Progressive annual consumption tax?

24 posts / 0 new
Last post
Jacob Richter
Progressive annual consumption tax?

Should developed countries replace all their indirect taxes with a progressive annual consumption tax?

Worker movements in the 19th century opposed sales taxes, despite their greater collection efficiency, not because they can be regressive, but because they are not transparent.  They conceal what taxpayers pay to the government, and thus they don't prompt them to regular tax oversight.

Then came the European welfare state.  Economists concluded that even the most progressive of income taxation could collect only so much money.  Collecting money from consumption as well as from labour income, savings, rental income, active business income, dividends, capital gains, and wealth was key.  The question was how to collect money from consumption.  Unfortunately, governments implemented high value-added taxes.  Even the Eastern Bloc wasn't much different in this regard, as they resorted to turnover taxes.

In recent years, business columnists have suggested replacing the income tax with a progressive annual consumption tax. (And I oppose this replacement, of course.)

That said, what if a progressive annual consumption tax were to replace all indirect taxes?  Taxpayers would file and pay this direct tax in a similar fashion to their income taxes, filing an annual tax return:

https://www.forbes.com/sites/timworstall/2014/03/18/bill-gates-points-to...

Mr. Magoo Mr. Magoo's picture

Quote:
That said, what if a progressive annual consumption tax were to replace all indirect taxes?  Taxpayers would file and pay this direct tax in a similar fashion to their income taxes, filing an annual tax return:

Interesting idea.  But how would consumption be documented?

My income is typically documented by my employer, my bank, etc.  But if I go to the bike shop and buy a $2k mountain bike, who would document that consumption, and how?  Or would we all be on the honour system the way (for example) servers are on the honour system to report tip income to Revenue Canada?

voice of the damned

Mr. Magoo wrote:

Quote:
That said, what if a progressive annual consumption tax were to replace all indirect taxes?  Taxpayers would file and pay this direct tax in a similar fashion to their income taxes, filing an annual tax return:

Interesting idea.  But how would consumption be documented?

My income is typically documented by my employer, my bank, etc.  But if I go to the bike shop and buy a $2k mountain bike, who would document that consumption, and how?  Or would we all be on the honour system the way (for example) servers are on the honour system to report tip income to Revenue Canada?

I think you'd have to totally re-work the whole process of buying and selling, so that every transaction is recorded by a central authority. FWIW, this seems to me like a major incursion into traditional notions of privacy, even worse than Facebook spying on your browing history, because nobody really has the option of ceasing purchases.

voice of the damned

Or maybe we'd assume that all money taken out of your bank account is for consumption, and tax it accordingly? For example, if I make two thousand dollars a month, and at the end of the month I have one thousand in my account, we calculate that as a thousand dollars spent, and tax it according to the graduated rate.

Or just get rid of paper money entirely, and make sure all purchases happen with a credit card, debit card, app, whatever, which can be recorded by the government. Youd probably see a pretty big pushback against the abolition of cash, if cash were the only way to duck paying the tax.

 

Mr. Magoo Mr. Magoo's picture

Quote:
Or maybe we'd assume that all money taken out of your bank account is for consumption, and tax it accordingly? For example, if I make two thousand dollars a month, and at the end of the month I have one thousand in my account, we calculate that as a thousand dollars spent, and tax it according to the graduated rate.

Okay, but how, at the end of the year, would we know that I'd spent it?  What if, later, there was an $800 deposit to my account?  Couldn't I say that I withdrew the funds and then redeposited (most of) them?

I do agree, though, that cash would become a pretty lucrative thing.

Quote:
Or just get rid of paper money entirely, and make sure all purchases happen with a credit card, debit card, app, whatever, which can be recorded by the government.

Well, if the government wanted to get rid of panhandling once and for all, that would do it.  :0

Jacob Richter

Mr. Magoo wrote:

Quote:
That said, what if a progressive annual consumption tax were to replace all indirect taxes?  Taxpayers would file and pay this direct tax in a similar fashion to their income taxes, filing an annual tax return:

Interesting idea.  But how would consumption be documented?

It won't.  It's simply the difference.

http://www.slate.com/articles/business/moneybox/2011/12/the_progressive_...

Quote:
Families would report their taxable income to the IRS (ideally under a tax code that greatly simplifies the calculation of taxable income), and also their annual savings, as many now do for IRAs and other tax-exempt retirement accounts. The difference between those two numbers—income minus savings—is the family’s annual consumption expenditure. That amount, less a large standard deduction—say, $30,000 for a family of four—is the family’s taxable consumption. Rates would start low and would then rise much more steeply

Quote:
My income is typically documented by my employer, my bank, etc.  But if I go to the bike shop and buy a $2k mountain bike, who would document that consumption, and how?  Or would we all be on the honour system the way (for example) servers are on the honour system to report tip income to Revenue Canada?

Income minus savings equals consumption, as per the above.

Mr. Magoo Mr. Magoo's picture

By "savings" do you really mean "money in a bank"?

What if I keep my savings in a jar?  Or will everyone need to have a bank account, and use it?  Including people who I'm told cannot even vote, because they lack even one of the thirty or so acceptable forms of ID?

This is, as I said, interesting.  But I also have to agree with VOTD, above, that the level of state spying required is a bit unsavoury.  Now they get to monitor my withdrawals and deposits on a daily basis?

Jacob Richter

Mr. Magoo wrote:
By "savings" do you really mean "money in a bank"?

What if I keep my savings in a jar?  Or will everyone need to have a bank account, and use it?  Including people who I'm told cannot even vote, because they lack even one of the thirty or so acceptable forms of ID?

This is, as I said, interesting.  But I also have to agree with VOTD, above, that the level of state spying required is a bit unsavoury.  Now they get to monitor my withdrawals and deposits on a daily basis?

Yes, money in a bank.

As for privacy, this proposal doesn't require that at all.  All that's required on the savings front are ending balances.

Income: CRA gets the info from income tax returns.
Savings: CRA would get balance info on your savings accounts from the banks.

Mr. Magoo Mr. Magoo's picture

OK.  Still an interesting idea.

josh

An oxymoron.

From Forbes no less.

bagkitty bagkitty's picture

Oh why not just microchip the lot of us and be done with it. Clerks can scan the chip to record consumption. I would have suggested tattooing, but I am sure there would be demands for religious exemptions.

6079_Smith_W

No surprise that they buried the lede in this story. I expect this is the bit that really has Gates salivating: No corporate tax. No capital tax.

So we need to move along that spectrum to the more expensive taxes, the ones with higher deadweight costs. And that's where our progressive consumptions tax comes in. We want to get rid of those more expensive ones, on capital, corporations and incomes and move to taxing consumption.

Really, this is nonsense, with no functional difference from taxing income, and we already have a consumption tax; it is called sales tax.

Spending more money isn't in and of itself a bad thing; it is a very good  thing, and ultimately what increases GDP, and employs more people. Given that,  I find it odd that this is something economists favour.

Start taxing people on how much they spend and one big incentive I see is the drive for people to buy cheaper goods, cheaper food, and cheaper everything. Who benefits? The larger corporations that sell things cheaper

The only reason I think someone might fall for this as a progressive idea is the confusion of consumption (spending of money) with consumption of resources. And the false idea that spending more on things is is necessarily wasteful, gluttonous, and using too much. It isn't.

Why is it the only tax not mentioned is the one that WOULD deal with real consumption  - of resources: a carbon tax?

Stephen Gordon

Actually, we already have pretty much the equivalent to a (progressive) consumption tax in place. For almost everyone, income from savings in exempt from tax - accumulated house equity, pension contributions, RRSPs, etc. So what we call income tax is a tax on income that hasn't been saved - that is, consumption.

Sean in Ottawa

Please explain how you make a consumption tax (that is blind to earning) progressive?

Moving on from that, the idea of not taxing savings is problematic. First, if you move your income to spend out of country is it taxed at the border? If so, be prepared for a 20 cent dollar.

If you mean to ignore all earnings not spent -- in other words tax harder the people who only make enough to live -- be prepared for increasing poverty and and greater inequality.

If you tax only what is spent, be prepared for the mother of all depressions as people with lots of money simply wait it out.

Having more than one type of tax can be a way to avoid excesses. It is also easier to design than finding one perfect tax -- so consumption taxes with rebates, property taxes, business taxes and income taxes as well as other duties and taxes is where we are.

I would move to reduce reliance on property tax before doing anything else. It pushes up the cost of housing. Instead replace it with a luxury tax on some items -- including high-value properties. A small civic fee for city services could remain as a tax but be based on income.

6079_Smith_W

Plus all the offloading from the provincial and federal levels have wound up falling on the municipalities. Virtually all our recent cuts here in SK have translated into a massive hike in property tax.

And getting rid of sales tax would be good as well, since it hits you harder the less you earn.

Of course the real elephant in the room is doing exactly the opposite of what Bill Gates wants - restoring corporate tax to a fair rate. Do that, and we wouldn't have to worry about tweaking here and there on everything else.

 

Sean in Ottawa

6079_Smith_W wrote:

Plus all the offloading from the provincial and federal levels have wound up falling on the municipalities. Virtually all our recent cuts here in SK have translated into a massive hike in property tax.

And getting rid of sales tax would be good as well, since it hits you harder the less you earn.

Of course the real elephant in the room is doing exactly the opposite of what Bill Gates wants - restoring corporate tax to a fair rate. Do that, and we wouldn't have to worry about tweaking here and there on everything else.

I have not heard Gates's opinions on corporate tax rates.

There are some issues with consumption taxes that we may want to bear in mind, especially as they are now with us. They are a real attack on the underground economy and many have to pay tax that could otherwise avoid it were it not for this tax. It is hard to say how much money is collected over the table business taxes that would otherwise have been lost without the intrusive sales tax credit system.

Consumption taxes are regressive by nature, but the use of a credit system can make them less so. I think these are not so simple.

Just as I have debated the flat tax issue -- A flat tax can be regressive or progressive depending on how you design it. A flat tax that starts at the first dollar earned as some libertarian's would have would be extremely regressive. Set a flat tax at a high rate and place the basic exemption at, say, 75% of the median wage and do the math, it would be more progressive than the current system. A two tier, almost flat tax would be even better via a surtax on income over $100,000. with the high up front exemption everyone would get, the result would provide similar progressivity to what we get with three tiers below $100,000 in earnings.

 

6079_Smith_W

The quote is from the article, not gates. I don't believe he is opposed to corporate tax, but if he's going to push a dumb idea like this I will make fun of him anyway. If there is one tax which deserves attention, it ain't this one; it is corporate tax.

 

Sean in Ottawa

It may be better to avoid distractions like what to do with consumption taxes and focus more on the declining share and rates of corporate tax and income tax reductions for the very wealthy.

Caissa

This idea is far too intrusive.

Jacob Richter

This thread has veered off-topic.

6079_Smith_W wrote:
No surprise that they buried the lede in this story. I expect this is the bit that really has Gates salivating: No corporate tax. No capital tax.

Like I said, I don't support this tax proposal replacing anything other than the GST/HST and provincial sales taxes.

Quote:
Really, this is nonsense, with no functional difference from taxing income, and we already have a consumption tax; it is called sales tax.

Wrong!

Both the sales tax and this proposal tax consumption.  However, the ordinary Joe doesn't know overall how much in GST/HST and provincial sales taxes he's paying to the government every year!  Value-added taxes and sales taxes are insidious in hiding from ordinary consumers just how much they're paying in taxes!

Sean in Ottawa wrote:
Please explain how you make a consumption tax (that is blind to earning) progressive?

Progressive annual consumption tax is as it says it is.  There could be one tax rate for all annual consumption up to $100,000, for example, a higher marginal tax rate for that portion of annual consumption between $100,001 and $200,000, an even higher marginal tax rate for that portion of annual consumption between $200,001 and $1,000,000, and an even higher rate for that portion of annual consumption above a million.

Notice that the tax is based on Income Minus Savings Equals Consumption, not taxing income, but consumption.

 

Here's the source of my beef with never-transparent sales taxes, VAT, carbon taxes, etc.:

https://www.marxists.org/archive/marx/works/1866/08/instructions.htm#07

6079_Smith_W

If you don't think people pay attention to the importance of sales tax you might want to consider the reaction to governments' changes to it. Reaction which have in some cases forced an overturn, and which historically have been the cause of revolutions. So I don't buy that people ignore it. People are paying very close attention to it in our province right now.
Another problem is that it involves an entire new tax regime on corporations, and if you have people shopping out of province do you send them a tax bill? What about people who spend much of their income out of the country?

We already have what you are talking about in some provinces. If you buy outside and bring something in you are supposed to self assess and pay the government. Part of the reason this is largely unenforced is because governments probably realize how little they would wind up with in the end in having to pay for a Byzantine tax structure like you propose. Fact is, those businesses which currently do that work absorb the cost of most of that bookwork into our bottom line.

And while you might say you agree only in part, it really can't be ignored that most who do argue for this are doing so to offload from the wealthy and corporations. The argument about hidden taxes is pretty thin, and not supported by how people really do react.

Jacob Richter

6079_Smith_W wrote:
If you don't think people pay attention to the importance of sales tax

It's not that we don't because we don't want to.  We don't because we can't.  Does anybody have time to add the GST/HST amounts in all their receipts for the year?  Ditto for provincial sales tax amounts?  I certainly don't!

Why leave this calculation to right-wing think tanks with an agenda, such as the Fraser Tax Institute's "Tax Freedom Day" propaganda?

Jacob Richter

6079_Smith_W wrote:
So I don't buy that people ignore it.

VAT taxes are much higher in Europe, where people over there really, really don't know how much they're really paying in taxes.

Quote:
Another problem is that it involves an entire new tax regime on corporations

So?

Quote:
if you have people shopping out of province do you send them a tax bill? What about people who spend much of their income out of the country?

Under this proposal, the banks provide ending balances of consumer and business bank accounts.  It's easy to send consumers the tax bill for out-of-province shopping, because it shows lower ending balance.  Ditto for bigger amounts of out-of-country spending by Canadian residents.

I suppose that, since the existing GST/HST and provincial sales tax regimes have quarterly and monthly filing requirements, the progressive annual consumption tax could become the progressive quarterly/monthly consumption tax for businesses.

Pogo

Stephen Gordon wrote:

Actually, we already have pretty much the equivalent to a (progressive) consumption tax in place. For almost everyone, income from savings in exempt from tax - accumulated house equity, pension contributions, RRSPs, etc. So what we call income tax is a tax on income that hasn't been saved - that is, consumption.

Hello Stephen,  I remember discussing this a number of years ago, though I cannot find the thread.  I strongly  believe that it has strong merits, though I also would say that transition is tricky.

Do not confuse this with current sales taxes - which are inherently unprogressive.  A universal progressive consumption tax would replace income tax (taxable income x progressive tax rates) with a consumption model where income is reduced savings/investment (taxable income - savings x progressive tax rates). It would need to be combined with a wealth tax (periodic or inheritance) as a consumption tax model does not recognize the value of ownership (income tax is not much better).

In a narrow economic sense it will focus energies on thrift and productivity.  Kardashian lifestyles will be punished while simple living will be rewarded. In the macro view investment will be pushed toward investment and can be focussed (in my view realestate investments would limited).  Moreover saving the planet calls on us to not just switch our energy sources but to reduce our energy usage a tax system that rewards this is a key component.

I don't necessarily agree with all the items on Stephens list, but it points to the transition. However, it is important to identify the serious issue of wealth.  The more the system becomes oriented to consumption taxation, the more important dealing with wealth tax becomes.