The most powerful tool that most societies have for shaping economic behavior is its tax system. America’s complex, convoluted and cumbersome system, overwhelmingly focused on income, is at the root of much of the economic behavior that accounts for our failure as a producing nation. At the heart of any viable tax system for the future will be a border-adjustable consumption tax. That may take the form of: a value-added tax as used in Europe, Mexico, China and the CAFTA countries; a national sales tax such as the Canadian tax on goods and services; or perhaps a business transfer tax that might rely on current financial statements but might tax the “value added” rather than “profit.”
Why should the US think of such a radical change in its tax system? Here are the top ten reasons:
1. We consume too much. If we collect more tax when dollars are spent than when they are earned, people will adjust. The more you spend, the more you tax pay, whether you are a lunch-pail factory worker, a high-flying stock broker or Paris Hilton.
2. We save too little. The solution: don’t tax savings by any American without any limitation or qualification. The more you save, the less tax you pay.
3. We invest too little. Solution: don’t tax invested funds; expense investment without any limitation or qualification. The more you invest, the less tax you pay.
4. We export too little. Increasing our net exports is the only way for the US to avoid a prolonged period of dollar weakness, high interest rates and steep inflation. Solution: rebate consumption taxes paid or due on all exports, just as more than 140 US trading partners do in a practice that is perfectly legal under international rules. The more you export, the less tax you pay.
5. Imports don’t pay their fair share of taxes in the US. Solution: impose the same consumption tax on imported goods as domestic goods must pay, also a perfectly legal practice under international rules. Outsourcers will be free to continue their supply chain practice, but they will no longer avoid contributing their full, fair share to the US economy.
6. The US is dangerously dependent on imported oil and gas. Solution: tax energy from renewable sources (overwhelmingly domestic in origin) at a lower rate than energy from non-renewable sources, whether domestic or imported. Instead of having an on-again, off-again policy of favoritism for specific technologies that are blessed with periodic subsidies, all technologies would benefit from the same tax advantage. The most competitive will win the biggest share of the market.
7. The underground economy, including many illegal immigrants, largely escapes taxation. Solution: tax people when they spend rather than when they earn.
8. Small businesses are unfairly burdened with bookkeeping, accounting and other administrative costs. The solution: substantially raise the minimum level for filing corporate and personal income tax returns, greatly simplify them (e.g. eliminate the alternative minimum tax), and do away with a host of smaller excise taxes now collected by the private sector.
9. Too much time and money are devoted to tax avoidance and evasion, leaving honest taxpayers to resent taxes as inherently unfair. Many taxpayers (and even their paid tax advisors) are often bewildered by the complexity of a tax code designed more to advance special interests rather than those of the nation as a whole. Solution: Rely on sellers to collect taxes from buyers; rely on the paper trail of purchases (taxes paid) and sales (taxes due); and devote the resources of the national tax agency to detecting and punishing
10. Lower-income families bear a heavy tax burden, taking into account the regressive effects of payroll taxes and those taxes imbedded in the cost of goods they buy. Solution: restore real progressivity to the tax system by eliminating payroll taxes on lower-income workers and refunding consumption taxes paid by lower-income consumers.
As a country we have become dependent on foreign borrowing to maintain our standard of living, ensuring that future generations will have to accept a reduced chance to live the American Dream. Every day we borrow more than two billion additional dollars to finance our trade deficit. The problem of America’s trade imbalance stems largely from systematic disadvantages stemming from our own tax system; the solution can be found largely in the same place. If America went from being a badly taxed country to be an excellently taxed one, we would start to benefit within a short period. By shifting towards a consumption-based tax system with progressive income taxation, we would also enable our government to immediately lower rates in response to a looming recession. No tax system is perfect, but ours is a perfect abomination to the national interest. Let’s change it – quickly, profoundly and with a steady eye on our performance as an international competitor. Good things will start happening once we do.
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Excellent points! I completely agree with your premise that the regressive manner in which America taxes is counterproductive both as a means to collect revenue from its citizens but also as a tool of forein policy.ReplyDelete
Your article fails to address low-income residents in many rust and sun belt states; residents who currently don't pay an income tax and still just barely manage to get by. A consumption tax would eat up what little savings they have. Furthermore, many States like New York and California already have a high consumption tax. Would the new Federal consumption tax apply at the same rates for them? Would I pay a 20% consumption tax for socks in Sacramento and butter in Buffalo? Like it or not, cheap imports from places like Wal-Mart keep many Americans afloat while their wages have remained flat.ReplyDelete
Would you eliminate the myriad scheme of taxes that the rich currently pay as well? Would the consumption tax replace the estate tax, capital gains, and the like? Would you completely eliminate income taxes for the super wealthy or keep them at much more progressive rates?ReplyDelete
How do you know that consumption taxes could generate the kind of revenue that income taxes currently do? If prices go up, as you state, consumption may go down and tax-free savings will rise. Won't that inevitably lead to fewer dollars in the federal coffers?
Your 7th bullet raises an excellent point. The U.S. has millions of illegal aliens working in its fields, factories, and homes. Afraid of deportation they live outside the law, paying few taxes but using many public/social services. Though I think the Government needs to make a serious effort to make these illegals full citizens, they need to pay their fair share of the tax burden in the meantime. Consumption taxes are a simple way of doing just that.ReplyDelete
Good points. Let me elaborate a little. First, regressivity is a central, legitimate issue that, if not resolved satisfactorily, will sink any attemot at fundamental reform. For starters, I would "flip" FICA to apply to incomes above a certain income level. Let A-Rod and the Wall Street bonus babies pay social security tax on virtually all, rather than on virtually none, of their earnings. At the same time, we would need to make the consumption tax rebatable (similar to the current EIT) for lower income folks. Second, a fundamental reform is an opportunity to eliminate many of the 20+ taxes collected by the federal government. That would simplify life (look at your phone bill, for example), reduce the burden on small businesses which have to collect and report on these taxes, and -- for me, most importantly -- add to the effectiveness of the border-adjustable tax in terms of improving our tradde performance. The higher the consumption tax rate, the bigger the positive impact on imports and exports. Third, the inheritance tax raises a number of issues. We don't want to kill incentives to work hard and build up assets, but, as Warren Buffett seems to preach and practice, there ought to be a limit. Why not revamp the inheritance tax by: a) excluding certain business assets such as inventory from the base; b) raising the base to a level where it doesn't impact the average small business and family farm; and c) index the base to inflation so that the system can remain equitable over time without the need for constant Congressional tinkering?ReplyDelete
Note that these are essential political, not technical, issues. If American producers -- farmers, ranchers, labor and manufacturers -- were to unite behind this sort of program, it could happen.
Let's put the problem of low and stagnant wages aside for now. It's relevant to the tax discussion, of course, but the fundamental causes lie elsewhere -- abuse of immigrant labor, to name only one. They need to be addressed, too, and soon.
Mr. Blum - It's interesting that you mention farmers and ranchers as potential supporters of eliminating income taxes in favor of consumption taxes. Many farmers and ranchers live in States that currently do not have an income tax. Consumption taxes would be a tax increase on these folks in addition to making their products more expensive to buy.ReplyDelete
The last point would be equally valid for industrial workers and small business owners in those states as well. However, my concern is to reform the FEDERAL system. Let's modernize, simplify and rationalize the nine million word, 3300 provision, special-interest outrage formally known as the Internal Revenue Code. Then states will be free to adjust their own systems as they see fit.ReplyDelete
In that connection, I'd urge everyone to study the Canadian goods and services tax. The way they have structured it, some (but not all) provinces have their own provincial goods and services tax that is also imposed on imports and rebated on exports. If any US state were to follow suit, they would make itself more attractive to investors in plant and equipment, especially for export. This might make a lot more sense than throwing subsidies at new plants in a effort to trump the offer made by a neighboring state.
Anonymous poster number 2 completely misses the mark and ignored C. Blum's original thesis. The consumption tax would REPEAL payroll taxes that currently eat up an unhealthy percentage of blue collar workers' paychecks. This empowers America's working class to be taxed only as much as they consume. The plasma screen TV in Sacramento may be taxed as high as 20% but that TV will be subject to border adjustable taxes. I'm sure that Wal-Mart will squeel with objections to this because their whole industry revolves around invading communities and flooding local markets with cheap goods from China. C. Blum's proposal simply puts more money in consumers' hands and forces consumers to pay the 'real' costs of goods.ReplyDelete
I have to agree with anonymous poster number 2. A consumption tax can shift the tax burden to the lower and middle class because people with higher incomes spend less in proportion to their income, particularly on consumables. Put another way, someone who is living paycheck-to-paycheck under the current system is likely to be in a similar position under a consumption tax, while someone who is able to save a portion of their income will only be taxed on the portion of their income they spend.ReplyDelete
Post Number 2 and Eric both miss C. Blum's point that the consumption tax would repeal Federal income taxes and 'flip FICA on its head.' Translation: lower-income workers would have more income to spend. They would be in control of how much they are taxed because they are only taxed by as much as they spend. Furthermore, the consumption tax could be rebatable for the truly needy in the U.S.ReplyDelete
I think that the point C. Blum is trying to make is that our tax policy has no direction. If taxation is a reflection of a nation's values, what does the American tax code say about the U.S.? If policy-makers are serious about encouraging Americans to save more, serious about promoting American productivity, and serious about helping blue collar workers, then they must at least consider a federal consumption tax.
This exchange serves to underscore a central truth about tax reform: do it right, or don't do it at all. If we end up piling an additional tax on all Americans, including the lowest income earners, the country will be worse off. By contrast, if we shift the tax base away from income (especially lower incomes) and toward consumption, we can expect the country to be better off. I repeat, Americans are not over-taxed, but they surely are badly taxed.ReplyDelete
C. Blum, well said! Americans are certainly not over-taxed but they are badly taxed. America's complex tax scheme leaves many hard-working Americans feeling cheated. Most Americans work hard and pay their taxes but see increasingly little return from their government. They see decaying roads, collapsing bridges, aging schools, and dirty drinking water. Meanwhile, they see their wealthier neighbors enjoying tax breaks that will supposedly trickle down to them... someday. America's tax code is partly to blame. It is not only inherently unfair but it also puts Americans producers at a competitive disadvantage to suspect so-called People's Republics. Simplify the code! Don't punish Americans for getting rich. Tax them for spending lavishly and reward them for investing and saving.ReplyDelete
Read this from CNN.comReplyDelete
and it should be abundantly clear why America should adopt consumption taxes.
Another reason to implement a consumption tax.