Why a consumption tax is better than an income/capital gains/corporate tax

myp · Jan 10, 2013

In the other thread I explained why I prefer a progressive tax to a flat tax. But the discussion still focused on income tax since that is what the existing system is. My preference is that there be no income, capital gains, or corporate taxes at all. Instead, I would like to largely replace those with a consumption tax (as well as Pigouvian taxes, but that isn't my focus in this thread).

The reason for this is that in the long run, income and capital gains are productive things- taxing them lessens the incentive to make/earn those things. Taxing consumption solves that as consumption is not as beneficial in the long run. This is why we currently tax capital gains and income differently. But I say don't tax either and tax consumption instead.

Thoughts?

clax · Jan 10, 2013

myp said:
In the other thread I explained why I prefer a progressive tax to a flat tax. But the discussion still focused on income tax since that is what the existing system is. My preference is that there be no income, capital gains, or corporate taxes at all. Instead, I would like to largely replace those with a consumption tax (as well as Pigouvian taxes, but that isn't my focus in this thread).

The reason for this is that in the long run, income and capital gains are productive things- taxing them lessens the incentive to make/earn those things. Taxing consumption solves that as consumption is not as beneficial in the long run. This is why we currently tax capital gains and income differently. But I say don't tax either and tax consumption instead.

Thoughts?

I support consumption tax, mainly because of the inventive issue. Out may effect consumption at first but I imagine it will even out after a while. More people making more money means better economy for everybody. Much better idea than flat taxes.

I fundamentally disagree with the basis, and notion of pigouvian taxes. A standard 20% on all consumption.

bluefig · Jan 10, 2013

myp: I agree with your reasoning here. Taxing productive activity is not good policy if one wants a thriving economy.

Another reason I like a consumption tax is that it taxes everyone, even those that do not work (welfare recipients for instance) or those that work in any of the numerous underground markets that spring up when legal productive work is over regulated and taxed. So, all people do consume and would therefore pay the consumption tax, no matter how they made their money.

myp · Jan 10, 2013

clax said:
I fundamentally disagree with the basis, and notion of pigouvian taxes. A standard 20% on all consumption.

That is ironic considering you agree with the incentive thing on income vs. consumption. That is essentially a Pigouvian argument in relative terms.

myp · Jan 10, 2013

bluefig said:
myp: I agree with your reasoning here. Taxing productive activity is not good policy if one wants a thriving economy.

Another reason I like a consumption tax is that it taxes everyone, even those that do not work (welfare recipients for instance) or those that work in any of the numerous underground markets that spring up when legal productive work is over regulated and taxed. So, all people do consume and would therefore pay the consumption tax, no matter how they made their money.

Well my point here is not to place extra burden on the poor. I want a progressive consumption tax. For the poorest of the poor I would want an effect 0% or even negative tax rate perhaps via a flat negative amount given to everyone (i.e. everyone gets $10k in tax returns automatically- number is not what i would necessarily want, but that is an example).

clax · Jan 10, 2013

myp said:
That is ironic considering you agree with the incentive thing on income vs. consumption. That is essentially a Pigouvian argument in relative terms.

No it's not, same taxes on all consumption. Doesn't mean cherry pick things we don't like the people doing and tax them more.

I am never in favor for higher taxes no matter the idea behind it.

myp · Jan 10, 2013

clax said:
No it's not, same taxes on all consumption. Doesn't mean cherry pick things we don't like the people doing and tax them more.

I am never in favor for higher taxes no matter the idea behind it.

Income, capital gains are positive externalities. You want to tax the thing with a relatively negative externality- consumption. So yes, there is a Pigouvian component there.

clax · Jan 10, 2013

myp said:
Income, capital gains are positive externalities. You want to tax the thing with a relatively negative externality- consumption. So yes, there is a Pigouvian component there.

Just leave it flat and it will balance out. No need to complicate things

myp · Jan 10, 2013

clax said:
Just leave it flat and it will balance out. No need to complicate things

What does that have to do with what I just said?

clax · Jan 10, 2013

myp said:
What does that have to do with what I just said?

No extra taxes on things because someone wishes to apply a subjective negative externality on something based on some arbitrary flimsy connection.

myp · Jan 10, 2013

clax said:
No extra taxes on things because someone wishes to apply a subjective negative externality on something based on some arbitrary flimsy connection.

But you just did that when you wanted to tax consumption over income because of the incentive issue...

And it isn't as subjective as you think- look at the literature. We can quantify negative externalities and then based on the cost apply taxes later if you want. That isn't subjective- it is according to the numbers. I.e. look at the cost of alcohol consumption on the healthcare system and tax to counter that. But I don't want to get in a tangent on Pigouvian taxes- we can make another thread for that if you want- this thread is about consumption vs. income/cap gains/corporate taxes.

clax · Jan 10, 2013

myp said:
But you just did that when you wanted to tax consumption over income because of the incentive issue...

And it isn't as subjective as you think- look at the literature. We can quantify negative externalities and then based on the cost apply taxes later if you want. That isn't subjective- it is according to the numbers. I.e. look at the cost of alcohol consumption on the healthcare system and tax to counter that. But I don't want to get in a tangent on Pigouvian taxes- we can make another thread for that if you want- this thread is about consumption vs. income/cap gains/corporate taxes.

No myp, flat tax period. I disagree with the concept of pigouvian taxes.

The cost of healthcare given to alcoholics should be on the person that engaged in the behavior, so there would be no cost to anyone else. You pay for your own health care, there would them be no costs or negative externalities.

I Well never ever ever agree with you on pigouvian taxes, just give up. There is no spin that will make me agree. This conversation is over. No debate, no compromise, I disagree. Until you can come up with an argument that I haven't heard before my position will not change.

myp · Jan 10, 2013

clax said:
No myp, flat tax period. I disagree with the concept of pigouvian taxes.

A flat tax isn't necessarily mutually exclusive from a Pigouvian tax. That aside, I was just showing you that you used a Pigouvian argument to support the consumption tax earlier in this thread.

clax said:
The cost of healthcare given to alcoholics should be on the person that engaged in the behavior, so there would be no cost to anyone else. You pay for your own health care, there would them be no costs or negative externalities.

That's not how the real world works. And it isn't just healthcare costs. But even if it were, what do you suppose we do when the broke alcoholic is having a heart attack on the emergency room floor? Let him die?

clax · Jan 10, 2013

myp said:
A flat tax isn't necessarily mutually exclusive from a Pigouvian tax. That aside, I was just showing you that you used a Pigouvian argument to support the consumption tax earlier in this thread.

No I didn't. Unless it is a pigouvian tax on everything equally except basic food.

myp;38200 That's not how the real world works. And it isn't just healthcare costs. But even if it were said:
It's his heath, if it isn't with his money to buy health care he deals with the consequences, or seeks a charity.

I don't know why it's anyone's concern if peoplekill themselves.

myp · Jan 10, 2013

clax said:
No I didn't. Unless it is a pigouvian tax on everything equally except basic food.

It's his heath, if it isn't with his money to buy health care he deals with the consequences, or seeks a charity.

I don't know why it's anyone's concern if peoplekill themselves.

Wow... that is an extreme position. And what about after he dies? At that point someone has to clean his body up off the floor, no? Cost to society. Again.

Overall though, I think I have done a poor job explaining the work of Pigou and later economists who have worked on this. I don't think you understand what the argument actually is considering you don't realize you used it in differentiating income tax vs. consumption tax. I suggest you do some reading on that as I won't be able to explain it as well as a textbook or something.

clax · Jan 10, 2013

myp said:
Wow... that is an extreme position. And what about after he dies? At that point someone has to clean his body up off the floor, no? Cost to society. Again.

Overall though, I think I have done a poor job explaining the work of Pigou and later economists who have worked on this. I don't think you understand what the argument actually is considering you don't realize you used it in differentiating income tax vs. consumption tax. I suggest you do some reading on that as I won't be able to explain it as well as a textbook or something.

as you defined it repeatedly it is a tax on something with a negative externality, I don't buy the concept of a negative externality.

I never supported something based on a concept that I am skeptical of. Any attempt you made to define a negative externality was subjective and flimsy.

I realize when you say I don't understand something, it's because you have failed to convince me. I disagree deal with it.

myp · Jan 10, 2013

clax said:
as you defined it repeatedly it is a tax on something with a negative externality, I don't buy the concept of a negative externality.

That is probably because I didn't explain it well. Do yourself a favor and look at a textbook or something (or online). To suggest negative externalities don't exist is pretty extreme. Heavily against the literature and in a lot of ways common sense. Negative externalities are basically side effects or unintended consequences- I am sure you agree those exist.

clax · Jan 10, 2013

myp said:
That is probably because I didn't explain it well. Do yourself a favor and look at a textbook or something (or online). To suggest negative externalities don't exist is pretty extreme. Heavily against the literature and in a lot of ways common sense. Negative externalities are basically side effects or unintended consequences- I am sure you agree those exist.

Yeah I looked up negative externality the first time I saw you use it. I don't agree with the ones you suggested previously.

Not really sure I buy that concept, that things have a negative side effect. Behavior does.

reader · Feb 18, 2013

Both can be turned to production in time but consumption tax directly would effect all people even whose basic needs are in jeopardy. On the other hand income tax not directly effect neither basic needs or production process. Consumption tax must have a very restricted place in a fair total budget and it is in the most part of Europe as far as i know. Or many basic things should be exempted from taxing system. Justice is also as important as economic targets for an healthy source of taxing and stabil economy. Here a millioner and añ unemployed payıng the consumption tax with same rates for many basic things and it isn't fair.

myp · Feb 18, 2013

reader said:
Both can be turned to production in time but consumption tax directly would effect all people even whose basic needs are in jeopardy. On the other hand income tax not directly effect neither basic needs or production process. Consumption tax must have a very restricted place in a fair total budget and it is in the most part of Europe as far as i know. Or many basic things should be exempted from taxing system. Justice is also as important as economic targets for an healthy source of taxing and stabil economy. Here a millioner and añ unemployed payıng the consumption tax with same rates for many basic things and it isn't fair.

This is an issue I have addressed in this thread and others: http://politicalfray.com/economics/3672-why-flat-tax-bad-idea.html

I agree with you- it should not be a flat tax on everything. It needs to be a VAT-type of tax. I also support a negative (flat) tax refund of some sort to go with it to again address this issue.

Why a consumption tax is better than an income/capital gains/corporate tax

Similar threads