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A Consumption Tax or an Income Tax?
LewRockwell.com ^ | 11/13/2002 | Llewellyn H. Rockwell, Jr.

Posted on 11/13/2002 2:55:22 PM PST by sheltonmac

[I was asked by a journalist about the issue of alternative means of taxation: income tax or consumption tax. Here is my answer.]

The tax shift is one of the great games of government. In the game, the government uses the prospect of lowering one tax in order to buy support for raising another. The proposal to move from an income tax to a consumption tax is a good example of the game.

The essential key to understanding the trick is to realize that the government wants money and is going to get it one way or another. Zig zagging from one method to another does not change the reality. But it can fool the gullible. And it can raise a lot of money from affected groups during the transition period.

One helpful way to understand this is to think of a robber who promises to stop coming through your front door if you promise to leave the back door open. So it is with the state that promises to stop taxing your income if you let it tax your consumption. The issue is not the method; it is the amount.

The case for the consumption over the income tax rests on these essential claims:

1. The consumption tax is at least voluntary. Actually, it is just as coercive as any tax. Under the income tax, if I earn income and don't pay the tax, I can be fined and jailed. Under the consumption tax, if I consume a taxed item and don't pay the tax, I get fined and jailed.

It's true that I can choose not to consume that item. Similarly under the income tax, I can choose not to earn income. Nothing is voluntary if I am not permitted to exempt myself. There is no such thing as a voluntary tax. If there were, it would be called something else.

2. The consumption tax doesn't tax production. Yes it does. Businesses don't set their own prices, which is why they cannot simply pass on the consumption tax to the consumer. If they could raise their prices without affecting their profits, they would have already done so. Imposing a new tax new on a business, all other things being equal, the business will have to absorb the cost of that consumer tax into its own operations. In this way, the consumption tax is a tax on production, wages, research, investment, and every other aspect of economic life.

3. The consumption tax is easier to collect. Assuming this to be true, why is this necessarily a good thing? A tax that is hard to collect suggests that it less tempting to raise. What's more, a consumption tax might be easy to collect at 1%. But to replace the federal tax with a national consumption tax would require a tax approaching 20%. This would throw markets into chaos, create an overnight black market in everything, and give a great excuse for massive despotism and mandatory record keeping.

4. The consumption tax doesn't tax savings. Generally this is true. But the government should not be in the business of prodding us into a particular pattern of saving and consumption. It should leave that up to us. Saving is great to the extent it reflects individual preferences. Consumption is great in the same way. But there is no way to know a priori what the right mix should be. And think of this: the degree to which the consumption tax discourages consumption is the same degree to which it does not raise revenue. How does the tax-hungry state deal with that paradox?

5. The consumption tax, whatever its problems, is at least not progressive. Far too much is made of the flat versus progressivity issue. Think of it this way. Would you rather pay a flat 40% tax, or finagle your way through a system with 20 different rates ranging from 1% to 39% (all else being equal)? If you knew that you would pay less under a progressive system, that is the one you would favor.

The champions of the consumption tax, particularly those who claim to support free markets, need to redirect their energies, away from the method of taxation to its level. They need to adopt the general principle that whatever the existing tax, it should be lower. Going back to the robber analogy, the ideal system would leave every door and window bolted down.

Let's not reform taxes. Let's eliminate them, starting with the income tax. That is not unrealistic. The income tax this year will yield $1 trillion for the federal government. Cutting that amount gives us a budget equal to the federal budget of 1987. Was the government intolerably small back then?


TOPICS: Constitution/Conservatism; Culture/Society; Government
KEYWORDS: consumptiontax; incometax; nationalsalestax; taxreform
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1 posted on 11/13/2002 2:55:23 PM PST by sheltonmac
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To: ppaul; ex-snook; kidd; Snuffington; Inspector Harry Callahan; JohnHuang2; GeronL; sauropod; ...
Some good points. A national sales tax is not the answer.
2 posted on 11/13/2002 2:56:24 PM PST by sheltonmac
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To: sheltonmac
How mean spirited - tax those unfortunates who suffer from consumption? On the other hand, wait! That'll work for me!
3 posted on 11/13/2002 2:58:58 PM PST by Revolting cat!
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To: sheltonmac
Taxing income requires that the government know far more about my finances than it has any business knowing.

A sales tax simply requires that the government know a retailer's gross receipts.

It's far less intrusive.
4 posted on 11/13/2002 3:00:34 PM PST by jdege
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To: Revolting cat!
:-)
5 posted on 11/13/2002 3:00:53 PM PST by sheltonmac
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To: sheltonmac
He ignores the argument that a sales tax would be less politically sustainable because it is more visible to the general population.
6 posted on 11/13/2002 3:01:20 PM PST by billybudd
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To: *Taxreform
http://www.freerepublic.com/perl/bump-list
7 posted on 11/13/2002 3:01:29 PM PST by Free the USA
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To: sheltonmac
Just a question...An American living in another country would pay no U.S. taxes...hopefully? I admit this is becoming a tad confusing.
8 posted on 11/13/2002 3:04:17 PM PST by Gatún(CraigIsaMangoTreeLawyer)
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To: Gatún(CraigIsaMangoTreeLawyer)
Just a question...An American living in another country would pay no U.S. taxes...hopefully? I admit this is becoming a tad confusing.

Current laws say that those overseas, earning $75K or more per year, must pay 10% income tax. Of course, you have to file for them to know what you are making. Under consumption tax, no, you would not pay any money.

9 posted on 11/13/2002 3:06:52 PM PST by ikka
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To: ikka
ikka, Thank you for your reply. I'll stay put in Panama. Since I pay U.S. taxes, I do not pay taxes to Panama (Panamanian law). Therefore, if this goes through, I take home every dime I earn.
10 posted on 11/13/2002 3:12:46 PM PST by Gatún(CraigIsaMangoTreeLawyer)
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To: sheltonmac
"Some good points. A national sales tax is not the answer."

Ah, yes it is...

Here’s why:

Most of the products that we buy are foreign made. Just look around your house or shop. Most manufactures today make their products offshore, and then they import them back into the country duty free. This gives a huge tax advantage to move manufacturing out of the United States, and deprives our country of one of the few vehicles for generating wealth.

What a national sales tax (if it replaces the income tax) does is to level the playing field. Since goods would be taxed when purchased, it would effectively be a tariff on imported goods. If you wanted to go a little further without having a big negative impact on the revenue collected, you could exempt products made in the United States.
11 posted on 11/13/2002 3:14:33 PM PST by babygene
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To: babygene
Then why not just raise tariffs on imported goods? Either way, I only see the consumer suffering in the long run. The government will abuse a national sales tax just as they now abuse the national income tax. I think it would be best to leave taxation to the states, be it an income tax, a consumption tax, or whatever. The federal government would then tax the state governments directly. Nationalizing a consumption tax would ensure that no American could escape it, no matter how oppressive it became. The only way out would be to renounce U.S. citizenship and flee the country.
12 posted on 11/13/2002 3:28:30 PM PST by sheltonmac
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To: sheltonmac
My favorite reason for the consumption tax is that citizens would not be forced to disclose their private life details (such as where they work, where they live, how they spend their money) and keep private records for government inspection for the the mere necessity of supporting themselves and their families.

The intrusive bookkeeping and loss of privacy would apply only to companies and those individuals who voluntarily decided to pursue retailing and such businesses.
13 posted on 11/13/2002 3:44:13 PM PST by Atlas Sneezed
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To: jdege
Taxing income requires that the government know far more about my finances than it has any business knowing.

A sales tax simply requires that the government know a retailer's gross receipts.

The government has to be able to see every transaction in any system to determine whether that transaction has some taxable consequence. I really see no difference. Most people get one pay check every two weeks, but they buy stuff every day.

14 posted on 11/13/2002 3:52:22 PM PST by Always Right
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To: sheltonmac
Some of the points are true, but irrelevant. I'm all for cutting government spending by a trillion or so, but it's just not going to happen anytime soon. As long as the government needs money, it has to collect it somehow, and a sales tax is far preferable to the complex, loophole-ridden, and invasive income tax we have now.
15 posted on 11/13/2002 3:52:24 PM PST by ThinkDifferent
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To: ThinkDifferent
As long as the government needs money, it has to collect it somehow, and a sales tax is far preferable to the complex, loophole-ridden, and invasive income tax we have now.

Since business to business transactions are not taxable, there are loopholes. What happens when every sets up businesses and try to claim everything as a tax-free purchase? There are loopholes in any system and as people get more creative, the tax becomes more complicated and more intrusive.

16 posted on 11/13/2002 3:55:38 PM PST by Always Right
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To: sheltonmac
the goal should be reduce gov intrusion on personal finances. obviously, eliminating the gov would accomplish this but that is probably impractical. there should be a way for the gov to establish a tax/revenue system that accomplishes the non-intrusion goal w/o bancrupting itself or over burdoning individuals income or consumption.

* flat tax on all monies going from corporations (business entities) to individuals (employee, contractor, owner/dividends, etc.) in the 5-10% range. this accomplishes most of the non intrusion goal in that the corporation would just have to report the totals and keep track of its payments for auditing purposes.

* flat tax on all monies going from individuals to business entities (i.e. sales tax) in the 5% range. again this accomplishes the non intrusion goal.

* fair, progressive taxing of businesses - promote and encourage small businesses. the intrusion is of business entities not individuals.

* tariff/sin taxes where necessary (imports, fuel, alc, etc.)- unrealistic to think that the gov, esp the states, would give those up.

* constitutional amendment eliminating gov intrusion on personal finances to make the states play by the same rules.
17 posted on 11/13/2002 3:57:09 PM PST by kpp_kpp
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To: sheltonmac
“Nationalizing a consumption tax would ensure that no American could escape it, no matter how oppressive it became. The only way out would be to renounce U.S. citizenship and flee the country.”

Renouncing your U.S. citizenship is an option but not necessary and not advisable at the moment until one researches everything. The more passports one has, one is better off in terms of survival in view of what the world is today. This has nothing to do with loyalty to one’s country. Although I am dual, Panama recognizes I pay U.S. Taxes. If I were to declare myself as strictly a Panamanian citizen, my taxes would be higher than those of the U.S.

18 posted on 11/13/2002 4:01:17 PM PST by Gatún(CraigIsaMangoTreeLawyer)
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To: babygene
You are right. that's the way Europe does it eith their VAT.
19 posted on 11/13/2002 4:24:10 PM PST by stubernx98
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To: sheltonmac
" Nationalizing a consumption tax would ensure that no American could escape it, no matter how oppressive it became."

Yes you could. You could stop buying new stuff and buy or barter used stuff. You control what you buy...
20 posted on 11/13/2002 4:47:26 PM PST by babygene
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