OK smarty pants, you say, you’ve been whining about economic inequality, and you’ve tossed out some ideas on Social Security and tax shelters, but let’s see you solve the whole freakin’ problem. OK, if you insist.
For purposes of our discussion, you’ll need to refer to the accompanying chart. Before we get to the specifics of the proposal, let’s consider some interesting facts. With total US consumer spending closing in on $13 trillion dollars and a U.S. population of around 308 million, that gives us an average annual spend of about $41,500 per person. Yet, according to the US Census Bureau, the median US household income is only $50,221 – and that household consists of 2.6 persons, giving us a median per person income of $19,315. Which means our “average” spender is spending more than twice what the average Joe actually earns.
That tells us one thing – somebody is really pulling the average up. The only explanation? People that have more money spend more money – and when they have a lot more money, they spend a lot more money. Hey, I got no problem with that. What’s the point of having a little extra scratch if you don’t get yourself something nice now and then?
Since I’m throwing all these spending numbers at you, you’ve probably figured out I’m a consumption tax fan. And I can hear you progressives out there wetting your drawers from here. “No!” you are shouting. “Sales taxes are regressive! You want to soak the poor!” Well, they certainly CAN be regressive, which is why I’d make a few adjustments.
Based on my chart, you might jump to the conclusion that I want to exempt certain categories of consumer spending from being taxed – namely, housing, medical and food. Not exactly. I do want to take that amount out of the equation, but among the numerous problems with our current tax code are its complexity, its use as a social engineering tool, and its constant manipulation by every jackwad in either party running for any office anywhere in transparently cyncial attempts to buy votes either by offering to lower your taxes or by threatening to raise them on “the rich” – the rich being variously defined, usually as anybody above the financial demographic currently being addressed. By offering credits, deductions, exemptions and preferences for everything from home mortgage interest to investments to education to child and elder care expenses, the government uses the tax code to try to influence behavior, which makes the tax code more complicated and puts the government in the position of deciding what we should or should not spend our money on.
I think we should use the tax code to do one thing – to raise the revenue we need, in an equitable manner, to run the government. Period. If politicians want to encourage or subsidize particular behaviors or economic activities, let them do it out in the open, with policy proposals that have actual price tags that the government cuts actual checks for. Let the discussion be this: We, as a nation, have X number of dollars this year. Here’s what’s already spoken for given our existing programs. Here’s what I’d like to do. It’ll cost Y. Now, given that, as a nation, we are already spending more than we take in, the plain fact is that Y has got to come out of some existing program somewhere else. So spell out which one. Instead, politicians currently throw our spending ideas on one side, and then play smoke-and-mirrors tax games on the revenue side, which too often lets them spend their cake and eat it too.
I digress. Back to a consumption tax. As shown in the chart, it would take a national consumption tax rate of about 7 percent of all consumer spending to replace federal revenues from individual taxes. If we take out spending on housing, food and medical costs, it would take a rate of 9.25 percent. Applying either of those two rates across the board would be horribly regressive. But exempting certain categories of expenses from taxation would get us back into the same social engineering boat I want to get out of. Pretty soon, you’d have politicians of every stripe fighting to have their pet interest excluded from consumption taxes, and, after a few election cycles, you’d end up with a tax system just as convoluted (and probably tilted just as far in favor of those who can afford lobbyists and legislators) as the one we have now.
Instead, I say we do this. Everybody needs a certain amount of money just to live on – you gotta eat, you gotta have shelter and you gotta take care of your health. So we back the total consumer spend on those items out and tally it up. Right now, the total for those categories comes to about $3.1 trillion, which, divided by a current US population of 308 million, comes out to $10,150 a piece. That gives us enough dough to do this – each household gets a sales tax exemption equal to the the annual US poverty level for the number of persons in it. At the beginning of the year, each household is issued a “pre-fund” equal to that amount, which offsets consumption tax that household would pay on the basic necessities of life. That amount wouldn’t come out to $10,150 per person. It would come out to around half that. The balance of that $10,150 per person goes, in the near term, directly to paying down our current deficit at a rate of about $1.5 trillion per year, so that won’t take long. Once that’s done, we can adjust the 9.25 rate down accordingly.
So, if you are our median US household of 2.6, which I’m rounding up to three, because .6 of a person is, well, messy, then you have a household income of $57,945 and a sales tax exemption of $18,310. Even if your household spends every single cent you make, you’d have a total annual tax bill of $3666 (after your pre-fund), which comes out to 6.32 percent of your income – hardly regressive. Now, suppose you are in the household of our hypothetical “average” spender, and you, too, are spending every cent of your household income. Three people again, but with $41,500 in income each for a household total of $124,500. Subtract the exemption of $18,310, and you’ve got a tax rate of 7.89 percent.
Seems like magic, doesn’t it? Theoretically, the current lowest tax bracket is 10 percent, and the highest is 35 percent, so how can a consumption tax rate lower than our lowest current bracket replace all that revenue? The problem is, given all the bullshit built into the tax code, people don’t pay the rates the brackets associated with their incomes indicate.
And incomes really only matter a whole lot to the poor, the middle class and the upper-middle class. Once you get (or after you are born) rich, that whole weekly paycheck thing gets a little trivial. The super-duper rich may pay taxes on their incomes, and some capital gains here and there on whatever they happen to sell that year, but most of their wealth is hidden away inside trust documents or other instruments, growing and making them wealthier by the day.
Consider an example. Suppose, for the previous tax year, you’re a fabulously wealthy re-married widow who inherited a fortune upon your first husband’s death – a fortune somewhere between $1 and $2 billion. What sort of taxes do you suppose you’d pay on the income that fortune generates? If you’re Ms. Heinz Kerry back in the year her husband was running for President, you’d pay $750,000 on $5.1 million in claimed income. First of all, that works out to a tax rate, even on the claimed $5.1 million, of only 14.7 percent – no where close to the top bracket of 35 percent. And second, only $5.1 million? Really? Only $5.1 million in income on a fortune that, at the most conservative estimates, amounts to more than $1 billion? That’s a return of 0.05 percent on her billion dollars, when most wealthy persons manage consistent returns of at least 10 percent.
Of course, she likely is realizing such returns, too. It’s just she can use any variety of trusts to shield virtually all of her income from taxes until she decides to spend it. Meaning what? Meaning that behind the walls of her trust documents, Ms. Heinz Kerry likely earned something like $100 million (or, if her fortune really is $2 billion, $200 million) and paid, best case, 5 percent of that in taxes. If she paid the marginal rate that a wage earner would have to on that amount, she’d pay better than $28 million in taxes.
That’s how a 9.25 percent consumption tax makes up the money. It doesn’t matter where your money comes from. When you spend it, you get taxed on it. In a way, it puts us all in the same boat that the wealthy have always been in so far as capital gains taxes go. They could hold assets that continually boost their wealth (often borrowing against them to create “income” as they need it, but income on which they pay no tax), only finally paying tax, but at the lower capital gains rates, when they finally sell the assets. Under a consmption tax regeime, you would have your income – or whatever money you get your mitts on — and you wouldn’t pay taxes until you want to buy something.
Of course, some of us would have less choice about that than others. If you’re just scrapping by, it’s not like you can decide you aren’t spending money this month, but hey, I don’t think it’s the job of a tax program – or a government – to make everybody equally wealthy and equally happy. It’s always going to be better to be rich than to be poor. It’s the job of a government to collect revenue fairly and spend it appropriately. This tax proposal takes care of half that problem. The other half? Oy.
In a nutshell, here is why a consumption tax works and why it’s fair. If the wealthy want to enjoy the fruits of their labor (or their inheritance), they have to spend it. And every time they do, Uncle Sam will get his cut. And it’s equal – everybody get’s the same pre-fund. For the poorest in our society, that pre-fund would likely exceed their current income, thus exempting them from taxes entirely. For those just squeaking by, it would eliminate most taxes. For the rest of us, the pre-fund would cover basic needs. What we spend beyond that is up to each of us.
And I’m not judging anybody. Hell, I’ve got a nice house in a nice neighborhood – and the 9.25 percent I’d pay on the principal and interest on my mortgage (the consumer spending portion of my housing expenses – you wouldn’t have to pay a consumption tax on your real estate taxes) would probably eat up most, if not all, of my pre-bate. My choice.
One final thing. If I were king, all of this would be written into a constitutional amendment – which means we would effectively take away all the politicians’ favorite toy. No more running on some tax-the-rich or Uncle-Sam-is-robbing-us-blind platform instead of actually proposing policy ideas based on the money we’ve got and the issues we face and what we’d have to spend to address them. Politicians would have to earn votes with ideas instead of trying to buy them with tax schemes. Imagine that.
I’ve seen proposals to replace the income tax with a consumption tax, and they usually end up with a much higher consumer tax rate. I don’t see why that’s necessary. Maybe they exempt things like housing, food and medical care entirely. Then, if you’re rich and you buy a $10 million home, you wouldn’t pay a cent of tax on that luxury even though your housing expenses would cover the needs of a few thousand regular families. If you spend ten or twenty times as much on food as someone just scrapping by because you’re dining on organic arugula and range-free filet mignon every night instead of a box of spaghetti and a jar of Ragu, you wouldn’t pay a cent of tax on that luxury. I suspect that’s the problem. And that’s not equal. That’s just bullshit.