"Why don't" states have a simplified tax scheme? Because tax policy is another source of governmental power, used to provide incentives to change public behavior. It's just another tool, along with various regulations and laws and fees. It's much the reason that the federal tax system is so complex, and it's such a political challenge to do tax reform. Everyone wants the whole system to be simpler ... but then each particular exception is of great value to some narrow special interest.
And there are more benefits to this approach. A progressive consumption tax could (and should) go negative on the low end, eliminating the need for all of the distortive and complex subsidies that litter our welfare state (like Section 8 housing), and also could (and should) go above 100% on the high end, so billionaires burning millions of dollars of resources on vanity space trips could do a little more to help others. A progressive consumption tax is a simple and efficient way to bend the consumption curve into a more socially desirable shape without creating perverse incentives and with a minimum reduction in productivity. Our productive billionaires can continue their work unimpeded while the consumptive ones can start paying their fair share.
I agree. But again, there are challenges in differentiating between consumption and investment. Thus a college education is a sort of investment in human capital, but many elite colleges provide a lavish consumption package to go along with it. Even vanity space travel will be claimed as "investment." But we shouldn't make the perfect be the enemy of the good, as income taxes also face these same dilemmas. As an aside for readers freaked out by your "above 100%" comment, rates are calculated differently in the two cases. Imagine 60% income tax imposed on an income of one million dollars. The guy pays $600,000 in taxes and consumes $400,000. That's a 150% tax on consumption, but more like a 60% tax on pre-tax income.
I think this is what you're getting at, but at his previous site, I think I remember Scott used the example of a Warren Buffett type person who saved 99.9% of their vast income, and a profligate trust fund kid who spend all his (lesser) "income" on yachts and cocaine and hookers. He pointed out that an income tax will take much more from WB than TFK, and since we all accept that "to tax is destroy/disincentivize" then we should highly prefer a world where WB pays less taxes, (as his money is going to socially beneficial things like investment, charity or price deflation) and TFK pays more (since his spending is going to consumption, that reduces the amount of, uh, yachts, cocaine and hookers that the rest of us can consume).
Yes, what you describe is pretty much exactly what I hope to accomplish: a tax regime where taxpayers contribute based on the value they are extracting from society, which is their consumption, instead of based on the value of what they are contributing to society, which is their income. I would be happy if TFK paid significantly more tax than WB, assuming TFK is consuming a lot more than WB, regardless of their incomes, and regardless of the nature of that consumption.
As one of your long-time readers who hasn't commented in a while, congrats on moving to a more reader-friendly platform like Substack! As always, you're at the forefront of innovative economic policies. I see an economy with a consumption-only tax as a rare policy that could achieve both efficiency and equity. In my view, the biggest gain might come from eliminating capital gains taxes, which are essentially a transaction cost. Overnight, spreads in all markets would narrow as market makers face lower costs, and the resulting efficiency would allow arbitrageurs to restore prices to equilibrium more quickly and tightly. This more efficient market would lead to faster resource allocation changes when shocks occur, increasing economic dynamism.
Another contrarian benefit of a consumption-tax-only economy could be the alignment of incentives for long-term investment. With no capital gains tax, investors would be more inclined to hold onto investments longer, reducing speculative short-term trading, and promoting a focus on sustainable growth and innovation.
Additionally, such a policy would significantly downsize the cottage industry of tax advisors, IRS staff, and other compliance-related sectors due to the simplification and elimination of numerous tax categories. This streamlining would reduce administrative costs and burdens, freeing up resources that could be better allocated toward more productive activities in the economy.
With Elon Musk potentially being tapped for streamlining government bodies, his voice could be key in promoting this idea. do you plan to develop this further in subsequent posts? Cato Institute or the Mercatus Centre could also promote it.
The transaction cost issue is a good point. I actually wrote an essay advocating a consumption tax for a think tank, but they've been sitting on it for a year. I need to nudge them. The Elon Musk comment raises some tricky issues about the transition. What to do with assets bought under the previous system? You might need a gradual transition, or people would claim he's trying to avoid taxes on his huge Tesla gain.
Think tanks move heaven and earth on things that they can sell. I've always felt that big changes like NGDP targeting and consumption only tax can be better communicated with a good short film. An essay can be the foundation for a script, and a producer with money. I'm just surprised that nobody's done one on NGDP targeting yet.
I'm interested in how property taxes fit into your view of consumption taxes, since real estate is a pretty unique asset class. You mention the trickiness of owner-occupied housing -- I assume your intent is something like, taxing rent as consumption for rented property, and taxing imputed rent for owned property? In this blank-slate thought experiment, would taxes on rents entirely supplant property taxes, or would there still be a role for some kind of real estate tax separate from taxes on rents / imputed rents? Also, should local governments be funded mainly via these taxes (as they are currently), or should local / state / federal governments all use more-or-less the same mix of taxes?
State governments have to worry more about higher income people switching to other states, and hence they tend to rely less on income taxes and more on sales and property taxes. I'm not certain as to the best way of handling the taxation of property, but the current system used by states seems OK to me (except California, which has the wildly unfair prop. 13 system.)
See my restack. Perhaps we could exempt real estate transactions entirely and use a Land Value Tax instead? LVT+VAT would be a powerful combination to efficiency raise revenue for government functions.
That's what I am leaning towards. However, the Tax Avoidance Industrial Complex will fight it tooth and nail. Same reason we probably won't ever get a X% above poverty line flat tax.
>>Why don’t they tell taxpayers “send us a copy of your federal forms and then pay us X% of what >>you paid the IRS”? Are there any states that do that?
Early in my career I worked for the IRS. Perhaps it's changed since then, but at that time most state tax authorities really didn't do their own tax evasion investigations. They just piggybacked on the IRS and relied on them catch the thieves and notify the state agencies that they should take their turn when the IRS was done with them.
1) If you only tax labor income and consumption, you will have to find a solution for the loophole of people incorporating and declaring their corporate income to be returns to capital (taxed at zero), and not returns to labor. The simplest solution in this case is to set the corporate tax rate equal to the highest labor tax rate, but allow for immediate expensing of investments (with the possible exception of land). If investment returns are also taxed at the individual level, then the combined corporate and individual rates should equal the top labor tax rate.
2) A reminder: a flat income tax is economically the same as a flat consumption tax. Progressivity can of course be achieved through other means (e.g. a UBI).
3) A "let's start from scratch" approach can be useful as a benchmark, and yes I agree that a progressive consumption tax is the ideal, but it is more helpful to think about realistic tweaks to the current system. I think it will be difficult to get rid of the taxation of individual investment returns. However, I believe there is a better way to do this, as I discussed here: https://www.taxnotes.com/tax-notes-federal/gains-and-losses/sensible-taxation-investment-returns/2024/04/22/7jfbz
Basically, the idea is that instead of tracking the cost basis of individual investments, we track one number, namely the aggregate cost basis for each individual. How much did someone invest? They can withdraw tax-free up to this amount, but any withdrawals above this are taxed.
When you invest more (e.g. from salary), your cost basis increases. When you withdraw, to consume, it decreases. When you sell a security to buy another one, or receive dividends/interest, this is not a withdrawal, and thus not taxable. When you take out a loan, this does not increase your cost basis, so that if you subsequently withdraw you could be taxed. No more "lock-in" effect. No more tax loss harvesting. Also, no more need for estate taxes: when you die, your cost basis is transferred to your heirs, who will pay taxes when they consume from their inheritance.
Practically speaking:
1) All cash inflows increase your cost basis, except dividends, capital gains, interest received, income from derivatives, new debt incurred, loans to third parties that are paid off, and inheritances.
2) All cash outflows decrease your cost basis, except interest paid, existing debts paid off, new loans to third parties, investments in private businesses.
If we work within the current system, I like the idea of expanding the 401k. End the requirement that money be withdrawn at 73. Raise the amount that people can deposit each year. That moves us closer to a consumption tax. It would also greatly simplify our tax system, as it's my mutual funds outside the 401k account that cause me nightmares.
On your first point, that's more of a problem for a wage tax than for what I'm proposing. Under my proposal, you pay tax on capital income unless you save it.
I see, so when you start your small business, you tax-deduct your investment, but when you take out money (returns) to consume, you are taxed. In Meade report terminology this is an S-based system, I believe. Theoretically fine, but not sure if it is politically feasible.
My understanding of the way the game works is that the very wealthy use margin loans to finance their lifestyle, it is their 'income'. With a $500M portfolio increasing in value at 8%+ per year I can take $2 million a month to live on, index the $2M to inflation annually, and never pay taxes and probably never come remotely close to a margin call. So, why don't we charge capital gains tax on the loans, and credit whatever tax has been paid to the borrower's capital gains tax bill when the stock is actually sold?
"Why don't states just run their taxes as x% of federal taxes?"
I think the simple answer here is that they don't like the structure of the federal regime? In a real sense, a state with a "x% of federal taxes" structure also has an "x% of federal EITC" and "x% of federal mortgage interest deduction" and so forth. "x% of federal marriage penalty/bonus". During the pandemic they would have suddenly had an "x% of federal stimulus checks" policy. That may not have been viable for them.
But this largely doesn't explain why they don't say, "take your federal AGI and apply this rate schedule". You can deal with deductions pretty easily (they're listed on a form, add them back as needed). But do that starting in some year, and then add or tweak a few more programs a decade for a couple decades, pretty quick you've got a whole separate system.
Illinois is a good example. Once it was basically, "Take your federal AGI and apply this rate schedule". But lawmakers couldn't resist adding complications. It was a simple one page form but now much longer.
For some reason it is easier to add lines, pages, schedules, and exceptions to the income tax forms than it is to take them away. Wouldn't a consumption tax also be vulnerable to this process?
In UK we get to pay 20% VAT on lots of things AND income tax. And stamp duty (tax) on buying a house. And inheritance tax if you’ve got anything worth anything. Tax avoidance is national sport.
It makes me start to think about “realization” from a more basic and fundamental level. As in, once capital provides value to you of any kind (i.e. you’re able to borrow against it, or, as in your example, it allows you to eat), it’s now become “real” in a practical sense. At that point, the benefit it provides can likely be taxed — though some benefits would have to be taxed more creatively than others.
Replying to you PS. I think most (but not all!) of the complexities in state tax forms have to do with dealing with income earned outside of the state one lives in.
Beyond that the next thing is that states do not necessarily want the same level of progressiveness as the federal government. So they can't quite just do "X% of what you paid the IRS."
My brother used to live in North Dakota, and between 1981 and 2001 you could just multiply your federal tax liability by a factor that from the link that I will add appears to have ranged from 7.5% to 17%. This not only outsourced progressivity to the federal government, but also definition of income and allowed deductions. https://www.tax.nd.gov/news/tax-legislative-changes/significant-changes-law/individual-income-tax-history
That's awesome! In my dream world states would go even further. The IRS should handle the collection of the money as well and then distribute it to the states on the backend. There's no reason I should have to log into several different state websites every year to pay.
That's the current system in Canada. We have one federal and ten provincial tax systems. The federal government collects the tax on behalf of nine of the provinces, basically based on the federal tax calculation, sometimes with one or two province-specific provisions that don't complicate things/ You fill in one form and send in one set of quarterly tax installments. The federal govenment takes care of the rest.
The tenth province, Quebec, always likes to be different. But the gist of their tax calculation is the same as the federal one. Many Quebec residents have asked for a similar arrangement as in other provinces, but symbolis matters too much/
I think this is the wrong question: "what is the problem with our tax system". There is no perfect taxation system and they all come with the well known avoidance tricks. Certainly our cumbersome tax system is dysfunctional along many dimensions but it seems to me that the right question to ask is how to constrain politicians from increasing the tax burden no matter what system is employed. A progressive tax on consumption is an open door for populist politicians to increase taxes on the wealthy: an interesting thought experiment for someone to model is the unexpected consequences of a 90% marginal rate on consumption! What is needed to stop this march toward fiscal lunacy is a constitutional amendment (with exemptions e.g. for war, pandemics) that forces a balanced federal budget within a small (2-3%) variance and which requires a ⅔ vote to overrule ...
“Collect roughly 10% of GDP with a VAT, possibly with a rebate so that the poor don’t have to pay any taxes on the first $25,000 in consumption. Collect 10% to 12% of GDP with a steeply progressive tax on money flows into consumption.”
Eliminate the word steeply (but keep the word progressive) - or ant least define it better - and I support this 100%!
Fabulous piece.
Question: would money given to charities be considered consumption?
We should be taxing less and growing productivity more. Who are the best capital allocators? The positive externality of growth is Tax revenue. Put capital in the hands of the best capital allocators.
"Why don't" states have a simplified tax scheme? Because tax policy is another source of governmental power, used to provide incentives to change public behavior. It's just another tool, along with various regulations and laws and fees. It's much the reason that the federal tax system is so complex, and it's such a political challenge to do tax reform. Everyone wants the whole system to be simpler ... but then each particular exception is of great value to some narrow special interest.
And there are more benefits to this approach. A progressive consumption tax could (and should) go negative on the low end, eliminating the need for all of the distortive and complex subsidies that litter our welfare state (like Section 8 housing), and also could (and should) go above 100% on the high end, so billionaires burning millions of dollars of resources on vanity space trips could do a little more to help others. A progressive consumption tax is a simple and efficient way to bend the consumption curve into a more socially desirable shape without creating perverse incentives and with a minimum reduction in productivity. Our productive billionaires can continue their work unimpeded while the consumptive ones can start paying their fair share.
I agree. But again, there are challenges in differentiating between consumption and investment. Thus a college education is a sort of investment in human capital, but many elite colleges provide a lavish consumption package to go along with it. Even vanity space travel will be claimed as "investment." But we shouldn't make the perfect be the enemy of the good, as income taxes also face these same dilemmas. As an aside for readers freaked out by your "above 100%" comment, rates are calculated differently in the two cases. Imagine 60% income tax imposed on an income of one million dollars. The guy pays $600,000 in taxes and consumes $400,000. That's a 150% tax on consumption, but more like a 60% tax on pre-tax income.
I think this is what you're getting at, but at his previous site, I think I remember Scott used the example of a Warren Buffett type person who saved 99.9% of their vast income, and a profligate trust fund kid who spend all his (lesser) "income" on yachts and cocaine and hookers. He pointed out that an income tax will take much more from WB than TFK, and since we all accept that "to tax is destroy/disincentivize" then we should highly prefer a world where WB pays less taxes, (as his money is going to socially beneficial things like investment, charity or price deflation) and TFK pays more (since his spending is going to consumption, that reduces the amount of, uh, yachts, cocaine and hookers that the rest of us can consume).
Yes, what you describe is pretty much exactly what I hope to accomplish: a tax regime where taxpayers contribute based on the value they are extracting from society, which is their consumption, instead of based on the value of what they are contributing to society, which is their income. I would be happy if TFK paid significantly more tax than WB, assuming TFK is consuming a lot more than WB, regardless of their incomes, and regardless of the nature of that consumption.
As one of your long-time readers who hasn't commented in a while, congrats on moving to a more reader-friendly platform like Substack! As always, you're at the forefront of innovative economic policies. I see an economy with a consumption-only tax as a rare policy that could achieve both efficiency and equity. In my view, the biggest gain might come from eliminating capital gains taxes, which are essentially a transaction cost. Overnight, spreads in all markets would narrow as market makers face lower costs, and the resulting efficiency would allow arbitrageurs to restore prices to equilibrium more quickly and tightly. This more efficient market would lead to faster resource allocation changes when shocks occur, increasing economic dynamism.
Another contrarian benefit of a consumption-tax-only economy could be the alignment of incentives for long-term investment. With no capital gains tax, investors would be more inclined to hold onto investments longer, reducing speculative short-term trading, and promoting a focus on sustainable growth and innovation.
Additionally, such a policy would significantly downsize the cottage industry of tax advisors, IRS staff, and other compliance-related sectors due to the simplification and elimination of numerous tax categories. This streamlining would reduce administrative costs and burdens, freeing up resources that could be better allocated toward more productive activities in the economy.
With Elon Musk potentially being tapped for streamlining government bodies, his voice could be key in promoting this idea. do you plan to develop this further in subsequent posts? Cato Institute or the Mercatus Centre could also promote it.
The transaction cost issue is a good point. I actually wrote an essay advocating a consumption tax for a think tank, but they've been sitting on it for a year. I need to nudge them. The Elon Musk comment raises some tricky issues about the transition. What to do with assets bought under the previous system? You might need a gradual transition, or people would claim he's trying to avoid taxes on his huge Tesla gain.
Think tanks move heaven and earth on things that they can sell. I've always felt that big changes like NGDP targeting and consumption only tax can be better communicated with a good short film. An essay can be the foundation for a script, and a producer with money. I'm just surprised that nobody's done one on NGDP targeting yet.
Agreed on a gradual transition.
I'm interested in how property taxes fit into your view of consumption taxes, since real estate is a pretty unique asset class. You mention the trickiness of owner-occupied housing -- I assume your intent is something like, taxing rent as consumption for rented property, and taxing imputed rent for owned property? In this blank-slate thought experiment, would taxes on rents entirely supplant property taxes, or would there still be a role for some kind of real estate tax separate from taxes on rents / imputed rents? Also, should local governments be funded mainly via these taxes (as they are currently), or should local / state / federal governments all use more-or-less the same mix of taxes?
State governments have to worry more about higher income people switching to other states, and hence they tend to rely less on income taxes and more on sales and property taxes. I'm not certain as to the best way of handling the taxation of property, but the current system used by states seems OK to me (except California, which has the wildly unfair prop. 13 system.)
See my restack. Perhaps we could exempt real estate transactions entirely and use a Land Value Tax instead? LVT+VAT would be a powerful combination to efficiency raise revenue for government functions.
states switching to a land value tax while the federal government runs on a progressive consumption tax seems like a winning combo to me.
Excellent post. Would it be sensible to replace the federal business income tax with a gross sales tax? Thanks.
That's what I am leaning towards. However, the Tax Avoidance Industrial Complex will fight it tooth and nail. Same reason we probably won't ever get a X% above poverty line flat tax.
>>Why don’t they tell taxpayers “send us a copy of your federal forms and then pay us X% of what >>you paid the IRS”? Are there any states that do that?
Early in my career I worked for the IRS. Perhaps it's changed since then, but at that time most state tax authorities really didn't do their own tax evasion investigations. They just piggybacked on the IRS and relied on them catch the thieves and notify the state agencies that they should take their turn when the IRS was done with them.
A couple of points:
1) If you only tax labor income and consumption, you will have to find a solution for the loophole of people incorporating and declaring their corporate income to be returns to capital (taxed at zero), and not returns to labor. The simplest solution in this case is to set the corporate tax rate equal to the highest labor tax rate, but allow for immediate expensing of investments (with the possible exception of land). If investment returns are also taxed at the individual level, then the combined corporate and individual rates should equal the top labor tax rate.
2) A reminder: a flat income tax is economically the same as a flat consumption tax. Progressivity can of course be achieved through other means (e.g. a UBI).
3) A "let's start from scratch" approach can be useful as a benchmark, and yes I agree that a progressive consumption tax is the ideal, but it is more helpful to think about realistic tweaks to the current system. I think it will be difficult to get rid of the taxation of individual investment returns. However, I believe there is a better way to do this, as I discussed here: https://www.taxnotes.com/tax-notes-federal/gains-and-losses/sensible-taxation-investment-returns/2024/04/22/7jfbz
Basically, the idea is that instead of tracking the cost basis of individual investments, we track one number, namely the aggregate cost basis for each individual. How much did someone invest? They can withdraw tax-free up to this amount, but any withdrawals above this are taxed.
When you invest more (e.g. from salary), your cost basis increases. When you withdraw, to consume, it decreases. When you sell a security to buy another one, or receive dividends/interest, this is not a withdrawal, and thus not taxable. When you take out a loan, this does not increase your cost basis, so that if you subsequently withdraw you could be taxed. No more "lock-in" effect. No more tax loss harvesting. Also, no more need for estate taxes: when you die, your cost basis is transferred to your heirs, who will pay taxes when they consume from their inheritance.
Practically speaking:
1) All cash inflows increase your cost basis, except dividends, capital gains, interest received, income from derivatives, new debt incurred, loans to third parties that are paid off, and inheritances.
2) All cash outflows decrease your cost basis, except interest paid, existing debts paid off, new loans to third parties, investments in private businesses.
If we work within the current system, I like the idea of expanding the 401k. End the requirement that money be withdrawn at 73. Raise the amount that people can deposit each year. That moves us closer to a consumption tax. It would also greatly simplify our tax system, as it's my mutual funds outside the 401k account that cause me nightmares.
On your first point, that's more of a problem for a wage tax than for what I'm proposing. Under my proposal, you pay tax on capital income unless you save it.
I see, so when you start your small business, you tax-deduct your investment, but when you take out money (returns) to consume, you are taxed. In Meade report terminology this is an S-based system, I believe. Theoretically fine, but not sure if it is politically feasible.
My understanding of the way the game works is that the very wealthy use margin loans to finance their lifestyle, it is their 'income'. With a $500M portfolio increasing in value at 8%+ per year I can take $2 million a month to live on, index the $2M to inflation annually, and never pay taxes and probably never come remotely close to a margin call. So, why don't we charge capital gains tax on the loans, and credit whatever tax has been paid to the borrower's capital gains tax bill when the stock is actually sold?
Yes, under my proposal any amount borrowed would be treated as taxable consumption, unless re-invested.
"Why don't states just run their taxes as x% of federal taxes?"
I think the simple answer here is that they don't like the structure of the federal regime? In a real sense, a state with a "x% of federal taxes" structure also has an "x% of federal EITC" and "x% of federal mortgage interest deduction" and so forth. "x% of federal marriage penalty/bonus". During the pandemic they would have suddenly had an "x% of federal stimulus checks" policy. That may not have been viable for them.
But this largely doesn't explain why they don't say, "take your federal AGI and apply this rate schedule". You can deal with deductions pretty easily (they're listed on a form, add them back as needed). But do that starting in some year, and then add or tweak a few more programs a decade for a couple decades, pretty quick you've got a whole separate system.
Yes, that sounds better than what I proposed.
Illinois is a good example. Once it was basically, "Take your federal AGI and apply this rate schedule". But lawmakers couldn't resist adding complications. It was a simple one page form but now much longer.
For some reason it is easier to add lines, pages, schedules, and exceptions to the income tax forms than it is to take them away. Wouldn't a consumption tax also be vulnerable to this process?
In UK we get to pay 20% VAT on lots of things AND income tax. And stamp duty (tax) on buying a house. And inheritance tax if you’ve got anything worth anything. Tax avoidance is national sport.
Oh. And national insurance (health) forgot that one.
[Totally separate from my other comment] I really like your general principle of erring towards categorizing as consumption. It reminds of the first I heard of a tax on borrowing, from this interview: https://www.forbes.com/sites/taxnotes/2024/02/27/taxing-billionaire-borrowing-a-new-kind-of-wealth-tax/.
It makes me start to think about “realization” from a more basic and fundamental level. As in, once capital provides value to you of any kind (i.e. you’re able to borrow against it, or, as in your example, it allows you to eat), it’s now become “real” in a practical sense. At that point, the benefit it provides can likely be taxed — though some benefits would have to be taxed more creatively than others.
Replying to you PS. I think most (but not all!) of the complexities in state tax forms have to do with dealing with income earned outside of the state one lives in.
Beyond that the next thing is that states do not necessarily want the same level of progressiveness as the federal government. So they can't quite just do "X% of what you paid the IRS."
Thanks. Both of those comments make a lot of sense.
Those states could just apply their own tax schedule to the Federal AGI.
Most state tax forms do this.
My brother used to live in North Dakota, and between 1981 and 2001 you could just multiply your federal tax liability by a factor that from the link that I will add appears to have ranged from 7.5% to 17%. This not only outsourced progressivity to the federal government, but also definition of income and allowed deductions. https://www.tax.nd.gov/news/tax-legislative-changes/significant-changes-law/individual-income-tax-history
That's awesome! In my dream world states would go even further. The IRS should handle the collection of the money as well and then distribute it to the states on the backend. There's no reason I should have to log into several different state websites every year to pay.
That's the current system in Canada. We have one federal and ten provincial tax systems. The federal government collects the tax on behalf of nine of the provinces, basically based on the federal tax calculation, sometimes with one or two province-specific provisions that don't complicate things/ You fill in one form and send in one set of quarterly tax installments. The federal govenment takes care of the rest.
The tenth province, Quebec, always likes to be different. But the gist of their tax calculation is the same as the federal one. Many Quebec residents have asked for a similar arrangement as in other provinces, but symbolis matters too much/
There's a lot of things I like about Canada. But I suppose if I lived there I'd find plenty to complain about.
I think this is the wrong question: "what is the problem with our tax system". There is no perfect taxation system and they all come with the well known avoidance tricks. Certainly our cumbersome tax system is dysfunctional along many dimensions but it seems to me that the right question to ask is how to constrain politicians from increasing the tax burden no matter what system is employed. A progressive tax on consumption is an open door for populist politicians to increase taxes on the wealthy: an interesting thought experiment for someone to model is the unexpected consequences of a 90% marginal rate on consumption! What is needed to stop this march toward fiscal lunacy is a constitutional amendment (with exemptions e.g. for war, pandemics) that forces a balanced federal budget within a small (2-3%) variance and which requires a ⅔ vote to overrule ...
I find the comments on Substack tend to be mostly good value. Also, I get way more engagement on Substack Notes than I do on X/Twitter.
Sometimes, I hit a nerve, and that can be fun too. For instance, https://www.lorenzofromoz.net/p/the-latin-americanisation-of-the
“Collect roughly 10% of GDP with a VAT, possibly with a rebate so that the poor don’t have to pay any taxes on the first $25,000 in consumption. Collect 10% to 12% of GDP with a steeply progressive tax on money flows into consumption.”
Eliminate the word steeply (but keep the word progressive) - or ant least define it better - and I support this 100%!
Fabulous piece.
Question: would money given to charities be considered consumption?
Given to universities?
We should be taxing less and growing productivity more. Who are the best capital allocators? The positive externality of growth is Tax revenue. Put capital in the hands of the best capital allocators.