Robert Frank: Reducing Income Inequality Through The Progressive Consumption Tax

Slate:

By pulling a simple tax lever, we could reduce the costs of growing income disparities, while at the same time freeing up several trillion dollars of additional resources each year—more than enough to pay down the federal debt and rebuild our crumbling infrastructure—all without requiring painful sacrifices from anyone. This essay is adapted from Robert H. Frank's recently published book, The Darwin Economy.

Read the whole story: Slate

Comments

[DSciarrino]

10:58 AM on 12/08/2011

Actually, this makes no sense at all. The problem is not that the 1% spend money, its that they don't spend enough money. They have far too much of if. If it were spread around the economy more efficiently, we wouldn't have an economic problem. A better solution is an equity tax. It can be a flat tax at a low rate, say 10% with a large standard deduction of $50k per person in the household. Take assets, deduct liabilities, and you're left with your total equity. Just use the cost basis of your assets. So, the Koch Brothers , who are worth over $1B each, pay 10% on their Billion, or $100M. Someone who has a net worth of $100k, pays $5k ($100k-$50k deduction).

If you want to create a VAT tax to make up for any shortfall and help curb consumption to go along with it, fine.

Bottom line: We need a fairer system, one that does not reward the wealthy at the expense of the rest of us. The "Job Killing" Bush tax cut has put us into a deep hole. Clinton raised taxes and balanced the budged, and unemployment fell dramatically. Bush cuts taxes, throws the economy into a tailspin and unemployment skyrockets. It seems the more we cut taxes and destabilize the economy, business pulls back out of fear and throws people out of work. the mantra of "Job Killing" taxes is is fantasy. "Job Killing" tax cuts is the reality.

[jsmit]

02:20 PM on 12/08/2011

Are you crazy? Taxing wealth? Wealth by definition was already taxed as income prior to being held as "wealth." That is, if you earn $100K per year and pay taxes on that income and put away $10K in savings, you want to tax that $10K the next year AGAIN? That makes no sense at all.

Also, who determines the value of assets such as homes, cars, jewelry, clothing, heirlooms, art, etc. All those items change in value year over year and are subjective.

So under your scheme an family with $75K in income and a $250K house and $20K car would pay taxes on $345K minus liabilities. Let's assume the family paid off their house and paid cash for the car. So in year 1 they would pay taxes on the whole $345K. Then what happens in year 2? They pay taxes AGAIN on the $345K (or whatever the value of the house and car happen to be then)? Then again in year 3 and so on and so on and so on?

You see how silly this idea is?

[DSciarrino]

04:59 PM on 12/08/2011

The idea that you can only tax something once is a man made rule. I don't see how that is relevant. We need money to operate the government. This is just a different way to do it. You've never heard of property tax? Same concept, except this is more fair because its the net worth and not the asset value that's being taxed.

The value is determined by the cost basis of the asset. No silly accounting tricks like depreciation. As you've pointed out, its too subjective.

As for your math, you are correct, except for the $50k per person deduction. But yes, if you have a net worth of $200k (assets less liabilities) and say, 1 person in your household, you deduct an additional $50k. You then pay 10% on $150k, or $15k.

I would also suggest that this method could be used in conjunction with a VAT tax to dampen consumption. In that event, the basic rate could be lower, say 5%. I would also advocate a lower rate for seniors because their income stream is generally lower. At that point, its a matter of adjusting the rates of both tax steams to be most optimal.

No, its not a silly idea. Its a simple, elegant solution. It scales well and its fair.
Benjamin Franklin famously said, "The more you have, the more you have to lose" Therefore, you should pay more to protect your freedom and your country. Its the patriotic thing to do.

[boxjelly]

09:22 AM on 12/08/2011

What a clueless proposal, but typical for liberalism.

"Yay! Rich people will only do half the upgrades on their homes and buy half the "luxury" items previously. We don't care about the folks employed in these industries that rely on rich people spending money! In bassackwards liberalville this makes complete sense!"

This is an idea steeped in envy, it's the "if I can't afford the Ferrari, then no one should be able to."

[slickbottom]

01:40 PM on 12/08/2011

Spoken like a true teabagger creature.

[jsmit]

02:20 PM on 12/08/2011

You are so mature with your little name calling. Do you and your liberal friends giggle when you type them?

[mitchum123]

02:06 PM on 01/29/2012

Funny how "bassackwards liberalville" didn't qualify as name-calling, but "teabagger creature" apparently does.
"We can't tax the job creators" is a pretty lame argument for everyone except Rush and his minions.

[European1919]

08:02 AM on 12/08/2011

At first I thought how weird, but there is definitely a lot of sense to this madness ;-))
I've just put the book on my wishlist ... after all, crimbo is approaching.

[frank day]

09:00 AM on 12/08/2011

crimbo! LOL

[bvgat]

06:58 AM on 12/08/2011

SO if you encourage people to save because it costs that much more to spend this will help the economy?? So the millionaire decides against doing the expansion to his mansion because you just doubled the cost - Workers who would get paid no longer get the job... This helps the economy??

You don't buy a particular luxury item like a yacht - so the workers for the company that produce this item make less yachts and the company eventually closes.. This helps how??

Other then perhaps getting the money back by some large inheritance type tax down the road how does this help the economy?

[frank day]

07:54 AM on 12/08/2011

Simple.

Lower and middle income folks will pay less taxes and buy more regular goods.

We'll have an economy geared towards producing mass goods instead of luxury goods.

[bvgat]

12:20 PM on 12/08/2011

And when the lower and middle income are let go this will allow them to buy stuff

[v650]

05:31 AM on 12/08/2011

Why is this in the business section anyway because it only does one thing kill jobs.

[v650]

05:26 AM on 12/08/2011

This is the best idea I have heard to kill the middle class, keep up the good work you are totally clueless about how the world works.

[frank day]

07:54 AM on 12/08/2011

Where is your Economics degree from?

[jsmit]

02:24 PM on 12/08/2011

He is right and I do have an honors economics degree from an Ivy League institution. "Steeply" progressive tax rates of any kind will simply discourage wealthy people to either pursue less income (progressive income tax) or spend much less (progressive consumption tax). When you raise the price of something you will get less demanded.

[v650]

03:37 PM on 12/08/2011

Its from a place called life, the author of the article clearly states that his idea will kill off construction jobs, by his own admission he said the Mystical millionaires would not be able to build the additions onto their mansions, they would not be able to because they would be taxed so much, so if construction firms are not building anything then how is this not killing jobs. Notice how he also uses the example of the horrible millionaires building onto their already huge mansions, not the fact that they would also be taxed if they tried to build their business up, or build new construction or anything that would actually improve the economy. No it is much better to take the money from people that earned it, know how to make money and give it to the government so they can fund bank bailouts, and wars. Construction is one of the few career fields that can not be sub contracted out to India, China or Mexico. All construction is 100% American made its really easy to figure out.

[noaxe397]

12:37 AM on 12/08/2011

How does reducing demand (because it costs twice as much to put the addition on the house, in the example given) create jobs?.................Everyone says what businesses need is not tax cuts, not less regulation but more customers.

[radiojunkie]

03:35 AM on 12/08/2011

Reduced demand from the top won't affect overall demand like reduced demand from the working class. Taxing gilded lifestyles wouldn't set the bar of upward mobility too high to achieve.

Lavish lifestyles would respond in ways not unlike the article's analogy of home sizes in Seattle vs NYC.

[frank day]

07:55 AM on 12/08/2011

Glad somebody on this thread 'gets it'. :)

[jsmit]

02:27 PM on 12/08/2011

You are thinking too narrowly. Yeah maybe the billionaire not buying a new jet won't be a big deal, but the upper middle class guy making $300K not buying the second or third car or adding onto his house or buying another iPad for his kids or not going out to eat or not going to the movies, etc will have a tremendous effect on the economy and employment of the middle and lower classes.

There are simply not enough people living "lavish" lifestyles to make a dent, but there are a bunch more earning above middle class that will have an impact.

Progressive taxation is a dumb idea. Consumption tax versus income tax is a good idea, however.

[Sherlock Holmes]

11:33 PM on 12/07/2011

It's still a tax on wages. Tax the F.I.R.E sector. Obviously, all governments have to levy taxes – that is, they have to tax somebody. But the super-rich would like this tax to be shifted off their shoulders onto those who have to work for a living. In diametric opposition to Adam Smith and other putative “founding fathers” of “free market” neoliberalism, the super-rich want to shift taxes off “free lunch” economic rent – off interest, dividends, rents and capital gains – onto wage-earners.

http://michael-hudson.com/2010/11/schemes-of-the-rich-and-greedy/

[SoylentGreenIsPeople]

08:11 AM on 03/04/2012

The argument for special tax treatment
of capital gains seems to hang on the
notion that such income has 'already
been taxed' (as *corporate* income),
so it's not 'fair' to tax it again,
because 'logic' decrees that if
something is taxed it can only
be taxed 'the one time'.

The somewhat more rational progressive
POV would seem to be that the guv'mint
can tax something as often as it damn
well pleases, or something like that.

(Progressives are obliged to tell you
how 'rational' that POV happens to be.
I'm progressive enough to believe it.)
------------------------------------------------------
llow me to simplify this debate (in my opinion).

This is a debate between Consequentialists and Deontologicalists. Consequentialits are concerned about outcomes. Deontologicalists are concerned about legal rights.
---------------------------------------------
Greg Mankiw tries to defend the low tax rate on carried interest but in a way David Cay Johnston's piece pulls the rug out from this argument. I try to tie this two links here:

http://econospeak.blogspot.com/2012/03/weak-defense-of-low-tax-rate-on-carried.html

[SoylentGreenIsPeople]

09:27 PM on 03/04/2012

But that's the libertarian dream: feudalism. The aristocracy not of money, but of the sword. The near future of a merchant aristocracy is just a transition state. This is because it is impossible for a business to internalize the cost of protecting and maintaining long range transport. Implicit coercion will gradually, or perhaps quite rapidly, be replaced with the naked force of local bullies, as the global economy fragments.

Libertarian -----------------------------------------------

In other words, the local bullies are free to revoke the freedoms of individuals, using methods more subtle than overt violent coercion.

http://noahpinionblog.blogspot.com/2011/12/liberty-of-local-bullies.html

[Quitcherbichin]

11:25 PM on 12/07/2011

Another in the never ending attempts to take the fruits of someone elses labor.

[radiojunkie]

03:39 AM on 12/08/2011

Along with the never ending excuse that living in a modern society doesn't mean one has to pay for it.

[jsmit]

02:32 PM on 12/08/2011

I know you libs like to say the extreme all the time because it fits your talking points/meme, but no conservative has ever said they do not want or have to pay for government. The issue is always the level. So be honest.

[cue]

08:33 PM on 12/07/2011

This idea is so dumb, it doesn't merit a comment. (Oops!)

[gateking]

08:20 PM on 12/07/2011

There is no tax available that is going to "free up a few TRILLION" per year as the author suggests. Take a basic math class.

[radiojunkie]

03:42 AM on 12/08/2011

Sounds like you took a basic course in hip shot. Today we call it home schooling.

[gateking]

08:16 AM on 12/08/2011

Nice deflection. Useful when have no facts and can't understand basics. Nicely done.

[jsmit]

02:36 PM on 12/08/2011

Even if it did "free up" a few trillion, what would that money be doing if there is no hope of getting people to spend on the products/services it would theoretically invest in because of the highly progressive consumption tax.

[lrobb]

07:49 PM on 12/07/2011

Let me see if I've got this right.

You want to tax the wealthy at 100% if they spend money to remodel their kitchen buying lumber and granite countertops (made by people in the middle class) and using the services of plumbers, carpenters, painters and electricians. (all middle class)

However, if they take the same money and send it to their stockbroker to make them even more wealthy there is no tax.

Are you absolutely sure the author isn't an uber-conservative mole?

[frank day]

07:57 AM on 12/08/2011

Simply remodeling a kitchen is not the kind of activity that would be heavily taxed.

Anyway, didn't you get to the part where estate taxes were mentioned?

[lrobb]

08:44 AM on 12/08/2011

The way this consumption tax works is that the taxpayer reports their income then subtracts the generous personal exemption ($30k) and whatever thy have saved or invested (stocks, bonds, gold etc.) The rest would be taxed at 100%.

It doesn't matter what they did with that residue. They could donate it, give it to their kids, bury it in the landfill or buy things made or installed by middle class Americans and it would still be taxed100%.

The minute large estates get dinged with draconian taxes, get ready to see large estates miraculously go away. A good probate attorney is better than David Copperfield at making an estate disappear. They will become irrevocable trusts, closely held corporations or simply be distributed during the life of the grantor to those who would have finally gotten them anyway.

[Sorenson]

06:44 PM on 12/07/2011

This reeks of stealth right-wind b ullshit and would only encourage people to hoard even moreso than they are already. Consumption taxes do not work effectively, no matter how "progressive" they may be, simply because the ultra-wealthy cannot consume enough goods and services to stay in proportion with the rest of society. Not only would increasing marginal income tax rates for the top brackets (and doing away with many of the ultra-exploitable deductions and loopholes) help increase federal revenue, but maybe it'll finally get corporations to start reconsidering the ridiculous executive compensation packages that've become the norm, investing that money back into the company by doing new development or hiring new workers instead of having it go into Uncle Sam's wallet.

[realorpretend]

06:40 PM on 12/07/2011

And what would the new revenue be used for? How would the new taxes create equality?

[jsmit]

02:40 PM on 12/08/2011

More fundamental question is why is income equality a government goal?

[realorpretend]

02:51 PM on 12/08/2011

Interesting response.

[Trustfunded1]

06:10 PM on 12/07/2011

Helloooo black market!