We were going to talk about how a consumption tax distorts consumption patters today, but we might get to that tomorrow. This is the good part about being “the Boss of the Blog.” You can change your mind at the last minute and still not get fired or anything. . . .
|If you want to cut consumption, tax it.|
Be that as it may, there is a rather loud chorus of people who find what we say about an income tax being inherently more fair than a consumption not merely presumptuous, but an outrage. It’s not because they disagree that an income tax can be much more fair than a consumption tax. That’s not the problem.
What is the problem? They think all taxes should be abolished; “taxation is theft” seems to be their mantra.
How, then, should the government get the money it needs to function? They have the answer: the government should just issue the money it needs, debt and interest free, and spend it into circulation.
There are some serious conceptual errors about money in that proposal, but we’re not going to address them — today. Instead, we’re going to look briefly at the politics of taxation.
One of the slogans going around right before the American Revolution was “No taxation without representation!” The colonies had neither appointed nor elected representatives in parliament to vote yea or nay on the taxes levied on the colonies. The colonial governors had no power to levy taxes, only the responsibility of collecting them. The colonial legislatures similarly had no power to do anything. The imperial parliament in London had all the power, although poor old George III got all the blame for it.
|Poor George III: more of a puppet than a tyrant.|
And why did the parliament have all the power? Because they controlled taxation. George III had more than enough money of his own to run the royal establishment (although his son, George IV, was a spendthrift and had to be bailed out by parliament), but pay the army and the navy? No way.
Whoever controls the purse strings controls the government. Want to know how so many whacky ideas get adopted by governments? Because taxpayers aren’t supplying the bulk of government financing anymore. It comes from issuing government debt . . . that never seems to get repaid. . . .
That means that the people who purchase the debt and provide the financing for government are the ones who usually get listened to, not the taxpayer. And as more and more voters become dependent on government one way or another, they are going to vote for the people who will secure them the most benefits, rather than the politicians running on the platform of who will do what is best for the country.
So why is a consumption tax worse than an income tax when it comes to trying to keep the politicians under control? For one thing, people will tend to vote for politicians who promise to make the exemption bigger, rather than the tax rates lower. Rather than the politicians going to the people for money, the people go to the politicians for money. That’s bad.
It is also unlikely, despite all the rosy promises, that a consumption tax is going to generate sufficient revenue, and the politicians will fall back on debt. Look at the numbers:
|The trap of national bankruptcy.|
Assume a federal budget of $4 trillion, a population of 400 million, and GDP of $12 trillion. These figures are just for illustration, by the way, and are not intended to be realistic, just plausible for the sake of the example.
In order to meet the $4 trillion budget, the government will have to collect $8 trillion in taxes out of a GDP of $12 trillion. How so, you ask? If everybody gets $10,000 of taxes back, the $10,000 first has to be paid, and $400 million times $10,000 = $4 trillion, which added to the amount needed to fund government is $8 trillion.
Problem. It is almost impossible to sustain tax collections in excess of 20% of GDP. It can be done for a short time in an emergency, but it won’t last. That means that a $12 trillion GDP will result in tax collections of $2.4 trillion. And the rest? Debt financing, another problem.
In order, then, to have enough money to run the government out of a consumption tax that promises to rebate $10,000 to everyone, the government is going to have to issue new debt each year in the amount of $5.6 trillion, or more than the total federal budget. And we didn’t even get to state and local government needs.
Is there an alternative? Definitely: an aggressive program of expanded capital ownership whereby actual people acquire capital ownership that takes care of their basic needs, cutting out the three-quarters of the federal budget that covers entitlements and transfer payments. For the rest, form for-profit corporations to take care of infrastructure and land and natural resource development, charging user fees instead of taxes, and getting profits from development that are distributed to actual people instead of to the State or go into the pockets of politicians.
The cost of government — and control over people’s lives — would be reduced to a minimum. A reformed income tax system that is used solely to raise the money to run government would be much easier to administer and certainly more fair than a consumption tax.
And one more thing: a consumption tax reduces consumption . . . and that means it takes away the incentive for growth. But we’ll look at that tomorrow.