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No IRS?

I'm actually a fan of consumption taxation, but it's simply not the case that you could abolish the IRS by moving to a national sales tax or a national VAT. Any tax system is bound to have rules (or if it's not going to have rules it would be a very strange system indeed) and that means people will need to enforce those rules. That's what the IRS does. Now, to be sure, you could eliminate the income tax, move to a national VAT, and call the agency charged with enforcing the VAT rules the "Value Added Tax Enforcement Agency" (either "VATEA" or "VEA" as you preer) but the idea of an enforcement-free tax system is obviously a chimera. Also chimerical is much of the alleged greater simplicity of such a system. The income tax isn't complicated because it's an income tax, it's complicated because over the years legislators have added tons of deductions, tax credits, etc. to the thing. The exact same issue would exist under a consumption tax system. Will my business purchases be exempt? If you buy a home is that consumption or savings? Do we want to encourage people to buy fuel efficient cars with a tax credit? Is going to the doctor going to count as consumption?

Now, clearly, you could have a very strict consumption tax with nothing exempt except the first X dollars of consumption. Under those circumstances, the rates could be pretty low. But of course the income tax rates could be a lot lower, too, if we reformed the tax code we already have. Which is, I think, something we should do, but is basically orthagonal to all this consumption tax business. And there's no reason, of course, that a consumption tax couldn't have brackets and progressivity. As with the "complification" issue we face essentially all of the same policy choices.

UPDATE: Want to know more? See Gale (PDF) and MacGuineas. Needless to say, like all sorts of other conservative policy proposals (see vouchers, private retirement accounts, etc.) the devil with this stuff is in the details. All of them could be improvements over the present way of doing things, or they could be boondoggles designed to further enrich the wealthy. Guess which sort of a consumption tax Dennis Hastert will come up with?

August 1, 2004 | Permalink

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Comments

I'm curious how you define "pretty low" - because it really wouldn't be all that low.

Posted by: Atrios | Aug 1, 2004 11:37:27 PM

Something in the vicinity of thirty percent, I would think, though it obviously all depends on the X.

Posted by: Matthew Yglesias | Aug 2, 2004 12:02:35 AM

I'd like to see a candidate propose a nice, simple income tax system. Not quite the flat tax, but something with just 2 or 3 marginal rates, a few basic deductions like mortgages and charity, and all income treated equally.

I think many American don't hate paying taxes so much as they hate that the system is too complicated and seems full of loopholes and exemptions for the rich and well-connected.

It should not take 27 hours and a computer to do my taxes.

Posted by: Oberon | Aug 2, 2004 12:22:14 AM

oberon, what you're describing - which i also support - is where bill bradley was heading in the '80s, and there were at least some republicans who were prepared to think along similar lines (essentially, this was the '86 tax bill in a nutshell). I've always been disappointed that no dems have picked up the torch: i couldn't agree more that a simple, progressive tax system would be viewed favorably by a large number of voters....

Posted by: howard | Aug 2, 2004 12:31:05 AM

Well, I agree mostly, but it isn't the number of brackets that complicates things. Whether you have two brackets or eleven, everyone's still going to be looking up their tax in the tax tables, and that's not all that hard to do. But getting rid of loopholes and unnecessary credits/deductions is definitely a good thing.

Posted by: JP | Aug 2, 2004 12:34:30 AM

I'm with you, Howard. I think the Dems should run on simplicity and fairness (which are mildly in conflict at times, but we won't go there) and hammer the Republicans on how they've larded up the tax code. 'Perfectly Legal' provides plenty of evidence of what is wrong with the current system.

Posted by: Tom DC/VA | Aug 2, 2004 12:50:18 AM

Not quite the flat tax, but something with just 2 or 3 marginal rates, a few basic deductions like mortgages and charity, and all income treated equally.

The problem with that is if you leave the basic structure in place, as was done in '86, within a few years complexity and inefficiency come creeping in. Or rather, they come running in with guns blazing.

I actually think the odds are pretty low that we'll ever see truly comprehensive reform of the tax code within the framework of a federal income tax. The voters of this country would never ever allow their paid servants to take away the mortgage interest deduction, for starters.

Which leads me to believe that, perhaps counterintuitively, shucking the system in favor of a consumption tax might actually be more politically feasible (some day). Think about it, what would be easier to accomplish: A) tell voters we're going to eliminate the income tax in favor of an efficient and simple national consumption tax; or B) tell voters we're going to radically reform the income tax code, and, oh, by the way, that means you may no longer deduct the interest on the $480,000 mortgage you needed for that 3-bedroom slab ranch...

Obviously "B" ain't gonna happen.

Personally, if we were to ever go to a VAT, I'd favor making it progressive not via complicated multiple rates, or exemptions for necessitites, rather, I'd opt for keeping the rate as low as possible (by making the base as wide as possible i.e., taxing everything) and combining that with cash payments to the poor to compensate (in other words a negative consumption tax).

Posted by: P.B. Almeida | Aug 2, 2004 1:09:55 AM

Hi -

Matthew: How can you, as a liberal, be for a consumption tax? Consumption taxes are regressive, not progressive: they tax consumption. Low-income groups consume almost all of their income, so they would bear the brunt of the taxation, while high-income groups consume relative less as a proportion of their income, effectively reducing their tax rates.

And giving tax credits doesn't help folks who are scraping by, since the credit comes as a lump sum once a year and these folks need their money now, not in 10 or 11 or even 3 months. They consume now and per definition can't wait for a tax refund to come. They'll go to a refund-advance company and effectively pay 4 times the going rate to finance their current consumption (which, of course, is taxed...) instead of finally getting their cash flow such that they can have something left over.

Do you really want to increase the tax burden on those least able to pay it and reduce it for those most able to pay? That is what you are advocating.

And a VAT tax is simply passed on to the end consumer of the goods and services. There are no magic wands to wave here. VATs are as regressive as consumption taxes: while they seem to tax the value added in production, manufacturers pass these costs on (or the following happens: Switzerland introduced a VAT in the early 1990s and it led to a massive drop in profits, since cost increases were carefully controlled by the government, leading to a significant reduction in jobs and a stagnant economy for more than 7 years).

What the tax system needs is a major restructuring, and I think a flat tax would, at the end of the day, be more equitable, considering that **all** loopholes would thus be closed. If you want to make it progressive, then make all income up until the median tax-free, then a flat tax of, say, 20% above that: if the median is $25,000 and you earn $50,000, then you pay 20% of $25,000, with no ifs ands or buts. No loopholes whatsoever.

That's probably going to be the closest thing you can get to tax equality. But tax the poor proportionately more than the middle class, let alone the rich? Na.

John

Posted by: John F. Opie | Aug 2, 2004 5:50:50 AM

Matt,

Are you serious? If I've read you right, you are quibbling with the detail on something that would disproportionately affect those on the very lowest incomes.

Tax should be redistributive - that is what it is for. While, say, VAT on certain luxury goods might serve this purpose, a flat tax would not.

So how can you be a fan of consumption taxation?

Posted by: Rod | Aug 2, 2004 6:48:37 AM

What we need is a much more progressive personal/corporate income tax system with AMT provision that takes care of the loopholes. That's all.

Posted by: abb1 | Aug 2, 2004 7:21:50 AM

Consumption taxes are regressive and hurt poor people. Even if you somehow institute income differences, how do you enforce them? Make folks bring a card in to the store? That's embarassing.

Income taxes are much fairer to the working poor.

Posted by: Poppy McCool | Aug 2, 2004 8:06:09 AM

Instead of having 250 million people plus all the businesses to enforce the laws on, you would reduce that to just the businesses. The individuals are a great deal of the time and expense in the current system.

But regardless, we have collect the most revenue per dollar spent to collect than any country in the world. The money we spend to collect all this money is very small part of the federal budget and cutting that expense is not at all a reason to go to a different system.

Posted by: Chad | Aug 2, 2004 9:32:22 AM

Matthew: How can you, as a liberal, be for a consumption tax? Consumption taxes are regressive, not progressive: they tax consumption.

Are you serious? If I've read you right, you are quibbling with the detail on something that would disproportionately affect those on the very lowest incomes.

Consumption taxes are regressive and hurt poor people.

Oh, for crying out loud...

You can have a progressive consumption tax if you just design it in a certain way. This is the worst kind of knee-jerk know-nothingism. You're all just reacting to the label "consumption tax" without even knowing the details of what kinds of proposals MY is talking about.

Posted by: JP | Aug 2, 2004 9:49:21 AM

Here is a better article by Gale on the subject.

http://www.brookings.edu/comm/policybriefs/pb31.htm

Posted by: Craig | Aug 2, 2004 10:02:26 AM

If you have consumption tax as MY wants, with "brackets and progressivity" you're back to all the complications of an income tax, maybe more. As has been endlessly pointed out, the complexity of the income tax derives mostly from defining income. If you want to make different people pay at different levels, you're going to have to have them prove their income.


You can have a progressive consumption tax if you just design it in a certain way.

You mean, with a lot of exemptions and exceptions and special deals and so on. That's a good way to simplify things.

One problem (of many) with going to a consumption tax is that of transition. Suppose you have some money you saved out of your after-tax income. Suddenly, when you spend it, you face another 20-30% VAT. That's fair, right?


What the tax system needs is a major restructuring, and I think a flat tax would, at the end of the day, be more equitable, considering that **all** loopholes would thus be closed.

Loopholes? Like what? Medical expenses? Charitable deductions? Deferral of tax on unrealized capital gains? Depreciation deductions for business investments?

Posted by: Bernard Yomtov | Aug 2, 2004 10:10:34 AM

Can't have a flat tax. Congress needs some way to reward its friends and punish its enemies. Congress needs the complexity.

Posted by: matt | Aug 2, 2004 10:24:24 AM

Apparently, none of you has been to www.fairtax.org and read about how to keep the poor from being exploited. A rebate to all for the amount of tax on basic needs. Secondly, we already have sales tax enforcement in place in almost every state, so you CAN eliminate the IRS and just have the states send checks to the treasury. Third, constant economic growth is the WORST regressive tax. It is a tax on the future which we don't know yet. If we don't slow our consumption RIGHT NOW, we will be completely screwed when the oil production peak comes. Almost all government services are needed due to consumption: the more cars we drive, the more roads we need. The more crap we eat and use, the more Medicare we need. The further from home we buy McDonald's Happy Meal toys, the more military we need to 'protect American interests' and sea lanes. We need to set up a consumption tax to eliminate the secrets, frauds, and just general dishonesty in government taxation by placing enforcement in the hands of more local officials, whom we can put our hands around and throttle when they overstep their authority. It's the HONESTY, you guys. To hell with what it does to the economy in the immediate future, think about your grandchildren. If you can explain the tax code to your grandchildren, then that's what we need. If you can explain to them why they have been saddled with dirty air, paved-over fertile land, and more debt than they can ever pay for, fine. Keep your damned income taxes and your Excursions and jetskis and boats. The biggest problem with changing our view of what constitues 'economics' is that errorgant Ugly American 'business majors' don't want to admit that their job, their junk, or their life is basically unnecessary to the future of the human race, and admitting we need to slow consumption would be admitting as such.

Posted by: Dan Conine | Aug 2, 2004 11:34:25 AM

Forgot one of the most important bits: Anonymity. If you use a sales tax, taxpayers become anonymous. This means no loopholes since what you pay isn't tied to who you are or who you know. The tax rebate for basic needs goes to everyone, regardless of what they've paid in. Those of us who are capable of self-sufficiency can make out pretty good ;-). I might even be tempted to send mine back or give it to someone to start a garden of their own.


Posted by: Dan Conine | Aug 2, 2004 11:45:03 AM

As a citizen of a country with no personal income tax (not at all) and a 23% comsumption tax, let me tell you; it's really regressive. Even with exemptions and different rates for different products, people in the lowest income bracket pays 50% more in comsumption tax than people in the highest income bracket.
It also allows for a lot of corruption and informal (read illegal) commerce. There is a whole industry here of small street markets which are completely out of the tax system and where you can get almost anything. ¿My advice? Don't go to a consumption tax only system.

Posted by: Carlos | Aug 2, 2004 11:45:48 AM

The current tax system is not complex for the vast majority of taxpayers who do not itemize, many of whom use the Form 1040EZ. So the best way to simplify the system would be to eliminate the vast majority of exemptions, with a special emphasis on those rarely claimed by wage-earners of modest means.

Posted by: son volt | Aug 2, 2004 11:50:00 AM

I am not sure this is a partisan issue and haven't followed the thread, so forgive me if these points have been made, but:

1. whatever one might feel about consumption/sales taxes vs. income taxes, the danger is that unless the constitutional amendment providing for the income tax is repealed, we would likely eventually end up with both;

2. Consumption taxes, unless they excluded mortgage payments, could have a devastating effect on most people's primary investment (which would also then adversely effect the stock markets);

3. Consumption taxes would encourage savings by those who can (which is good), but wouldn't that also mean that it would adversely effect our consumer economy?;

4. I am concerned about the effects of such a tax on low wage earners, who have less ability to avoid taxes by economizing (although I recognize that the reality is that larger wage earners have many times increased their obligations to match their incomes);

5. Finally, would eliminate 401(k) and related programs that depend on income tax savings to encourage retirement savings.

Posted by: hanke | Aug 2, 2004 11:54:25 AM

You could probably implement a tax system needinging very minimal enforcement if you had a tradeable currency that depreciated against the official government currency-of-account, which was only held by the government.

For instance, a "circulating dollar" issued in 2000 might be worth $0.90 in 2001-issue currency, $0.81 in 2002-issue currency, etc., in effect producing a 10% annual "currency tax".

Of course, it complicates a lot of things (like, retail operations) besides enforcement, and runs the risk of evasion through barter.

Posted by: cmdicely | Aug 2, 2004 11:55:28 AM

Well, it's business at the same old stand. Today the IRS concentrates enforcement efforts on the poorest taxpayers, allowing the richest to defraud us of billions of dollars.

But-not to worry- the rightwingers have a solution! With a generous touch of the magic wand, the NEW tax system, although it appears to be a scheme that has always failed in the past, will be even better than the old system.

PB Almeida probably said it best- if the people see it coming, they will never stand for the shafting the Republicans intend to give them. But maybe, if you promise them a NEW PONY, you can pull the old switcheroo and transfer more taxes to the backs of the middle and lower classes.

Or maybe the Rs are just recognizing the fact that income has been falling, and taxing income is a less reliable way of putting the burden on the middle class.

Incidentally, I finally found some of those loopholes. Not the same as benefitting from them. Naturally, they don't affect any tax YOU are ever likely to pay. But if you have enough money to set up an offshore trust to avoid taxation, or just want to see what loopholes look like, read the IRS regs on trusts. And ponder the fact that the industry built on those loopholes will be first in line to determine how any other tax system is built.

Posted by: serial catowner | Aug 2, 2004 11:57:37 AM

Secondly, we already have sales tax enforcement in place in almost every state, so you CAN eliminate the IRS and just have the states send checks to the treasury.

State sales tax rules are different than each other, and are unlikely to be harmonized with the feds VAT. That's like saying that, since many states have income tax enforcement, we could eliminate the IRS and just let the states send checks to the treasury, now.

Even if it were true, I doubt it would fix anything. The only reason the state taxing authorities aren't just as despised is most people pay more $ in federal taxes, so dislike the IRS more. Shift the burden, and you'll move teh dislike right along with it.

Posted by: cmdicely | Aug 2, 2004 11:59:46 AM

"Tax should be redistributive - that is what it is for."

This is an interesting comment. I understand arguments for progressivity, but I must say that this seems to go further, with government playing Robin Hood.

I am really curious. How many people on this board agree with this statement? If so, why?

Posted by: hanke | Aug 2, 2004 12:01:18 PM

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