Consumption vs. Income vs. Sales
People who know more than I do keep calling for replacing the income tax with a “consumption” tax.
As if they’re expecting the consumer to calculate it and send it in at the end of the year… if it could be done that way, it would alleviate a lot of my concerns about the use of sales taxes instead of income taxes.
In Is it better to tax incomes or purchases? I wrote that “Sales taxes are not sales taxes, they are purchase taxes” because they are paid for by the purchaser, not the seller. So I really don’t have a problem calling them “consumption” taxes despite the joke. And I am generally well-disposed toward replacing the income tax with a consumption tax, because I am generally better-disposed to discourage consumption than to discourage income. What is taxed is discouraged, and if something has to be discouraged better consuming than creating. But the more I think about the long-term effects of purchase taxes vs. income taxes, the less well-disposed I am to making the change.
It is reasonably possible for the average person1 to know what their income is, and so, under a simple income tax, calculate what their income tax is. That makes it reasonably possible to not force employers to become an enforcement arm of the federal government, calculating, collecting, and remitting taxes. Getting third parties out of paying taxes would also make it harder to hide some taxes, such as half of the social security tax that employers take out of their employees’ pay and pretend it never existed.
It doesn’t seem reasonably possible for the average person to know what their consumption is, and so to calculate their own consumption taxes. This means that sellers will always have to be forced by the federal government to calculate, collect, and remit such taxes. Consumption taxes will always conceptually be sales taxes.2 Politicians will easily be able to hide some taxes that they would rather remain hidden. And so consumption taxes will always be a damper on new business creation—and new job creation.
Further, much of the benefit from the consumption tax appears to be that, when it’s new, a consumption tax will be simpler than an income tax. There’s an assumption that consumption taxes will remain simple even though income taxes did not. That the problems of complexity that bedevil income taxes are problems with the income tax, and not problems with what politicians do to the income tax.
But once the consumption tax is the hammer that Congress holds, I see no mechanism for keeping it simple. It seems to me that not only will consumption taxes become just as complicated as income taxes, but that it will be easier for politicians to make them more complicated and get away with it, because of the nature of sales taxes. Sales taxes are applied to things, whereas income taxes are applied to people.
It will become just as complicated and prone to tax-avoidance schemes as the income tax is. Perhaps more so, as most people have far more sources of consumption to shift the definitions of than they have sources of income. As long as there will have to be definitions of consumption and consumers (or of sales and sellers), it seems to me that there will be at least as much, if not more, incentive on the taxpayer side, especially among those whose consumption taxes will rival the cost of hiring tax lawyers, to work both the natural and the artificial complexity in order to pay less.
Some consumption tax schemes run up to 25% on top of state sales taxes. An additional cost of twenty-five dollars to forty dollars for every hundred dollars spent is a very large incentive to evade sales taxes.
It also seems to me that it would be a lot easier for Congress to decide that some forms of consumption deserve to be taxed more, than it is for Congress to decide that some kinds of jobs need to be taxed more. So that while it is undeniably hard to simplify our current income tax system of deductions, exemptions, floors, and ceilings, it will be even harder to keep a consumption tax free of the same problems.
That is, it seems to me that the work and resources that we will need to expend to convert the United States from an income tax system to a sales tax system would be more effectively used to improve our income tax system.
I would, in actuality, not rhetorically, love to be convinced otherwise.
In response to Simple, obvious, and unobstructive: minimize the value-minus of taxes: There is no value-added in taxes, but we can minimize the loss of value.
Or below average; this is not a difficult calculation.↑
While sales taxes will always in effect be a tax on consumers rather than a tax on sellers, they will always, due to their nature, be thought of as a sales tax.↑