THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, April 19, 2023

Let’s Talk About Consumption Taxes

Especially this time of year it’s common to hear proposals about how to eliminate the Internal Revenue Service and institute a simpler, kinder way of taxing people . . . like a flat tax, or a consumption tax.  Now Representative Buddy Carter has come up with a new twist: a flat rate consumption tax.  As he says,

Buddy Carter


H.R. 25, the FairTax, would eliminate the federal income, payroll, and estate and gift taxes, replacing them with a revenue-neutral national 23% consumption tax. It would eliminate the need for the IRS. It would eliminate Tax Day. It would allow you to take home 100% of your paycheck so that you control where your hard-earned dollars go. . . . They claim this will disproportionately impact the lowest income earners. That claim is false. The FairTax includes an advance tax refund to every legal American family at the beginning of every month to purchase goods and services tax free up to the national poverty level. This means a family of four can spend $30,000 a year without paying a penny in taxes. That’s an effective tax rate of 0%.

As one commentator in our network declared, “To all: a flat rate consumption tax direct or value added tax VAT would eliminate ALL other federal state and municipal taxes.  Perhaps it should only include user taxes such as tobacco, alcohol, and drug use to fund treatment for abusers.  Any other specific user taxes apart from the general flat rate or fair consumption tax to be divided among federal, state, and municipal governments?  (How to divide the total revenue may be difficult to say the least; we had better have a well thought out plan to do so!)


Let’s take the “advance tax refund” first.  As Carter stated, “a family of four can spend $30,000 a year without paying a penny in taxes.”  Note entirely correct, as they would still pay the taxes, but would be “pre-reimbursed” for them . . .assuming they actually purchase consumption items.

What Carter really means is that a family would receive about $160 for every family member at the beginning of each month, paid out of taxes that haven’t been received.  Given the current U.S. population of 332 million, give or take, that’s $53 billion the government must shell out each month, or a little under $637 billion a year before collecting a cent in taxes.  That means the government will have to issue new debt each month, inflating the currency, and raising prices through the “hidden tax” of inflation.  This will, of course, increase the amount that must be “refunded” each month as the poverty level rises.

Prices are sticky downwards for those stuck on money


And if Carter thinks businesses won’t raise prices because of the tax . . . he’s right.  Sales taxes are not a component of price.  They’re an add-on.  Sellers will retain their current pricing structure and simply add the tax to the total amount of the bill.  You see, an income tax is an expense.  A sales or VAT tax is a pass-through or transfer.  Prices will not go down because price is “sticky” downwards.  In English that means sellers are quick to raise prices but very slow to lower them.


And how about the definition of “consumption”?  Are all expenditures counted?  Or only items in the CPI?  Education?  A lot of people claim education is investment.  Consumer durables?  A house?  New capital and equipment for a business?  All of these are normally paid for out of after-tax income.  By shifting to a consumption tax instead of income tax, all these things would be acquired tax-free if not classed as consumption . . . and who decides?  Imagine the howl from business owners if you told a business that it must pay sales tax on all purchases not intended for consumption . . . and the screams from consumers if you told them businesses didn’t . . . And the tax rate?  What happens when people cut consumption in response to getting less for more?  Remember: a consumption tax reduces consumption; an income tax increases it if you tax some consumption at lower rates or not at all (In Pennsylvania, for example, food is not taxed, while whenever New Jersey gives a sales tax holiday, they get millions of sales from people in New York for some reason.

Consumption taxes are more unjust inherently than income taxes

Now, about that government control.  If you are dependent on the government for $160 per month, you are going to be very careful to do what the government says for fear that your $160 per month will be cut off.  But, Carter no doubt will say, everybody means everybody . . . right?  Including illegal aliens?  Convicts?  Homeless people without a fixed address?  People who look funny or who vote for the wrong party?  Anti-abortionists?  Pro-abortionists?  The Woke?  The Unwoke?  Bottom line: the government will own you.  Never fear, there will be exceptions to who gets the money at the beginning of the month, and anyone somebody else doesn’t like will have a good chance of getting on the list of non-recipients.

At the very least, what you would see if Carter’s proposal were to be adopted is a big jump in government deficit spending, inflation, a far larger part of the tax burden being forced onto the middle class, and the rich enjoying huge windfall profits as the corporate tax was eliminated.  It violates three of Adam Smith's four principles of taxation.

Why not just adopt the Economic Democracy Act and get away from all the schemes to protect the wealthy by making everyone wealthy, or at least having access to the opportunity and means of doing so?