be gored forever. He has absolutely no concern for the good of the country.

I too will likely pay more under the NRST, but I'm more concerned about the future of this country, my kid's tax burden, and getting out from under the tyranny of the IRS and the Income Tax.

One of the greatest side benefites of this plan that I predict will occur is that when these congresscritters lose their power to dispense favors and wield power that it will no longer be as much fun or as profitable to remain in office and will start to retire. The turnover will do wonders for representative government.

[Your Nightmare]

I'm more concerned about the future of this country, my kid's tax burden

Then you need to look elsewhere. The NRST at this rate is a debt buster. You'd be better off trying to cut spending.

[Badray]

This is the best and most viable plan to cut spending and take control of the government again. What we have now is the worst system possible for countless reasons. You should be ashamed that you put your narrow (and likely temporary) self interest ahead of the country's.

[ancient_geezer]

I'm more concerned about the future of this country, my kid's tax burden

Then you need to look elsewhere. The NRST at this rate is a debt buster.

How is staying with the income/payroll tax system:

 

 

A cure for the National Debt?

 

 

You'd be better off trying to cut spending.

Hmmmm, hasn't worked under the income/payroll tax system,

Walter Williams, World Net Daily, 10-25-2000

According to the most recent U.S. Treasury Department figures, in 1997 the top 1 percent of income-earners (those with income of $250,000 and higher) paid 33 percent of all federal income taxes. The top 5 percent of income-earners ($108,000 and over) paid 52 percent, and the top 50 percent ($36,000 and over) paid 96 percent of income taxes. Guess what the bottom 50 percent of income earners paid?

If you're among those who pay little or no federal income taxes, what do you care about tax cuts? Moreover, if you think tax cuts pose a threat to government handout programs, you might be openly hostile and support Al Gore's silly "risky scheme" talk. So many Americans paying little or no federal taxes makes for a natural spending constituency. It's like me in the restaurant: What do I care about extravagance if you're footing the bill?

 

---

- KEYES TRANSCRIPT (01/28/02)

"As a matter of fact, what the income tax does — and this is the debate that I think we always try to get into in order to let you and him fight, see — and the people of this country are led down a path where the actual control of their resources, which in the end is the control over their will, is handed off to the government."

. . .

"The government then manipulates that will in order to destroy the freedom of our electoral system through the income tax structure, and we call the resulting slavery a free system."

"In point of fact, it is not as the founders understood, and the only way to restore real freedom is to give people back control over the income that they earn so that they won‘t, at the voting booth and in other phony issues, be subject to that manipulation."

 

To remove perception of the tax burdens of the individual, is to remove the goad which assures accountability of government to the electorate. Federal tax rates are high, yet the national debt and government grows ever larger because a majority of the electorate do not perceive proportionately the burden their demand for largesse imposes on the minority of citizens.

The siren call for representation without taxation is the formula that got us where we are at today. The ability to hide or disguise taxation from the view of large sectors of the electorate allows the Congress to get away with the creation of the evergrowing monster that it fosters.

The Intent of the individual income tax is for political and social manipulation not revenue collection. The Individual Income tax is maintained to establish and hold every person in the country perpetual legal jeopardy. That is a situation that must end with the repeal of the income tax from the statutes, and the prohibition of its use by Constitutional amendment that future generations will not face the same manner of manipulation and interference in their lives.

[Final Authority]

With respect to 133, collectivist is a term of art, that is, it has a certain meaning that you nor I can impose upon it, unless you are using some language other than English, BTW, I speak English and use it properly as I trust you wish to. The meaning per Webster's New World Dictionary is as follows: An advocate of collectivism. Collectivism is defined as; The ownership and control of the means of production by the people as a whole; socialism.

I want you to recognize that I spent several minutes of my time, expensive for my clients, for you, to educate you in the proper use of the English language and the development of thoughts thereof. I suspect you will be indebted to me for such an education.

[Badray]

Yeah, that was kinda what I said. Just not as good as you did. ;-)

[Your Nightmare]

This is the best and most viable plan to cut spending and take control of the government again.

Can you point out the spending cuts in this bill? I can't seem to find them.

You should be ashamed that you put your narrow (and likely temporary) self interest ahead of the country's.

This country going further into debt is not in my self interest or the country's.

[ancient_geezer]

Can you point out the spending cuts in this bill? I can't seem to find them.

HR25 is a revenue bill, spending cuts go into appropriations bills.

This country going further into debt is not in my self interest or the country's.

The Intent of maintaining the income tax is for political, social and economic manipulation not revenue collection. You will note the total federal debt is never paid down, it only increases. Government will never move to decrease spending until the American electorate as individuals perceive a proportionate burden of the costs of government they demand.

 

Walter Williams, World Net Daily, 10-25-2000

• "the top 50 percent ($36,000 and over) paid 96 percent of income taxes. Guess what the bottom 50 percent of income earners paid? "

• "It's like me in the restaurant: What do I care about extravagance if you're footing the bill?"

 

Taxes & Government Spending:

• "The income tax in effect makes us vassals to the government – the politicians decide how much income we can keep. No mere “reform” of this slave tax, such as flattening the rate, can correct its fundamental denial of control over our own money. Only the abolition of the income tax itself will restore the basic American principle that our income is both our own money and our own private business - not the government's."

• "Replacing the income tax with a national sales tax would rejuvenate independence and responsibility in our citizens. True economic liberty and moral revival go hand in hand."

 

The Honorable James DeMint (R-SC)
United States House of Representatives
THURSDAY, APRIL 5, 2001

• "There has been a shift in the relationship between individuals and government, he argues, such that fewer and fewer are paying taxes at the same time that more and more are receiving increasingly generous benefits. If it becomes the case that most voters do not bear a financial burden for this largess, then there will be little to restrain--and significant political incentives to encourage--the continued growth of government.

[Badray]

"This country going further into debt is not in my self interest or the country's."

Here, in your own words, is the narrow self interest to which I was referring.

"The biggest reason is I pay less with the income tax than I would with the NRST. You don't really believe we can all pay less and the government can generate the same revenue, do you? That's just not possible. Use some common sense. To generate the same revenue it has to be a zero-sum game. If someone is paying less, other's (mainly the middle class) pay more. I'm one of the others."

Your assertion about the nation's debt is just that. A mere assertion and one designed to obfuscate and distract from the discussion of the benefits of this proposal.

[remember]

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."

As you can see from the first sentence of my short and long analysis, their immediate focus is the claim that the near-doubling of revenues during Reagan's two terms proves the value of tax cuts. Do you at least concede that this claim is totally bogus? In any case, I assume that YN referenced my analysis because of the part of your statement above that I put in bold type. You now seem to be saying that you made no claim as to revenues but were talking only about economic growth. In any case, are you simply referring to YN's use of my analysis as a "strawman and lousy job of analysis" or are you referring to my analysis? If the former, then you can take it up with YN (and clarify that you have no complaint against my analysis). If it is the latter, then please post specifically what number or conclusion you disagree with.

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

Where did you get the exact years 1986-2000? Was there text accompanying that graph? If so, please post a link to the page. In any case, I can't see the great growth from 1986-2000 that you speak of. I see high growth from about 1946 to 1968, general stagnation from about 1968 to 1982, fair growth from about 1982 to 1991, and higher growth from 1991 to 2000. In fact, it appears that you got that graph from Bradford DeLong's website. I found an nearly identical graph in one of his papers at http://www.j-bradford-delong.net/macro_online/lec_notes/LN_ch1.pdf. About that graph, he writes:

Figure 1.4 shows this upward trend in real GDP per worker. Despite temporary setbacks in recessions and depressions--of which the Great Depression of the 1930s--was by far the largest--the principal event of the twentieth century was this quintupling of measured real GDP per worker. Other macroeconomic events visible in the figure include the World War II boom, the 1974-1975 and the 1980-1983 major recessions, the 1990-1991 minor recession, and the two-decade long period of stagnation from the early 1970s to the early 1990s--a period that saw the 1973 and 1979 sharp oil price increases by OPEC, and the large investment-reducing government budget deficits of the 1990s.

As the part I put in bold type shows, he states that the stagnation lasted from the early 1970s to the early 1990s. As I said, the eighties look to me like they had fair growth. In any case, neither of us see the unique spurt of growth that you seem to see during the eighties. That is the same result in the look at GDP that I did for my analysis. As you can see from the following graph, there appears to have been nothing terribly spectacular or unique about the growth in GDP during the eighties. I refer to this graph in the analysis at longer analysis at http://home.att.net/~rdavis2/taxcuts.html.

So, once again, if you have any disagreement with a specific number or conclusion in my analysis, please post it. If your disagreement is simply with the relevance of my analysis to your discussion with YN, then you can take that up with YN.

[remember]

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.

I never claimed that is showed anything but federal revenues and outlays, as a percentage of GDP.

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

How can you say that when the chart simply shows federal revenues and outlays? It sounds to me like you're seeing what you want to see.

[Principled]

I want you to recognize that I spent several minutes of my time, expensive for my clients, for you, to educate you ...

You said WE. You are only one person, hence it does not follow to use the plural. The question is why did a singular individual use the plural form of the subjective pronoun?

You have a very high opinion of yourself - ridiculously so. Anyone on this thread is embarrassed for you with respect to your self-aggrandizement.

[Final Authority]

When you say "anyone" in this context, you must mean "all" as anyone becomes all. How do you speak for all? You can't but at least others do agree with me therefore there is a "we". Busted again.

[Principled]

You said WE. You are only one person, hence it does not follow to use the plural. The question is why did a singular individual use the plural form of the subjective pronoun?

Why did you use the plural "we"? This is the fifth time you've been asked. Why do you refuse to answer?

[lewislynn]

Why did you use the plural "we"?

Because he includes me...get over it.

[Principled]

Because he includes me...get over it.

There was nothing to "get over".... irrespective of that odd comment, the information is appreciated.

I wonder why he didn't answer himself?

[ancient_geezer]

"their immediate focus is the claim that the near-doubling of revenues during Reagan's two terms proves the value of tax cuts. Do you at least concede that this claim is totally bogus? "

Since revenues have increased in a periods of rising taxes, "doubling" can't be due solely to tax cutting it was as much due to continued inflation during the '80s. In fact looking at the first Reagan tax measure "Roth-Kemp '82", cutting was not the main thing happening as many deductions were taken away simultaneously, countering the effect of rate cuts.

It is the '86 tax package that many economists look at as the substantive package, with the subsequent economic growth that was a consequence of both dropping the top marginal rate to 28% along with enhancements encouraging investment over consumption that initiated the economic growth of the '90s. That was the true impact of the Reagan administration.

The most that I see is that reducing tax rates alone while on the upper half of the "Laffer curve" would provide an enhancement over the revenue one would expect from static anlysis. One could expect from the resulting stimulus to economic growth to maintain revenues or even increase revenues if the impact on economic growth were sufficient.

The key factor, as I see the issue, is economic growth, in the '86 tax & stimulus package most of that was due to encouraging investment into the infra structure of the economy which allowed subsequent tax rate increases without immediately killing the goose. Hence the performance up until 2000, where tax system disincentives to investment introduced during Bush I & the Clinton administrations finally were too much for the economy to bear resulting in a slowing economy and return of revenue deficits.

You now seem to be saying that you made no claim as to revenues but were talking only about economic growth.

Economic growth is what allows revenues to remain stable or increase inspite of tax rate reductions or increases for that matter.

In any case, are you simply referring to YN's use of my analysis as a "strawman and lousy job of analysis" or are you referring to my analysis?

Mainly YN's missuse of your analysis which seems to be mainly focused on the Roth-Kemp '82 tax measure, which really didn't reduce tax burdens as much as play shell games between rates and deductions.

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

Where did you get the exact years 1986-2000?

They followed the 1960-1985 lack of GDP productivity growth in per unit labor terms.

I was aware of the issue from analysis of tax reform measures based on the lessons learned from the the 1986 Economic Recovery Tax Reform Act PL 99-514 and its effects.

The Economic Impact of Fundamental Tax Reform
http://www.economics.harvard.edu/faculty/jorgenson/papers/208.pdf,
Frontiers of Tax Reform, Stanford, Hoover Institution, 1996, pp. 181-196; reprinted in Joint Economic Committee, Congress of the United States, Roundtable Discussion on Tax Reform and Economic Growth, One Hundred Fourth Congress, First Session, 1996, pp 98-112.

So I looked for a graph using Google image search illustrating the gdp growth in labor productivity terms and found it in a university economics class website:

http://econ161.berkeley.edu/Graphics/GDP_growth.gif

[ancient_geezer]

How can you say that when the chart simply shows federal revenues and outlays?

I bring your attention to the increase in tax revenues as a percentage of GDP arising from the '97 tax rate increases and reversal of many of the productivity & investment incentives of the '86 tax reform package.

The '97 tax package essentially reversed the factors that set economic growth on its 90's trajectory.

It sounds to me like you're seeing what you want to see.

No I'm just look at it with knowledge of the factors that make for all those ups and downs.

[Zon]

Final Authority wrote: ...we [emphasis mine] now believe that a sales tax if ever enacted will be another layer of broad based taxes adding to the levy of the income tax. 48

Zon wrote: ...it may be that you're so mired in mysticism you aren't aware of the "we" group you speak for, or you're just feigning that you didn't notice that you wrote the word "we". Pleading incompetence is unbecoming of you.  

So who is this "we" group you speak for and what is it about? Are you a tax accountant, a lawyer, a politician, perhaps an IRS bureaucrat -- an automaton?133

I want you to recognize that I spent several minutes of my time, expensive for my clients, for you, to educate you in the proper use of the English language and the development of thoughts thereof. I suspect you will be indebted to me for such an education.

Blah blah blah... You respond like a politician -- a member of which political cult, I wonder. Just answer the question: for which group of "we" members do you speak on behalf of?