It is Tax Day again in America and some people left their returns to the last minute (as you can see on this photo, which I took in Los Angeles yesterday.) So I’ll take this occasion to muse about the relationship between America’s tax system and freedom.
One year ago today, I offered some “tax day thoughts on complexity in American life.” The gist of that post was that the complexity of America’s tax system, not the rate of taxation, is what harms freedom in this country. Contrary to what you might think if you go to Tea Party rallies, we are not overtaxed, we are badly taxed.
But I did not offer a better — meaning simpler — alternative system. In this post, which I expect to be controversial, I want to do that. (As always, keep in mind that the views expressed on The Hannibal Blog are mine alone, not necessarily those of The Economist.)
There are many proposals out there for a simpler and more efficient tax system: A flat tax, value-added tax, et cetera. I won’t review them all, but instead pick the proposal that I consider simplest, cleanest and boldest.
The Idea
It is the so-called FairTax Plan.
Part of its strength (ie, simplicity) is that I can describe the entirety of America’s proposed tax code in a few short lines:
- America’s existing income and other taxes would be abolished. (Not cut, but eliminated!)
- The IRS and America’s other organs of proto-authoritarian oppression would also be abolished.
- Instead, all Americans would pay a national sales tax, as most Americans already pay state or local sales taxes.
- In addition, all Americans would get a prebate — ie, at the beginning of each year, everybody gets a check.
And that’s it!
The drafters of the proposal think that the rate of this new national sales tax needs to be about 23% to provide the same revenues that we now get from the income tax. It might be 28% or 19%. I’m not the least bit interested in that.
The idea is that we raise as much money as we would otherwise raise through an income tax. As it happens, we would need to collect quite a bit less than we currently do, because we would no longer incur the enormous costs of the IRS bureaucracy, auditors and accountants!
Now for the discussion of the advantages and alleged disadvantages of this new tax system:
Advantages
I think the advantages are self-explanatory:
- You would keep your whole pay check. Ie, your take-home pay would spike right away.
- You would not have to file a tax return.
- No more record-keeping! You no longer maintain mountains of paper for wages, the cost basis of your investments, mortgage deductions, childcare and nannies, et cetera et cetera.
- IRAs, 401(k)s, Roth IRAs, Keoghs…..: You can throw them all into the trash, because all your investments are by definition untaxed.
- Thanks to your annual prebate (which gives you a certain amount of subsequent sales tax “back”), a portion of your consumption is untaxed, too.
- But beyond that, all your consumption is taxed, thus making you think twice about frivolous and unnecessary consumption, which reduces your carbon footprint and clutter.
- Whenever you do consume (either goods or services), you can see the tax you pay on the receipt, in the clearest and simplest manner possible.
- All this amounts to: transparency (replacing opacity) and freedom (replacing anxiety and bureaucracy).
Criticism
There is only one major criticism of this sales tax, but it is a big one, so I want to concentrate on it.
The disadvantage is that this sales tax, like any consumption tax, at first glance appears to be regressive.
In the current system, rich people pay not only absolutely but relatively more of their income than poor people. (There is a reason why I italicized that phrase. Keep reading.) In the new system, poor people (who might need to spend, rather than save, all their income) would seem to pay relatively more of their income than rich people.
And this seems unfair.
Rebuttal
I’ve pondered this for some time. As you may remember, I am a liberal, correctly defined (ie, libertarian but not loony). And I do worry about inequality, which is inevitable in a free society to some extent but in excess (ie, in America) harms freedom.
Part I
My first response to the above criticism is that our current income tax (ie, that which the FairTax proposes to replace) is not fair either!
Warren Buffett has famously explained how he, as a mega-rich investor who does no “tax planning”, pays a lower tax rate than his secretary, who lives off her meager pay check.
Fairness, it turns out, is not about progressive tax brackets. If you have progressive brackets but exceptions to everything (= “complexity”) you get not fair but unpredictable and arbitrary taxation.
So if you do care about fairness, first join me in stipulating that our current system must go.
Part II
My second response is to ask you to re-examine, as Socrates might, what wealth is.
Is it:
- to have vast stores of potential spending power (ie, paper statements of bank balances that produce income)?
- or to consume vast amounts of resources, human and natural, with your own or others’ (borrowed) wealth?
Our current conventional wisdom says 1. So if income is the definition of wealth, then a consumption tax is regressive.
I propose that the correct definition is 2. So if consumption is the definition of wealth (as it used to be for almost all of human history), then a consumption tax is fair.
Example: Croesus and Diogenes
Let me illustrate that point playfully by reviving two characters who have previously featured on The Hannibal Blog:
- Croesus, the ancient king of Lydia who gave us the phrase “rich as Croesus”, and
- Diogenes, the Greek cynic who chose to live in a barrel (and who is a hero of mine).
Let us assume that Croesus and Diogenes are equally rich in our Number 1) definition: Both get huge amounts of income from assets (Croesus from tribute, Diogenes from the equivalent of a trust fund set up by his benefactor, a wealthy Athenian).
Now let’s think about how the FairTax would treat these two rich guys:
Both Croesus and Diogenes would start every year by getting their prebate check. Their basic cost of living, their subsistence, is thereby pre-paid.
Diogenes can buy the few things he needs (dog food, loin cloth, etc) and his prebate covers the sales tax on these items. He pays no net tax at all, in other words.
(Meanwhile, he has millions in his bank account, sitting idle for him, but being lent out to other Athenians to grow the economy.)
Croesus is different. He sneers at his prebate check, which barely covers the sales tax on a single slave, and spends it in a day. Then he keeps spending: Gold, silver, jewels, women, palaces, feasts, galleys, ….
He consumes immoderately and to the detriment of his planet. But he is free to do so (freedom is one of our goals), and nobody even looks askance at him. However, each time he spends, he pays tax, and he knows exactly how much (transparency and simplicity are our other goals).
The years go by, and Diogenes donates his potential (= hypothetical) wealth to an anonymous Athenian. His wealth has been helping the economy all these years, because it was being lent to entrepreneurs. But now the Athenian recipient spends the wealth. And as he does so, he pays tax.
The taxes on Diogenes’ money were therefore only delayed, until such time as his wealth turned from potential into actual consumption. The taxes on Croesus’ money were immediate, because he chose to spend.
Every single dollar in the economy is therefore taxed, but only when it becomes consumption.
At a very fundamental level, this is how it ought to be. We should not calculate equality based on income but on consumption. If I have more than you but live more modestly than you, I should not pay more than you. This is the mental switch I ask you to attempt.
I believe it is fair that Croesus pays lots of taxes all along, but that Diogenes, who never consumes much, does not.
Effect on politics
A final thought about what the FairTax would do to our political discourse and climate.
Our current tax system is as complex as it is because it is the tote bag for our politicians: Any weird political give-away — to owners of gold mines or race horese, homeowners or Prius drivers…. — gets dressed up in Congress as a “tax break” and stuffed into the code. Each time that happens, society as a whole loses, but nobody notices because, well, the tote bag is too messy to see any individual item in it.
Complexity, in short, is the tool politicians and lobbies use to hide things from our attention.
If we switch to the FairTax, the tote bag is dumped and replaced by two and only two numbers:
- rate of sales tax, and
- the amount of the prebate check
Every American could understand this system and therefore participate in our debates about government, funding and fairness.
Should more people be exempt from all taxation? Fine, raise the prebate amount.
Is government too big? Fine, cut the sales-tax rate.
But what what if we still want to help particular groups of people? Earthquake victims or people whose homes are being foreclosed, for example.
Today, we would stuff more gibberish into our tote bag and nobody would notice the cost.
Under the FairTax, we could still help these people, but we would no longer do it through the tax code. We would pay these groups actual cash.
This, of course, would be transparent and easy to measure. Once again, we could all debate whether home owners in foreclosure actually deserve this cash (perhaps not) or whether earthquake victims do (probably).
We would understand what’s going on in our country as well as in our own finances, and understanding is the beginning of freedom.
A shocking thought, isn’t it?
Hannibal and Me: life lessons from history 
but if we do this fair tax thing, what will there be left for us to complain about? in high school, we had our parents’ rules. in college, it was cafeteria food. what’s our default complaint going to be now?
This is admittedly a big problem with my proposal, jamesbrett. I suspect that after a period of transitional trauma we will deploy our (now newly idle) creative energies to find something new to complain about. Verizon phone menu trees, perhaps. Or Empire Bluecross claim forms. I’ll have to think about it.
Would stuff like rent, utilities, and health insurance be taxed as well? In other words, everything we spend money on?
OK, I didn’t check the actual FairTax proposal, so I’ll just answer you how I myself would reason through this:
Rent and utilities, yes. With health insurance, it would depend on whether we consider it a government service (and thus to be financed with the sales tax) or a private service. Thus, if Britain or Canada were to switch to the sales tax, they would continue to have free healthcare, but it would now be funded (more efficiently) with a sales tax.
Since we are treating tax reform separately from healthcare reform here, I therefore guess that Americans on Medicare or Medicaid would continue to get free care. Those buying private insurance would continue to get that.
Notice immediately that ALL Americans with private insurance (ie not just employed ones) would now pay premiums out of gross rather than net earnings (since the two are the same). Notice also that neither the insurance company nor the company’s shareholders would pay income tax anymore. So premiums might drop a bit, but then have a sales tax added back on top.
Clear as mud?
Sounds good. A snowball’s chance in hell that such a proposal will ever be implemented—IRS abolished and the whole nine yards—or are we just gathering wool here?
Love the wool-gathering idiom (even though you mix it with a snowball/hell image).
Could you define “gather wool” for me? I want to get the nuance right when I plagiarize you.
Oops—did I meataphorsmix?
to woolgather = to engage in fanciful daydreaming
I meant metaphor. (meataphor = to carry meat)
I love the idea of a consumption tax (and your proper definition of liberal) but I think we would need to have lower/no tax for certain things like rent or schooling. Most of our tax money already comes from the richest part of the country and I’m skeptical that only taxing the small part of that money that they spend each year wouldn’t leave us at a huge deficit. As someone who spends virtually his entire salary on rent and food, I woudlnt support this unless I was really shown that my taxes wouldn’t rise much.
Well, as i see it, there are two ways to go:
1) Yes, we can start exempting certain things, such as rent or food. But before you know it, we would again have a “tote bag”, ie the oxymoronic exception for everything.
2) We keep it simple (that’s the main idea, after all) and apply the sales tax to everything. In the case of rent: Notice that the landlord no longer pays income tax (!), you don’t pay income tax, and above all that you as tenant (like everybody else) get a prebate. So the sales tax on your rent and food might well be covered with the prebate.
Regarding education: Public education would still be a government service, ie something to be funded (more efficiently) with the new sales tax and free of charge. Private education is more tricky. We could again agree as a society to exempt all education, or we could….
3) resort to what I discussed at the end of my blog post: A clean, open and transparent CASH subsidy for education. Instinctively, you were hoping to jam this into the “tote bag” of our tax system (because that’s what we’re used to doing), but I’m saying let’s have a clean and simple tax mechanism, and then decide openly as a democracy to whom to redistribute that money.
So the sales tax on your rent and food might well be covered with the prebate.
But in your post you wrote that the basic cost of living—not just the tax on it—would be covered with the prebate:
Both Croesus and Diogenes would start every year by getting their prebate check. Their basic cost of living, their subsistence, is thereby pre-paid.
So what’s the deal with the prebate? And everybody gets the exact same amount?
Sorry, I wasn’t clear.
1) Yes, everybody (Croesus AND you) gets the same prebate.
2) The TAX on the basic cost of living is covered, not the cost itself (the actual cost of living is not covered NOW either). So you get the prebate and you have money. Then you buy things. As you do that, youi pay tax. But the tax you pay as you spend has to exceed the prebate amount for you to pay “net tax”.
A brilliant proposal, and eloquently argued. Are you by chance testing the waters to run for president as an independent in 2012?
My attention was drawn to the 23% consumption tax as you envisage it. We in Canada have a Federal consumption tax on goods and services, but it’s only 5%. However, food, financial services (because they are so international) and goods for export, are not taxed.
Canada’s GST (Federal consumption tax) comes to approximately 10% of the total Federal tax intake. Were Canada to abolish the Federal income tax, the GST rate would go to at least 40%. If everything was taxed, this percentage would be lower, but it would still be at least 30%, and probably higher.
Since Canada’s Federal system of governance is similar to the US’s, I suggest that your 23% number is too low. It would more likely be between 30% and 35% assuming current levels of consumption. If consumption dropped as result of your proposed tax system, this percentage tax rate would be higher still.
I can’t debate you in your comparison with Canada because I just don’t know the numbers.
But let me re-focus your attention on what I consider the salient point here:
The goal is to have the SAME level of government service as before (whether we should shrink government is a good but separate debate).
So we can take the same amount one way or the other way. Even if the sales tax would be at 35%, your income would go up by the same amount (not rate).
Better yet: We can have the same level of funding by collecting LESS in sales tax than we collected in income tax because we would no longer spend so much money on the IRS, audits and accountants. (All those people would actually become productive to society). So (I am making this up), if it costs us $1 in bureaucracy today to collect $4 from you through the income tax, we can simple collect $3 from you in sales tax and leave you free and unbothered to boot.
Oh, by the way, Phil: I tried to leave comments on your Blogspot (as opposed to your WordPress) blog, but, as often before, got booted out. Blogger makes me jump through so many steps and then drops me that I get quite frustrated.
If you hit the “Name/URL” button, leaving a comment is as easy on Blogspot as on WordPress. Just write your comment, then type in your name in the box shown, hit the “publish” button, and Bob’s your uncle.
Phil originally raised a number of the points in his current posts here, which were responded to:
http://thecriticaline.wordpress.com/2010/04/08/courage/
Perhaps wealth is the reward for goods and services in a free market.
If so, then money is a deferred reward.
To tax the spending of money is thus to inhibit the free market.
I do not say whether to curtail the free market is right or wrong, but ask whether to do so is your intention.
I’m certainly not curtailing the free market here. I believe I am enhancing it.
But you are correct in your definition of wealth. Money is indeed a deferred reward.
An analogy from our present tax system: You would never propose taxing somebody on the UNREALIZED gain on his shares, would you? You wait till he sells the shares, then you tax the gain.
Well, why should we tax people on “unrealized wealth”?
At one time we had Capital Gains Tax on death in the UK in addition to death duties. It still applies on gifts.
Perhaps “curtail” is the wrong word. Taxing spending will distort the market in ways it’s difficult to foresee. You yourself differentiate between spending by the rich and spending by the poor. Such tax could be the least harmful, though.
“…….America’s existing income and other taxes would be abolished………”
If you are implying that your proposed tax would replace all state taxes, wouldn’t the individual states regard this as a Federal takeover of an important state power?
“………The IRS and America’s other organs of proto-authoritarian oppression would also be abolished……..”
Since businesses would collect the tax and remit it to the Federal government, are you implying that there would be no government oversight on whether businesses were remitting this tax?
“…….we would need to collect quite a bit less than we currently do, because we would no longer incur the enormous costs of the IRS bureaucracy………”
Last time I checked, direct and indirect defense spending was taking up 50% of the US federal budget. Isn’t this a tad high? Somehow, I doubt that the costs of IRS bureaucracy come even close to those for defense.
“………all your consumption is taxed, thus making you think twice about frivolous and unnecessary consumption………..”
I surmise that only a behavioural psychologist (no, not Satoshi Kanazawa) would know how people would react in their spending habits to your proposed tax system. Logically, it would have no effect. But, psychologically it just might.
If it caused people to consume less, it would almost certainly bring about a severe economic recession, if not a depression, because these are caused by a lack of demand for available goods and services, as was graphically shown in the months after the recent financial crisis.
I forgot to mention in my last comment, that a large consumption tax charge on the types of services that could be delivered to Americans from beyond America’s borders, could encourage such service suppliers to move their businesses across the border into, say, Canada, from where they needn’t charge their American customers your proposed tax.
I’m thinking of the growing numbers of services that can now be supplied over the internet.
1) The states could piggy back on the national sales tax or have their own (which most already do).
2) You’re right that there would have to be some oversight that vendors are remitting sales tax, but we already have this infrastucture in place (ie, we already have sales taxes of various sorts).
3) Of course, the military, social security etc are the main budget items. But the tax collection bureaucracy is huge, so eliminating it is SOME saving.
4) We would still consume. But stupid, excessive, gratuitous consumption was never good for any economy. I can buy a toy in big plastic packing, give it as a gift, find it a week later in that person’s trash and how did the overall economy benefit?
The economy would benefit from the new tax, because there would be more investment. America’s economy in particular would benefit because lots of foreign companies would now relocate here to avoid paying income tax, and their people would then live here and pay sales tax.
to the extent that Americans go to Vancouver to shop to avoid the sales tax (you already have Washingtonians going to Oregon to do that), they can. There will be a small net loss in sales tax revenue, but no big deal.
thans for write it, very good!
ahh. just reminded myself to do my taxes…. grrreat.
http://www.tracyzhangphoto.wordpress.com/
Oh boy. A bit late for that on April 16th, no? Good luck.
my stuff is relatively easy. haha.
still a race against time nonetheless!
Mine were easy, too. In fact, I didn’t pay any taxis in 2009. I either walked or took the train.
Excellent analysis of Fair Tax. Thank you. I have shared this on my Facebook page.
Thanks, Owen, and welcome to the Hannibal Blog.
Absolutely wonderful. I am a conservative and I appreciate your definition of a liberal as well as your view. What amazes me is that when 2 individuals such as us, could sit and have a logical discussion, all of these problems don’t seem that difficult. However, with the Congress, Senate, and President (Bush or Obama) things are way too complicated and as you say, “non-transparent.” In all actuality, I don’t believe any of them have our best interest at heart.
Thanks, Brandt. That’s what The Hannibal Blog is for: No vitriol, just good brainstorming spiced up with twisted and usually inappropriate humor.
Yes, in general I would agree that if you put readers of the HB, such as you, in a room and said “figure this out!”, they would figure it out a good part of the time. And when they don’t, at least they would all agree that they understand the problem and the opposing views better.
We strive to be “ignorant at an ever higher level”. 😉
Hear, hear! Great blog! Thanks so much for posting and it really helped me get a greater understanding of the Fair Tax idea. I, like Brandt Davis above, not only appreciate the simplicity but sensibility on this blog. Definitely going to start following. Thanks again 🙂
I would argue about your comment of transparency. Our current administration has made steps to make data generated by the government available to the public. If you think that the information is not there, then you must not be looking.
Well, you’re right in that I have not been “looking” — ie, I have not bothered to total up every deduction to every interest group, every special treatment, in fact every economic consequence of every clause in our tax code, which is longer (by word count) than War and Peace.
But so what? I think it’s great the the Obama administration makes more data available on a web site! That has nothing to do with my point here. What I’m decrying is a tax system that is so impenetrable that nobody understand his OWN taxes, not to mention the overall situation. And what I’m proposing is a tax system that we can all understand.
A great post. I’ve always found this concept fascinating. I am especially intrigued by two outcomes: the effect on the political discource on taxes and the effect on consumption itself. I would think the latter is a bit easier to predict, since some countries have implemented a consumption tax and I’ll guessing data exist that show the impact of the tax.
The effect on political discourse would be far harder to predict. I have long felt that one of the greatest fundamental problems facing the country is that we have institutionalized artificially LOW tax rates. The supply-side economists essentially won the debate, under Reagan, and it seems like this has become accepted wisdom in the general public. The fact that the country’s entitlement programs are unsustainable is causing cognitive dissonance. Despite astronomical deficits, huge swaths of the electorate are clamoring for even LOWER taxes. Even conservatives have to admit that to address the deficit taxes will need to go up, even if every non-essential government program is cut. But this narrative is entirely missing from the current debate.
So, what would happen if there was no federal income tax? The beauty of this in terms of discourse would be that an individual’s level of taxation would be in his/her own hands. Don’t like entitlement programs? Don’t buy a luxury car. Rather than railing against Obama, the IRS, and other, external forces, taxation could be interpreted as a matter of personal choice. I must admit, the concept is so foreign that I’m having trouble imagining what this debate would look like in our current political climate. That only strengthens the feeling that this model would have to be an improvement.
“…I must admit, the concept is so foreign that I’m having trouble imagining what this debate would look like in our current political climate…”:
The concept is just as foreign to me as to you, Brian. That’s what I love about it. Simple and elegant but infinitely subtle in its extensions, once one thinks it through. And I’m still thinking it through….
I love your point that “an individual’s level of taxation would be in his/her own hands.” That’s largely true. As you know I am a knee-jerk anti-consumerist, without being remotely anti-capitalist. So this tax might remind us to separate consumption for its own sake from economic well-being.
I must say that I love the distinction between consumerism and capitalism, but I suspect it is a bit facile in the absence of your proposed model. Obviously this is one of your points, but I think it towers over the other advantages you list. I’ll state it even more strongly: if capitalism is ever going to peacefully coexist with environmentalism, or going to seriously address resource scarcity (of anything–oil, food, etc), it must incorporate a strong check on over consumption. Your model is probably the most practical way to do it, as difficult as it would be to implement.
There is a variation by the way: That we have not one sales tax rate but many, depending on how “dirty” the good or service is. Ie, we tie the sale tax rate to the carbon footprint.
But that gets complex, and I want to simplify.
It’s an interesting concept, but here’s the challenge (problem) that I see… You probably wouldn’t charge tax on goods purchased for resale because that would add levels of tax onto goods that weren’t sold by the original producer directly to the end consumer. It is certainly within the ability of the higher wealth individuals to find the loopholes and therefore pay tax on only a portion of their actual consumption. Whereas the lower wealth individuals would only have resources to purchase within their communities and would always be subject to the sales tax.
Hi Monica.
Let’s see: I think you’re describing the difference between a sales tax (applied only to the end consumer) and a value-added tax (at each stage of production). Right?
And you’re saying that rich people, through connections or whatever, would somehow circumvent the system and buy their stuff “wholesale” rather than retail, right?
Let me ponder that one, and throw it to the other commenters here. First, I’m trying to figure out how these rich people would actually do that….
I have a hard time imagining that tax-dodging would be easier for the wealthy than it is in the current system.
I think the problem has to do with perceptions. People have already touched on this, but consumers spend based on their perception of whether they can afford something, not on whether they can really afford it. When they see that the price of Robert Pattison-shaped pillow they want has gone up 25%, they are more likely to just think “I can’t afford this!” than to remember that they also have 25% more money.
The prebate check will help with this problem; when people receive a check, the instinctual response is “I have money! I should spend it!”
You do make a very compelling case, though.
The shock of seeing everything go up by 25% will happen once and only once. So we would get over that. And we would have the simultaneous (one time) delight of seeing our paychecks “go up” (ie, come to us gross).
The prebate delight, however, would be an annual ritual. 🙂
My mother (my father is a doctor so we are considered wealthy) started putting some jewelry and flowers for sale at my grandma’s antique shop. Now she buys all her jewelry and plants (along with all the women in the rest of my family) wholesale, which is significantly cheaper than the retail price. So under this system my mom would be saving even more money while also cheating the government.
My mother (my father is a doctor so we are considered wealthy) started putting some jewelry and flowers for sale at my grandma’s antique shop. Now she buys all her jewelry and plants (along with everyone else in the rest of my family) wholesale, which is significantly cheaper than the retail price. So under this system my mom would be saving even more money while also cheating the government.
Any changes to the current system would mean millions of tax dollars wasted to “change” it. Also the current accountants and tax related workers would lose their jobs and there goes another 100,000 jobs in the tax department and it gets even more complicated as change occurs such as last minute job lost bonuses which wastes even more tax dollars therefore I don’t think its a very good idea but I’m not saying no to your suggestions tho.
Hmmm. An objection I did not expect. You’re saying we should not swap a bad tax system for a good tax system because…. the accountants would have to find other jobs?
I like this idea. I would also add one other thought. You wrote, “The gist of that post was that the complexity of America’s tax system, not the rate of taxation, is what harms freedom in this country. Contrary to what you might think if you go to Tea Party rallies, we are not overtaxed, we are badly taxed.” From an economic standpoint, history seems to demonstrate that a high tax rate is always counterproductive to prosperity. In fact, whenever governments lower the tax rate, prosperity increases. Therefore, whether or not America’s tax rate is too high, the economy (and, thus, the government’s income) would benefit if the tax rate decreased.
Absolutely, Daniel. A lower tax rate is usually preferable.
But I deliberately wanted to separate that debate (ie: “how big should our government be?”) from this debate about the method of collecting taxes, in order to clarify the problems in the latter.
Is it true that lower tax rates increase prosperity? It seems to me that there are many very wealthy countries that have very high tax rates, particularly in noticeable in Europe… Sweden, France, Norway, Germany, Netherlands… many of these countries have income tax up to around 50% AND consumption tax around 20%.
While a Fair Tax may prevent politicians from manipulating the tax code to “bribe” voters, it would not prevent them from borrowing to fund programs beneficial to only certain segments of the population while harming the country as a whole.
While I like the idea in theory and it’s implications are fun to ponder, perhaps America’s problems are best solved not by making the system easier to understand but by wisening up people to understand (and not simply navigate) complex systems?
If there’s one thing I’ve learned in my career in art is that complex is easy and simple is hard work. Just look at how easy it is to create that tote bag you referred to and how hard it is to imagine living in a Fair Tax system.
Again, a great solution, and one I’d vote to employ, but I’d prefer a smarter voter.
We’d all love “smarter voters”. But I don’t think we’re going to get smarter. So, in the absence of some Orwellian eugenics program (which we here, as libertarians, would oppose anyway), I’m concentrating on simplifying our governance systems. 😉
Oh, boy.
When will those favoring liberty simply get to the heart of the matter to come out and say the only thing that can push through all of the rhetoric and break the power of the coercive state? The only thing that can truly change hearts and minds is simply the revelation that: all aggression is unjust, and ALL TAXATION IS THEFT! Every single instance of one person imposing their will over the conscience of another person is contrary to the self-evident principles of natural laws of self-ownership, and of ownership of ones justly acquired property and is therefore unethical and immoral! The only true alternative to the violence of the state is one that does not suppress love and charity, which by definition can and must never be commanded. The only true alternative is the proposal of a non-violent society in which aggression and coveting themselves are no longer imprinted, institutionalized, codified, enforced, and embedded among the public!
Any discussion of “replacing” one tax for another completely misses the heart of the matter, and has and will always only work against freedom. I’ll be blunt, all of this rhetoric right now about a Value-added tax is the direct result from the groundwork laid by those advocating the misnamed “Fair Tax”. Do you really think that politicians who are not ethically opposed to taxation would just lay down old powers when faced with the possibility of being handed new powers and new taxes by the public?
No, the only answer to this problem which is in fact a moral one is for society to cease legitimizing aggression against others. Is it Utopian to expect people to make a principled choice for non-aggression? Maybe, but much less Utopian than expecting them to simply arbitrarily choose “a little less aggression and coercive against their neighbors” without concluding that aggression itself is actually wrong!
Again there can be no just or fair tax. And if we believe in the power, efficiency, and ethics of uncoerced and freely cooperating individuals to provide healthcare and it’s insurance, we can believe in the possibility and the ethicality of a non-coercive provision of any other goods or services one might need, including that of non-profit and for profit insurance and other various companies providing defense and dispute resolution services, under a society with a constitution with only one law: do not aggress upon your neighbors life, liberty or justly acquired property!
Aha. But now I think you’ve taken that small step over the line of what’s reasonable. If you say that ALL tax is theft, then you must (logically) be an anarchist, because without tax you cannot have any government at all. But anarchy leads to awful human suffering (read Hobbes), so we can stipulate that we do want a government. that leaves us to figure out what that government should do and how best to collect the taxes to fund it.
In Leviathan, Hobbes was clearly referring to ‘chaos’ or social disorder – the state of nature – and not anarchism. To suggest that he could critique an ideology that Leviathan pre-dated by a good couple of hundred years is absurd.
Why absurd? That chaos is what you’d revert to within hours of anarchy….
What is chaos? Why is aggression against person and property to be considered somehow less “chaotic” than intentional order through voluntary cooperation and an educated recognition of equal self ownership with no ruling class?
And why does an ordered free society of cooperation and non aggression have to be called anarchy? Why does “government” have to equal aggression? Why can’t we have first self-government, and for those who don’t like the freedom of self-government who instead choose aggression, “government” consisting of institutionalized law and force that is neither aggressive itself nor monopolistic, but simply defensive in which individuals may choose their own defense agencies and specialty natural law dispute resolution insurance providers on the market? No aggression and no taxation does not equal no force and no funding. The solution to the problem of voluntarily funding government is just as any other economic problem – restoring the natural link between payments and services. If your family or some other charity doesn’t pay to insure you and you don’t want to buy protection, you don’t have to have it. But with no taxes and regulations there would be so much prosperity that people wouldn’t mind paying a bit for these basic services, as long as they continued to be good services. And as long as people could cooperatively start up their own court systems whenever they chose, with these new competitive companies entering the market to keep others accountable, we would not get the tyrannical monopoly rule over every aspect of our life that “limited government” has turned out to be.
We didn’t have to go this way. For example while their were flaws in the thinking of those in an ancient Icelandic system, it has at least been historically proven that judicial services can be provided for through competing market systems over an extended period of time, even 300 years. And when the settlers first threw off their old government on the radical ideas of Lockean self-ownership and rights to life liberty and property instead of the rights of a kingly class to rule a subject class, they came here and naturally found ways to live peaceably with them having no “taxes” unless they chose to do so with a community of others, but many live in Pennsylvania or Rhode Island which rejected taxes for years.
Rhode Island was a perfectly free colony that vehemently opposed the creation of “a United States” and really, if we don’t need the ultimate decision making power of a global monopoly government, we can probably do without the ultimate decision making of national monopoly government. And if we don’t need the ultimate decision making power of a national monopoly government, maybe we can do without the ultimate decision making power of a state monopoly government and instead each make our own selection from multiple government agencies for these services.
So if non aggression must be understood as chaos and anarchy, I’ll take chaos and anarchy. Why is enforced monopoly necessary? Do we want to go back to a central planning monopoly overlord to tell us what to uniformly believe about extremely important religious matters, or do we prefer the utter chaos of being able to band together with other like minded people and decide if, when, and what kind of church we would like to associate with?
Do we want to go back to a central planning monopoly master to tell us uniformly how to educate our children and what to teach them about important things like life, history, interpersonal relations and proper citizenry, etc, or do we prefer the chaos of being able to band together with other like minded people and decide if and what kind of school we would like our children to associate with?
Does aggression or chaos work better with language, or do we need someone else to define what words mean? Do we need state regulation of what words are ok to speak to other people? Is the chaos of thousands of different presses all saying different things ok, or do we need just one “true” press, television and radio station to tell the story? Do we need central planners telling us where we can build our houses and our business, or can we leave that up to a free society? What about chaos in all the various industries and factories.. central agriculture, central health care, one central currency, central banking, the government computer company, the internet itself, phones, planes, automobiles, eating, smoking, drinking, dancing, marrying, the list goes on and on, can “chaos” work?
We are talking about the same real every day people here with God-given intellect to make thousands of everyday decisions and who by default would be no more or less criminal than they are now, of which regardless of either scenario, initially the same number of people would be the type to want to live peaceably and cooperatively. Is it not in the individuals best long term interest to do so? The only difference is that right now, we have a political system that steals from people and tells them that thieving from their neighbor through political means is a proper way to gain wealth, while at the same time expecting to somehow keep people from stealing from their neighbors!? Even those who would otherwise be peaceful must necessarily become politically savvy just to feel they are not being aggressed upon quite as much but instead getting some of their labor back.
So, is it unreasonable? Again no one says this would happen overnight. Decreasing the power of the state takes a tremendous amount of education of the public about the ethics of violence. What is unreasonable is to expect to do this without introducing them to the non-aggression principle and telling them that taxes simply amount to theft. Three years ago, even with a physician father explaining the horrors of Medicare I wondered about whether universal government healthcare might still be “the right thing to do”. It was the involuntary nature and ultimately the non-aggression principle that convicted me on the matter of taxes. Besides, we’re not talking about cavemen here, we’re talking about rational people examining the evidence of not only these things, but also thousands of years of history books and then choosing to experiment with freedom. Isn’t that what America is?
Decreasing the power of the state takes a tremendous amount of education of the public about the ethics of violence.
@nathancdavis:
Dear Mr. Thoreau:
It does indeed, and it won’t happen “overnight.” In fact, educating people out of human nature, of which, sadly, violence is an unfortunate aspect—as evidenced by history—, won’t happen for millenia, if ever.
If your vision of institutional non-aggression, beautiful as it is, became reality, the first thing that would happen is that the country would break up into little fiefdoms which would soon all be at war with each other. Instead of worrying about the power of the state, each of us would be too busy worrying about how to make it through the day without getting killed.
And of course, without taxes, we wouldn’t have a strong national military. American Indians didn’t have one, either. I wonder what happened to them. So in addition to fighting each other 24/7, we’d have to deal with aggresssion from other countries.
I don’t know about you, but when I’m down at the beach and looking out into the ocean, I’m never too concerned about a fleet of hostile battle ships suddenly appearing on the horizon and opening fire at my city. Hmm, why is that?
I don’t think we’ll see true “aggression towards persons and property” until your beautiful non-aggression principle gets implemented. And it is beautiful, I’m not being sarcastic.
Alas, the law of unintended consequences says hello.
“The first thing that would happen is that the country would break up into little fiefdoms”
What would be wrong with this? Why is the allowance of a centrally planned national government and supreme court decider somehow by default less tyrannical to it’s members than multiple localized separate state governments and courts?
“…which would soon all be at war with each other. Instead of worrying about the power of the state, each of us would be too busy worrying about how to make it through the day without getting killed.”
This is very strange speculation. Why on earth would there suddenly be such a thing? As Rothbard points out: “There is no need to assume any such magical or miraculous change in human nature. Of course, some of the private defense agencies will become criminal, just as some people become criminal now. But the point is that in a stateless society there would be no regular, legalized channel for crime and aggression, no government apparatus the control of which provides a secure monopoly for invasion of person and property. When a State exists, there does exist such a built-in channel, namely, the coercive taxation power, and the compulsory monopoly of forcible protection. In the purely free-market society, a would-be criminal police or judiciary would find it very difficult to take power, since there would be no organized State apparatus to seize and use as the instrumentality of command. To create such an instrumentality de novo is very difficult, and, indeed, almost impossible; historically, it took State rulers centuries to establish a functioning State apparatus. Furthermore, the purely free-market, stateless society would contain within itself a system of built-in “checks and balances” that would make it almost impossible for such organized crime to succeed. There has been much talk about “checks and balances” in the American system, but these can scarcely be considered checks at all, since every one of these institutions is an agency of the central government and eventually of the ruling party of that government. The checks and balances in the stateless society consist precisely in the free market, i.e., the existence of freely competitive police and judicial agencies that could quickly be mobilized to put down any outlaw agency. It is true that there can be no absolute guarantee that a purely market society would not fall prey to organized criminality. But this concept is far more workable than the truly Utopian idea of a strictly limited government, an idea that has never worked historically.”
Clearly then human propensities are irrelevant because it would simply be the same society with the same people. And if we are talking about a future society, we are talking hopefully of an intentionally more educated one in this regard. But even so, is your statement really how you view most of your neighbors now? Is our current central government monopoly of violence with commander in Chief Obama that which is largely keeping yourself and your next door neighbors from sneaking into each others houses and stealing each others property? Is the supreme court what is keeping members of our local court systems from planning genocide against each other over their differences in rulings? Are you worried about the various professional property protection and dispute resolution services known as insurance companies stealing from you all the time, or is it the government while assuming the power of forced “voluntary” taxes more of a threat to your income? Even more absurd, is our current central government monopoly of violence with commander in Chief Obama the main reason keeping you and your next door neighbors from breaking out and killing each other on a day to day basis? Or is there a precentage of us that generally like peace and wish to be left alone except that we are forced to participate in an inherently corrupt system of circular aggression upon both us and our neighbors in which the funding of such is in fact predicated on us being required to utilize mass class-warfare and calculated political aggression against others just to continually try to get even?
And still if all that is keeping us from killing our neighbors is our massive government, why is a central government with one Supreme Court forcing all others to abide, less violent itself, or more capable of preventing mass violence and murder than multiple courts those of which we can voluntarily choose to align ourselves with based on our own confidence in such systems? Why can we not have professionally proven specialized appeals courts instead? And if you say that a Supreme court is necessary and superior for keeping the peace, then why not a Global Supreme Court for all people? Does not every single person living now on the border of any country already deal with others and various courts across their own border without having a Supreme Court system presiding over them?
In this regard, which would bring more efficiency of services, a single payer national health-insurance system, or the exact opposite, completely ending laws against the voluntary purchasing of health-insurance across state lines? Why would an open system of freely associated, principled, local and “across state lines” natural law courts, the funding of which are predicated not on theft and class-warfare, but instead contingent on voluntary competitive business income by customers wanting peace with their neighbors and protection from aggression, by default result not in a price and efficiency war for who can most effectively and peacefully resolve conflicts, but instead one of who can cause the most violence and disruption? Have you tried such a system to so boldly say not that it might have some problems to be worked out over time, but that it simply could never work in any scenario and therefore make the further leap that somehow aggressive violence is actually moral? Quite the opposite, as I pointed out earlier, the Icelandic Commonweath existed for more than 300 years until the defect of forcibly preventing the startup of new competitive mutual defense units instead allowed the foreign, massively wealthy, and coercive Christian church to buy up the whole system forcing it into a monopoly!
“And of course, without taxes, we wouldn’t have a strong national military.”
Without a central state meddling in the affairs of other countries to target, what rationale would cause the leaders of another state to mount a wholesale attack against peaceful individuals? Generally wars are conflicts between the government monopoly rulers, not the citizens themselves, and the involvement of the citizens in these wars comes from the State rulers convincing their subjects to defend thier own continued subjugation from attacks by those outside. But in the case that large groups of foreign individuals indeed decided to attack a free society simply because of their freedom for example, would not the same mass defense services and the various insurance companies, naturally be the ones most likely expected and contractually required to be equipped to protect from such an attack? Why do you assume people in a free society would not join together to patriotically defend themselves, or that those in a free market cannot simply choose for themselves services that they believe are best for them, and in their own defense even if it includes an army with bombs fighterjets and missiles? Do you believe for example a draft is neccessary to require this country to choose to protect itself? Do you believe that the people can enlist themselves, or that they can make “congressional declarations of war”, or do we need one infallible master to forcibly tell us all when to go to war?
“It does indeed [take time], and it won’t happen ‘overnight.’ In fact, educating people out of human nature, of which, sadly, violence is an unfortunate aspect—as evidenced by history—, won’t happen for millenia, if ever.”
Again, I am not suggesting that a large number of the general populace could return to the simple Lockean idea that aggression is immoral in any certain time-frame, or that something close to such a resulting society could be implemented in the next few years, even millenia for that matter, or that we must necessarily even speculate about or promote the specifics of such a society.
No, I am simply suggesting that aggression is in fact immoral. This can be arrived at via common sense, religion, the founding fathers, whatever. To me I think naturally the burden of proof lies with those who believe they have a human or divine right to rule and coerce others for whatever various reason.
Secondly I am suggesting that giving unprincipled politicians a new taxing power most likely would not result in them putting aside old ones and that we should, ***one at a time***, simply call for the elimination of the various taxes and not call for replacing them with new ones.
Third, I am suggesting that the freedom message that aggression itself is immoral, and that love and charity by definition cannot be coerced, is a far superior way to disuade on the fence leftist and socialistic, supposedly “liberal” people, who are clamoring for increased taxation for “fair” and “moral” “social justice” purposes, than to try to sell them our preffered version of an arbitrarily chosen “fair” amount of new forcible taxes!
And last, the suggestion that educating people about principles is near impossible and cannot be a proper change agent is entirely false, for the American revolution itself was based on a crippling of the long established, pre-printing press, “divine right of kings” doctrine with this very same revolutionary Lockean alternative of self-ownership and non-aggression. Yes education is hard to do, but now not only do we have the printing press, we have the internet. If we could only just convince those libertarian leaning, party of principle people, to consider letting others know about their principles if they have them.
Without a central state meddling in the affairs of other countries to target, what rationale would cause the leaders of another state to mount a wholesale attack against peaceful individuals?
So in what way exactly, if I may ask, did Native American Indians “meddle” in the affairs of Europeans that caused the latter to cross the Atlantic and wipe them all out?
I agree with you that Americans are poorly taxed – with the wealthiest often paying no tax at all – which is why so many parts of the U.S, particularly the former industrial powerhouses such as Detroit, resemble nuclear wastelands.
I also agree that, as with the U.K, your taxation system is unnecessarily complicated. This leads to the kinds of loopholes that allows tax-evasion by the very wealthiest to occur on a morally criminal scale.
Your proposal, however, will not solve the problem of a flawed tax system. It is deeply regressive and therefore unfair, hitting overworked, underpaid families the hardest, because a relatively greater proportion of their income is consumed by such taxes. This would mean that, despite earning considerably less, some families would be paying a much greater proportion of their income in taxes – this relates to the concept of decreasing marginal utility, which, economic expert that you are, you should be aware of. For example:
Family A (combined annual income of $50,000) consists of four people, with two working parents who each need a car. They buy two cars at a cost of $10,000 each. With your 23% ‘sales tax’, they pay a combined tax of $4,600, which represents 9.2% of their combined annual income.
Family B (combined annual income of $200,000) also co consists of four people, with two working parents who each need a car. Given their increased income, they buy two cars at a cost of $20,000 each. With your ‘sales tax’ they pay a combined tax of $9,200, which represents 4.6% of their combined annual income. Even if they bought a third car, they’d still be paying proportionally less tax, whilst benefitting from the additional, albeit slightly lower, utility of a third vehicle.
Despite earning considerably more, family B are actually contributing proportionally less of their income in taxes. This is not only morally reprehensible but also economic madness because of the damage would inevitably do due to its negative effect on social mobility.
Your ‘fair’ tax actually punishes hardworking families for failing to monopolise as much income as possible and, as such, is socially divisive. It’s these families that form the backbone of the American labour-force and they deserve better than to be punished for the IRS’ and, by proxy, the political class’ failure to crack down on tax evasion by the very wealthiest people in America.
But don’t just take this from me; here’s an extract from book called ‘The Wealth of Nations’ by a little known Scottish economist called Adam Smith:
“The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”
Introducing a uniform sales tax in lieu of a progressive, rigorously applied income tax with zero loopholes would harm America by creating even greater economic inequality than currently exists. ‘The Spirit Level’, by Richard Wilkinson and Kate Pickett, has established – through extensive primary and secondary research – the undeniably powerful relationship between income inequality and a whole range of social phenomena, such as crime, educational performance, mental health, physical health etc and, I’m afraid that for the anglo-saxon societies (particularly the U.S) the news is not good because, the more economically unequal a society, the greater the level of social failure.
Your proposed tax would increase inequality further still, thereby magnifying the effects of high-level inequality; and let’s be honest, America has quite enough crime, mental illness, lifestyle-related physical illness, single-parent families, educational disenfranchisement, and social deprivation already.
While there are clear economic holes in your argument, there are also deep philosophical ones. Not least, your idea of ‘freedom’. Most Americans, although by no means all, have come to understand the concept of freedom as ‘freedom from’: freedom from taxation, freedom from the state, freedom from the responsibilities of citizenship, freedom from constraints on the kind of consumption that is destroying the planet. This definition, of course, serves the wealthiest best, which is why wealthy, right-wing reactionaries so often fund political organisations that lobby so vociferously for this kind of ‘freedom’.
But what about the concept of freedom as ‘freedom to’? Freedom to access equal educational opportunities, freedom not to starve when you lose your job because investment bankers have bankrupted the country, freedom not to be told to take your child home to die if your employer won’t provide healthcare insurance, freedom to dignity in old-age, freedom to walk the street without fear of having your head blown off in a ‘drive-by’? That’s real freedom. The idea of freedom that you sell to people in your sophisticated way, is a freedom enjoyed by the wealthy few at the expense of the impoverished many. That’s not freedom, it’s slavery.
The tea-partiers have been duped by an economic elite that is consolidating its position within the class system – yes, America has one too – thereby kicking the ladder of social mobility from under the under the feet of those in greatest need. Sadly, it appears that they might have to get their way before they realise just how wrong they really are.
Welcome to the Hannibal Blog, John. You’re the first one here in the comments to drill into what I expected ALL of you to object to, namely the controversy (for that is what it is) about whether or not this tax is “regressive”.
If you scroll back to my post above, you’ll see that I asked you to attempt to think in a new way about wealth. Not as “income” but as “consumption”.
You’re saying that you either did not engage with that thought experiment or that you did but found it flawed.
Let me add to your example of Family A and B.
First of all, you neglected the prebate in the FairTax proposal (the name “FairTax”, btw, is not mine). For simplicity, let’s assume the prebate is only $4,600.
So Family A, the poor family, pays NO net tax at all!
Family B, the rich family, pays $4,600 net tax.
So where’s the problem?
But now add Family C: It consists of one strange OM-chanting Yogi. He makes exactly as much as Family B — ie $200,000 — but he doesn’t believe in buying anything, not even a car. He sits on a mat and meditates, drinking river water.
You’re saying that he should pay (for example) $66,000 (33% of his income) in income tax. For what? For meditating with river water?
Now, with respect to social mobility: Why would mobility be threatened by a tax system where ANY family, either A or B, pays no tax on ANYTHING they earn, or on ANY profit of any venture they can think of?
And with respect to your “freedoms to” and “freedoms from”, that’s a great discussion, one that I’ve had and will continue to have for the rest of my life, because it’s fascinating.
godol’s fuzzy math?
the prebate is based on 100% of the federal poverty level. period. no matter what your income or cost of living, according to the link you supplied “Prebate Based on 100% federal poverty level”
here.
so the entire prebate for either family of four (A or B) would be $ 6,702 for a two adult, two child household. less for a single parent household. after purchasing the two cars at $10,000 each family A would be left with $2,102.00 prebate to cover the tax on all necessities the rest of the year, food, clothing, shelter, transportation, medical care at a taxed rate of 23%.
wouldn’t family B making $200,000 be able to make up this difference much easier than family A?
example C… what the guy doesn’t need food, clothing or medical care? just water? how is he earning his $200K? someone paying him to say OM 🙂
So Family A, the poor family, pays NO net tax at all! on the purchase of the cars ONLY. the rest of the year they pay a higher percentage of their income than the rich family for necessities.
the “fairtax” is regressive. agree with all points made by john and others who refute based on the fairtax “home page” 5 common objections.
the post disturbed me on that basis, but did not feel i had the vocabulary to make john’s points.
as far as consumption. we are human we consume, the FPL’s are absurd… family of 4 on $20,050. How? they must assume that this family is making use of every entitlement program available – which would me highly improbable since these funds are limited.
OK, one last reply on this topic, Andreas:
The common “liberal” complaint that a consumption tax is regressive does not take into account several potential outcomes of such a fundamental change in taxation, most notably:
(1) With no employer payroll taxes, salaries would likely go UP, and rise disproportionately at the lower levels (since payroll taxes are proportionately higher for lower-salaried employees)
(2) Like you, I am skeptical about the fairness of the current system, so don’t think we’d be regressing with a new method.
(3) The “prebate’ could be progressive and tiered by income level.
(4) Perhaps I’m alone in this, but I believe if we greatly improved public institutions (notably schools) through more efficient and higher taxation, then perhaps a small decrease in wealth would not be such a big thing, especially at the lower income levels. If the statistic that the American Enterprise Institute published last week is to be believed, almost HALF (47%) of American households pay no federal income tax at all. I find this shocking and disturbing, mostly because I believe there are terrible consequences if almost half our families have no financial steak in the federal government. This would seem a worthy blog topic for you, Andreas–what do think this means for political discourse?
That’s a great point about the payroll tax, Brian. It, too, would disappear in the new system.
Amen, to the public school system. Somebody here somewhere mentioned social mobility. Good education is probably the largest prerequisite.
Dear Andreas
I did not find flaws in your “thought experiment” of replacing the concept of ‘wealth as income’ with the concept ‘wealth as consumption’; the flaws were waiting for me upon arrival.
To quote you, you said “for simplicity, let’s assume the ‘prebate’ is only $4,600. So Family A, the poor family, pays NO net tax at all!”. No, Family A pays no sales tax on the two cars it purchases, after which – because the allowance is used up – they then begin paying 23% sales tax on everything they buy thereafter. On the other hand, Family B would pay a sales tax of $4600 ($9200 less the $4600 prebate), after which they would then begin to pay the same 23% sales tax.
At this juncture, then, Family A has paid nothing in tax, while Family B has paid $4600. Let’s say both families bought their cars at the beginning of the financial year and let’s also assume that over this financial year, both families respond to your consumption tax by only buying highly inelastic goods, such as foodstuffs, basic housing and heating.
Since both families are only buying the goods they absolutely need, we can reasonably assume that, as there are four people in each family unit, they need to spend exactly the same amount on these goods.
If both families spend $200 (an arbitrary sum – whether it’s greater or lesser is irrelevant) per week on only the goods that they absolutely need, their cost of living per year would be $10400. At the end of the financial year, Family A (income $50,000) would have paid $2392 in tax (23% of $10400) whereas Family B (combined income of $200,000) would have paid $6992 in tax (23% of $10400 + ($9200 – $4600)). In this circumstance, Family A would have paid 4.8% of their annual income in tax, whereas Family B would have paid 3.5% of their income in tax. Despite being less well off than Family B, Family A would be contributing a relatively greater proportion of their income to the treasury than Family B.
This example clearly demonstrates the inability of your ‘prebate’ to deliver any kind of equity in terms of tax contributions. However, since you will probably raise the prospect of Family B incurring greater tax revenues by spending more on relatively elastic consumer goods due to their greater level of income, so I suppose I ought to address why it is hard to maintain this presumption:
• One of the “advantages” of your proposed tax is, as you state in your original piece, its efficacy at “making [people] think twice about frivolous and unnecessary consumption, which reduces your carbon footprint and clutter”. You must agree , then, that instead of consuming at the same rate, family B is likely to massively reduce its expenditure on consumer goods, perhaps only spending money on essential, inelastic goods, in response to your sales tax.
• Even if we assume – which I think is fair – that Family B will reduce its expenditure in response to the sales tax, but not quite down to the level of Family A, Family B would be able to spend approximately $12800 dollars before it begins to pay the same level of tax as a proportion of income as Family A does on $10400 worth of expenditure. Your ‘fair’ tax actually puts more money in to the back pockets of the wealthier few by giving them what amounts to a tax break! Family B can spend $12800 before it begins to contribute the same proportion of its income in tax to the U.S treasury as Family A; a full £2400 more. Such circumstances would have clear implications for social mobility but I will discuss that a little later.
Your ‘fair tax’ would result in those least able to do so contributing a much greater proportion of their income to the provision of public goods and merit goods, such as roads, street lighting, defence, sanitation, and education. Under your ‘fair’ taxation system, low and middle income ‘Family As’ not only cross-subsidise the rich ‘Family Bs’ relatively, by paying a greater proportion of taxes relative to income but, because they make up a much greater proportion of the population, they actually contribute absolutely more in tax revenues!
O.K, so I’ve addressed your assertions regarding the Family A and Family B scenario, now for Family C.
You do not explain how the Yogi generates his income of $200000 p/a but let’s take a look at two different scenarios:
Scenario A
People drive from miles around to sit and watch the Yogi in the woods. For some bizarre reason they enjoy this kind tripe. On average, annual donations amount to $200000. In order to get to the Yogi, they will no doubt have to use a vehicle of some sort, since he lives in the middle of nowhere. Since the Yogi’s income is dependent upon people being able to get to the woods, he must surely be expected to contribute a proportion of that income to the construction of roadways that allow him to make his living.
Even if the Yogi lives in the woods on the edge of town and therefore is not dependent upon people driving to visit him, his donations and therefore income is still dependent upon the ability of his visitors to generate income themselves. It would, of course, be impossible for them to do so if federal taxes were not there to provide the kind infrastructure that there is no incentive for the market to provide i.e. roads, pavements, street lighting etc and, as such, he is still dependent upon public spending by the government.
Also, it costs considerably more than you might imagine for your federal government to ensure that people aren’t fly-tipping in the forest and businesses aren’t polluting its rivers. Is it not right that, since the Yogi lives off the land, he contributes to its upkeep?
Scenario B
Nobody visits the Yogi but, like your friend Diogenes, his income is derived from a rich benefactor.
In this instance, however, the Yogi should not only still contribute to the upkeep of the forest and its river water because that is what he lives off but also to the maintenance of transport infrastructure because, of course, it’s necessary for the people who look after the forest to be able to get to it with relative ease. The Yogi is dependent upon their work to survive, so he should contribute to the cost of the work they do.
Furthermore, the ability of the Yogi’s benefactor to provide him with $200000 p/a will, as with most occupations, be dependent upon government intervention to provide the kind of services and infrastructure that make the ability to generate such wealth in the first place possible. Since the Yogi is directly dependent upon the benefactor to generate income, and the benefactor is dependent upon the federal government to generate his income, the Yogi is therefore also dependent upon the federal government and the work it does. He should, therefore, contribute to this work.
It’s also important to remember that the forest is a carbon sink. In recognition of its wider environmental benefits (positive externalities) to broader society (to the Yogi in particular) and in order to ensure social efficiency, the federal government may have to subsidise the logging company that owns the forest in order to ensure that logging remains sustainable. Should the Yogi not contribute to the provision of this subsidy? If not, he may not only find he has no forest to live in and no planet to live on.
Even setting aside the Yogi’s dependence on, and therefore responsibility towards, the federal government and his fellow citizens, it must be acknowledged that you are not describing somebody who is indicative in any way of the people of United States. In short, it is a preposterous example because out of a population of 400,000,000 people in the U.S, the amount of people living as ‘off-grid’ as the Yogi, whilst simultaneously generating an income of $200000 p/a, is, as you well know, so rare as for it to be irrelevant.
Having dealt with families A, B, and C, it is obvious that, since our level of consumption is predicated on our income in the overwhelming majority of cases, wealth is fundamentally a expression of income and therefore should be measured in this way. Income tax should therefore predominate in the tax structure.
One final point on the Yogi and one which I feel appeals to your philosophical sensibilities: since the only value of money is as a means of exchange, and since the Yogi never buys anything, what does it matter if he pays tax on the income received?
Finally, let me address your point on social mobility. You wrote in response to my post:
“Why would mobility be threatened by a tax system where ANY family, either A or B, pays no tax on ANYTHING they earn, or on ANY profit of any venture they can think of?”
As I have demonstrated, sales taxes increase economic inequality by failing to adequately distribute the proceeds of economic prosperity. Instead, because if their regressive nature, they allow for the concentration of wealth in the upper echelons of the class structure by punishing people on low and middle incomes for being on low and middle incomes.
Your ‘fair’ tax would provide the wealthiest with an absolutely and relatively greater share of disposable income than the poor, which would allow them invest in the kinds of ‘supply-side’ measures, such as tutoring or music lessons, that would allow their children to streak ahead academically, monopolise places at the best universities, and subsequently obtain the most highly remunerated and influential positions.
Your tax proposal would therefore create the circumstances in which the wealthy would use their economic capital to ensure that their children do not slip down class structure and, in so doing, prevent or, at the very least, make it much more difficult for the children of the poor to extricate themselves from the circumstances in to which they were born.
It also would not matter how much money was freed up by the abolition of the IRS to improve the education system, as the children of the wealthy would also be the recipients of these improvements in addition to the privilege afforded to them by their parents’ increased income as a result of your tax. The children of the poor would always be trailing behind because high-level inequality is hardwired in to your tax proposal.
Such unfair practices are, of course, endemic within all economically liberal societies under prevailing tax structures. However, this is because of a failure of such societies to tax the incomes of the wealthiest appropriately, whilst simultaneously preventing appalling levels of tax evasion, which essentially represents the theft of public goods.
On an unrelated and final point, I would like you to consider the implications of your proposed tax in relation to the ‘free-floating’ status of America’s super rich. How would your sales tax benefit average ‘main street’ Americans when the super wealthy would register for income tax in the United States (which would be levied at 0%) whilst living permanently in countries with a progressive income tax regime but low sales taxes? Since the super-rich would be living abroad, tax revenues generated by their purchases would be non-existent, while income tax revenues would also be zero. While this situation is clearly a win-win for the wealthy superstar or businessman, what benefit can hardworking Americans possibly derive from such practices?
Well, John, first of all kudos to you for a well-written and lucid argument.
This is exactly the sort of argument and response I was hoping for. You’ve taken all of us to a higher level of debate.
I take absolutely no issue with your demonstration that the FairTax (no need to put it in quotes, btw: I didn’t choose the name, and I know it’s not ideal) is regressive when the tax burden is measured as a percentage of income. Most of your comment proves only that, ie that poor families would pay relatively more of their income. I conceded this point in the actual post above, but challenged whether income is the appropriate denominator.
In the bottom of your comment you build a compelling case that consumption ought not to be denominator instead. I’m still digesting these points.
In the mean time, let me ask you two other question:
1) What do you think of the current American tax regime?
2) What system you YOU replace it with?
The objective is to maximize freedom, simplicity, efficiency and, yes, also fairness.
What a great post. The politicians don’t want to fix anything as that would dry up their gravy train. Term limitations, please! I vote for you and your Fair Tax … am confused about how my mortgage would be taxed?
Thanks Izziedarling.
First, it’s not “my” proposal. I hope I made that clear. I’m just trying to make sense of it.
Your mortgage: It would NOT be taxed. That also means you wouldn’t get any deduction (there are no more deductions at all).
(Frankly, I’ve never understood that bit about the mortgage deduction even within the existing income tax system: Why should renters pay for homeowners? For that is what they do. Ah, but perhaps they don’t realize it, because the deduction is in the “tote bag”…)
As a fellow liberal, I have always been plagued with the idea of our tax system. For some odd reason, it has been deemed a “Republican thing” to want tax cuts and a “Democrat thing” to increase taxes. I’ve always wondered if there was a better way, and this idea sounds pretty good. I especially like the idea of getting rid of the “Tote bag”. All it does is distract us from where our money is really going, and it would be nice to be able to see everything again. Awesome idea, truly!
Thanks, Skyofroses.
Flat tax on your income 10% no matter how much you make. I think that’s fair to everyone.
A flat tax would certainly be a big improvement on what we currently have, gearldsgrotto. But, in my opinion, not as good as this FairTax, for the following reasons:
1) You would still report your income (and what counts as income? That’s a few tomes of code right there) and presumably deductions. That’s where the mess and complexity lies. Applying one tax bracket as opposed to several does not simplify THAT much.
But I may have misunderstood the flat-tax proposal. Correct me if I’m wrong.
2) Even if we agree that we only have one tax bracket (ie, the “flat” part), they (ie, the politicians) will still use the rest of the code as their “tote bag”. Exception here, loophole there….
Cool idea! No taxes! Nothing better than taking your entire pay check home. Human resources are taking faxes about this non- tax policy idea into the boardroom. No taxes equals more money for the employees. Yes! Splendid! Think, the plus’ of constant receiving and increased spending without taxation. Imagine, “take-home- pay” with no taxes. No taxes!! Imagine, going into Urban Outfitters with extra cash. Here, the idea-to have extra cash from your earning statements – with financial approval- without minus’ – with no taxes, is perfect right? An individual can not feel the fiscal deficit within their own finacial secured accounts. Perfect ! Well, on the contrary, in contrast, the jobs distributing the funds and coporations that balance the wages and company bills (Lot Rent, etc.) , observe a losses weekly. No build on stocks or productive exchange in the liquid or paper markets. Taxes, are like our Social Security Checks in the future. Taxation( ‘taxes charged against citizens activity or property” are in support of the government (google.com). We as that if we donate our one percent or fifteen-prcent to our central market, our government, we are investing in a sure finacial institution thats going build and produce world goods. Remember, we have to charter big planes and ocean carriers to take some of these products overseas. Therefore, my next point is American citizens should rethink the idea of dimissing all taxes. Do we as citizens, want our money to be worthless? Can our financial instutions go under because all we are doing as American consumers is receiving and spending money. Its kind of worthless! Imagine: Do we want banks like B of A or Chase (Washington Mutual) to never exist or exist with a short lease because all its doing is allocating money out. Look at what happened to FannieMae. Loss of revenue lack of investors. Have you ever thought to see yourself as paying the light bills at your bank. Just a little antedote. On another note, I know I want my money to ride! Anyway, receiving and spending without actual investments sounds like a losing situation. Plus, we need to rotate and ciculate our finances towards or around business development, too. Additionally, I like the idea of getting that income tax return at the beginning of every year. Some Americans really do rely on that H&R Block tax return. Personally, I like the idea that I am investing yearly into my beautiful homeland and getting a reward. And yes, man power builds institutions and payrolls must pay their employees. Again, if our fabulous country can stand as a unite by our tax revenue then we as citizens should stand by our country. To conclude, we should give back to our America. We do not want a system of allocating constantly to lead us to a state of “The rich keep getting richer and the poor keep getting poorer” James Truslow Adams 1931. We need to be able to have a big budget piggy bank to keep commerce circulating. Lets’s work with the government everyone. Think of it as Donations! trosebud-trosebuds-girlpure-pleasant’s muse-Bebe 04/13/2010 Blog me at girlpurewordpress.com
I can’t believe that’s one single paragraph.
I have to take exception with your photo. You cliam it illustrates that people left their taxes until the last minute. However, despite all the signs, there is NOT ONE SINGLE PERSON in your photo! (Unless you count the man holding the advertising sign, and he is clearly not worried about having his taxes done.) Such an obvious fallacy made the rest of your blog unreadable.
Yes, you’re supposed to notice that guy waving people in. (I took the photo out of my car, while waiting at a red light). He was waving people in, so presumably those people were the ones waiting till the last minute…..
What people? There is no one for a block in either direction!
Oh boy. I snapped a photo while I was waiting for the light to turn green. Other cars were turning. This being LA, there were no pedestrians to speak of….
Hear, hear! I am with you on the “would not have to fill in a tax return”- the most complicated system!
Though I’m not conservative, I argue for less government intervention into personal lives. The government doesn’t know what’s good for everyone everywhere. What may work in one county may not work in another county due to demographics.
However, that’s a topic for another time.
I like this tax plan. I agree with a graduated income tax, but I view the current system is unbalanced. Too many loopholes and oversight.
Whoever says that taxes should be eliminated entirely is out of their mind. I view that conservatism has no place in the modern world because there’s too many faulty ideas out there that people want to keep – why? In order to progress forward, we need to have a new way to think about things, instead of keeping old ways that are faulty and do not work.
So if there were no pedestrians, who was he waving in? The cars? Did he have a parking lot? How could you tell anyone was following him to the tax preparer?
I do not know how many customers he had that day, or whether he had any.
AHA! So this is a lie?
“It is Tax Day again in America and some people left their returns to the last minute (as you can see on this photo, which I took in Los Angeles yesterday.)”
Perhaps no one left their tax returns until the last minute. The picture seems to argue for that.
“The IRS and America’s other organs of proto-authoritarian oppression would also be abolished.”
While I would be in favor of such a move, I wonder what would the immediate and long term effects would be with so many people out of work.
The long-term effect would be positive: These people are not doing productive work.
Great post. Lots to think about.
For some easy math (everything is rounded for easier math)
1. … If I purchase a $30k new car in NY, under your plan I would pay the $30k + $2,700 (NY ~9% sales tax) + $6k (a 20% natonal sales tax) = $38,700 … am I correct?
2. I always liked the flat tax idea. (10%) The guy making a million pays $100k, the guy making $50 pays $5k. Period.
3. How do all these proposed changes affect all the charities?
Thanks again for the post!
Hi, billghecarguy.
Yes, you’re math is correct, if you’re using those tax rates.
I also like the flat tax idea, but keep in mind that you’d still need to keep the entire infrastructure to define and verify what people “make”. With the FairTax, you can get rid of it.
Charities: I don’t think they’d be affected at all, but you can think it through with me. We’d all donate out of gross earnings (ie, higher earnings) anyway (as opposed to donating out of net earnings, then grossing them up with a deduction.) Charities would also pay the sales tax when spending money, but we could talk about a rebate for them.
nice blog
Cheers
3indianmonkeys
http://www.3indiannonkeys.com
i tried to post but my magic mouse made my post disappear. it took me a long time to compose it. i am unable to do it again. the gist was that i agree with john the fairtax is a regressive tax.
also andreas your math was/is fuzzy in response, as it misrepresents the impact of the pretax – which is based on family size and the FPL ONLY (proposed numbers can be found on fairtax link you gave, actual FPL can be found on gov. web site)
So Family A, the poor family, pays NO net tax at all! family A pays no tax on the purchase of the two “needed” cars to earn a living, but continues to pay 23% the rest of the year for food, rent, transportation, medical care etc. which is a much higher percentage of their total income that Family B. the yogi who lives on water alone must be the comic relief.
“john’s” (whom i suspect is a regular hannibal reader) post was so relevant i hope you will allow me to repost it, since if i had the vocabulary, it’s what i would say.
I agree with you that Americans are poorly taxed – with the wealthiest often paying no tax at all – which is why so many parts of the U.S, particularly the former industrial powerhouses such as Detroit, resemble nuclear wastelands.
I also agree that, as with the U.K, your taxation system is unnecessarily complicated. This leads to the kinds of loopholes that allows tax-evasion by the very wealthiest to occur on a morally criminal scale.
Your proposal, however, will not solve the problem of a flawed tax system. It is deeply regressive and therefore unfair, hitting overworked, underpaid families the hardest, because a relatively greater proportion of their income is consumed by such taxes. This would mean that, despite earning considerably less, some families would be paying a much greater proportion of their income in taxes – this relates to the concept of decreasing marginal utility, which, economic expert that you are, you should be aware of. For example:
Family A (combined annual income of $50,000) consists of four people, with two working parents who each need a car. They buy two cars at a cost of $10,000 each. With your 23% ‘sales tax’, they pay a combined tax of $4,600, which represents 9.2% of their combined annual income.
Family B (combined annual income of $200,000) also co consists of four people, with two working parents who each need a car. Given their increased income, they buy two cars at a cost of $20,000 each. With your ‘sales tax’ they pay a combined tax of $9,200, which represents 4.6% of their combined annual income. Even if they bought a third car, they’d still be paying proportionally less tax, whilst benefitting from the additional, albeit slightly lower, utility of a third vehicle.
Despite earning considerably more, family B are actually contributing proportionally less of their income in taxes. This is not only morally reprehensible but also economic madness because of the damage would inevitably do due to its negative effect on social mobility.
Your ‘fair’ tax actually punishes hardworking families for failing to monopolise as much income as possible and, as such, is socially divisive. It’s these families that form the backbone of the American labour-force and they deserve better than to be punished for the IRS’ and, by proxy, the political class’ failure to crack down on tax evasion by the very wealthiest people in America.
But don’t just take this from me; here’s an extract from book called ‘The Wealth of Nations’ by a little known Scottish economist called Adam Smith:
“The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”
Introducing a uniform sales tax in lieu of a progressive, rigorously applied income tax with zero loopholes would harm America by creating even greater economic inequality than currently exists. ‘The Spirit Level’, by Richard Wilkinson and Kate Pickett, has established – through extensive primary and secondary research – the undeniably powerful relationship between income inequality and a whole range of social phenomena, such as crime, educational performance, mental health, physical health etc and, I’m afraid that for the anglo-saxon societies (particularly the U.S) the news is not good because, the more economically unequal a society, the greater the level of social failure.
Your proposed tax would increase inequality further still, thereby magnifying the effects of high-level inequality; and let’s be honest, America has quite enough crime, mental illness, lifestyle-related physical illness, single-parent families, educational disenfranchisement, and social deprivation already.
While there are clear economic holes in your argument, there are also deep philosophical ones. Not least, your idea of ‘freedom’. Most Americans, although by no means all, have come to understand the concept of freedom as ‘freedom from’: freedom from taxation, freedom from the state, freedom from the responsibilities of citizenship, freedom from constraints on the kind of consumption that is destroying the planet. This definition, of course, serves the wealthiest best, which is why wealthy, right-wing reactionaries so often fund political organisations that lobby so vociferously for this kind of ‘freedom’.
But what about the concept of freedom as ‘freedom to’? Freedom to access equal educational opportunities, freedom not to starve when you lose your job because investment bankers have bankrupted the country, freedom not to be told to take your child home to die if your employer won’t provide healthcare insurance, freedom to dignity in old-age, freedom to walk the street without fear of having your head blown off in a ‘drive-by’? That’s real freedom. The idea of freedom that you sell to people in your sophisticated way, is a freedom enjoyed by the wealthy few at the expense of the impoverished many. That’s not freedom, it’s slavery.
The tea-partiers have been duped by an economic elite that is consolidating its position within the class system – yes, America has one too – thereby kicking the ladder of social mobility from under the under the feet of those in greatest need. Sadly, it appears that they might have to get their way before they realise just how wrong they really are.
Hmmm. You’re reposting verbatim what somebody else already said? Why?
The question of whether this tax is regressive or not is indeed the big one. It depends on how you define wealth, and I wanted to start a discussion on that definition: income, or consumption?
i explain why, and my post is not entirely verbatim.
first three paragraphs are mine. and i make some points that have not been brought up.
Adam’s book, too, is so relevant, I hope you don’t mind my posting it here. If I had the vocabulary, the following is what I would say. It is not entirely verbatim, as the first three sentences (of which this one is the third) are mine:
INTRODUCTION AND PLAN OF THE WORK
The annual labour of every nation is the fund which originally supples it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.
[…]
If any of the provinces of the British empire cannot be made to contibute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expence of defending those provinces in time of war, and of supporting any part of their civil or military establishments in time for peace, and endeavour to accomodate her future views and designs to the real mediocrity of her circumstances.
(To tighten it up a little, I skipped the middle part.)
oh my peter!
after all That’s what The Hannibal Blog is for: No vitriol, just good brainstorming spiced up with twisted and usually inappropriate humor.
@ andreas, i think that most people took the topic as two-fold, an endorsement of the “fairtax”, and a discussion of the definition of wealth “income v.s consumption”. people simply chose to comment on what interests them most.
@Andreas
A commodity tax of the sort you are advocating, is, in fact, a tax on business, not the individual consumer, despite that the official version is always that the individual consumer pays the tax, and that the business supplying the goods or services collects (receives) the tax from the consumer, and then remits it to the government.
But this is all semantics. The fact is that the government imposes the commodity tax (which under your plan would be at least 35%) on whatever price the supplier charges the customer. If the business (the supplier) doesn’t pay it, then the government will take punitive action against that business, not the customer.
It is also a fact that most small and middle-size businesses don’t now pay much income tax because profits earned by most small businesses are small (for some time now, income taxes from businesses generally, have been declining as a percentage of total income taxes paid by individuals).
Thus a 35% commodity tax would be a huge and unwelcome burden on businesses, which would now be the source of all government tax revenues, previously shouldered by the population at large.
Naturally, businesses, chafing under this new and crushing 35% commodity tax burden, would use every means to underpay this new crushing tax. One consequence would be a huge expansion of the “underground” cash economy. All of this would hence require expanded government policing of businesses, in the form of frequent and exhaustive government audits
If the new 35% tax resulted in people buying less, this would add further to the burden on businesses. They would be forced to lay people off, who would then add to the welfare rolls. This would require even more commodity tax revenues, in the form of tax rate hikes.
thanks phil! well said.
this time i will just say ditto, instead of re-posting. i join you in a dissenting point of view.
many of your points are also well made by others on the internet (factcheck.org?) some other reputable links (perhaps you have the time to supply?). my aphasia is running a mock today 😦
i’m amazed that you so eloquently self-generated these arguments. do you have a background in economics?
andreas, haven’t missed the points about consumption, complex tax system or transparency – disagree “fairtax” proposal is the solution.
“………do you have a background in economics……..?”
I was, for some years, involved with Canada’s Goods and Services tax (similar to Britain’s VAT).
You’ve changed “consumption tax” to “commodity tax”. Why? A commodity is oil, pork bellies, cocoa, etc, right? We’re talking about all goods and services here.
This tax is not a burden on “business”. Vendors would remit the tax but not pay it. Business would love the system because they pay not income tax.
Let me put this differently: in a nustshell, we are collecting the SAME taxes as before but with less bureaucracy, while exempting all investment activities from tax.
I fear, btw, that we’re in the weeds here. the big points have got lost.
andreas, haven’t missed the points about consumption, complex tax system or transparency – disagree “fairtax” proposal is the solution
no just disagree with your big points and the fairtax as a solution. looks like you haven’t responded to my big point or phil’s.
phil’s point (as i understand it) – it costs to run a business “consumption cost” applies to businesses.
my point prebate is being aggrandized by you, based on FPL and family size ONLY (fact), after which it costs to live.
it will cost the poor disproportionately more to live… so with what money will they have to pay these “extra” consumption taxes or start these wonderful new ventures.
back to phil… business will suffer.
“…….You’ve changed ‘consumption tax’ to ‘commodity tax’. Why? A commodity is oil, pork bellies, cocoa, etc, right?………”
My copy of the OED defines “commodity” as “Useful thing; article of trade (staple ~)”.
So, in the sense that oil, pork bellies, and cocoa are useful things and articles of trade, then I agree they would be “commodities”. But wouldn’t anything else tangible, like chairs, knives, computers, and whips, also be “commodities” under the OED definition?
Anyway, I should have said “consumption tax”, in the sense of a “goods and services tax”, or “value added tax”.
“……we are collecting the SAME taxes as before but with less bureaucracy……”
Doubtless there would be less bureaucracy, but not as much as you think. A government apparatus would have to be set up to administer the tax. This would include periodically auditing businesses to ensure they don’t cheat. Such audits can get complicated for there are so many ingenious ways to cheat.
But I think an expansion of the “underground” cash economy would be a real problem, given how much more (perhaps as much as 35%) a consumer would have to pay for his goods and services from a business obeying the rules, than he would from from a business not obeying them.
The expanded underground economy might become as much a headache for law enforcement, as was the illicit brewing of booze during Prohibition. It might create a new government monster as large and as oppressive as your dreaded IRS.
OK, now you’ve got my attention. The risk of such an “underground economy” is actually a great point.
As I see it, we have to compare the potential black economy of any new system with that of the current system. For example, I keep reading that 80% of nannies in America are paid “off the books”. So we have entire sectors “underground” now.
This means that a new system merely has to be better, but not perfect.
Why do I think that the underground economy could be kept smaller in the new system?
Because of its main feature, which is simplicity. Everybody would know and understand the system and its only two numbers, so nobody could say that it was too obscure or complicated.
Spot checks would still be necessary, which is regrettable.
Anyway, great point, and I’m still thinking this through…
I want to reiterate what I said in an earlier comment, that your proposed tax would make Americans seek out foreign suppliers of services which can be delivered over the internet, so to escape your 35% tax.
This also ties in to the potential “underground” economy problem, which would also stem from a desire to escape this extra 35% charge.
Any Canadian suppliers of internet-deliverable services who are reading this post, must be licking their chops in the hope that your plan will become reality!!!
btw, does not a single other hannibal blog reader suspect that “john” whose blog appeared one day after this topic, might be a nom de plum of a regular hannibal blog responder?
image of Aneurin Bevan… i am really interested in seeing any future posts by john. i have never read The Wealth of Nations but apparently he has been refered to as the father of modern economics and there is a sculpture (spinning top) dedicated to him in with part of the original text of the book inscribed i binary code…
really sounds like someone was making good points and having fun with their post.
opps, “he” adam smith = father of modern economics. name of sculpture not the spinning top, rather circulating capital
Hello Dafna, I can assure you that I’d never before even heard of WordPress until I set up my blog last week, least of read the ‘Hannibal Blog’. So, sadly, no intrigue; just me.
Hello John,
thank you so very much for both wonderful posts. i am in full agreement, and made a meager attempt myself above to extract/explain the fuzzy math or fuzzy sentence that claimed Family A pays no tax at all! but i was not clear.
i suffer with episodic Aphasia, some days are better than others.
all your points have been floating around in my head since this topic began, but they have been word soup.
frankly it has been disturbing that there seems to be only three responders with dissenting view points. comforting that the topic is limited to this blog, it last had legs in 2007?
if you continue to frequent the Hannibal Blog you will soon see that if you wait long enough, a regular reader will present your viewpoint in proxy.
thanks again to Phil and yourself for acting in proxy.
oh and to newcomer edwin lee, who offers another path The fairest would be an annual per capita tax plus a wealth tax on individuals and businesses and alternate definition of “wealth”.
well said.
When you mentioned aphasia before, Dafna, I thought you were joking. I looked up the word. What exactly are you suffering from?
thanks andreas,
douglas thought i was kidding also.
i made you look up a word, wow…life’s not so bad.
i will send a short note to your email about my aphasia.
@Andreas
“………I believe it is fair that Croesus pays lots of taxes all along, but that Diogenes, who never consumes much, does not………”
Croesus and Diogenes are both using their money, but in different ways. Croesus uses his money to buy things. Diogenes uses his money to make yet more money. Therefore each is benefitting from his money but in different ways, most likely because each finds his happiness in different ways, and this is reflected in the different ways each uses his wealth.
Hence the wealth of each is in the amount of money each has. This means that Diogenes’ wealth is not potential wealth, but actual wealth. There is nothing hypothetical about it. Therefore both men should be taxed at the same time, which is when they receive their wealth.
If each were taxed only when he bought goods and services, Diogenes might never be taxed because he might never buy any goods or services. And anyone to whom he leaves his wealth might never buy any goods and services either (let’s ignore your hypothetical Athenian beneficiary).
Diogenes reflects reality more than Croesus, because most rich people spend only part of their wealth on goods and services. The rest is invested, and always will be invested. Therefore under your plan it will never be taxed. Or if it is ever taxed, it will be so far in the future that no-one now living will benefit from it.
So, not to tax Diogenes right now, is grossly unfair to Croesus.
Bingo. Now you’re engaging in the riddle of the post.
So, you are arguing (which follows logically) that we also should tax investors on their unrealized gains on stocks and bonds, not just on those they realize when they sell. That is, those gains are not hypothetical in your view.
I’m teasing you, but you see what I mean.
Money being invested as opposed to spent is there for other people: Investing means lending it out, so somebody else has it to spend (and to pay tax on those spendings) or to build a factory to produce something to sell (and then to pay tax) and so on.
Anyway, if you think that not taxing Diogenes, who lives the life of an ascetic, is unfair to Croesus, who lives a wasteful and indulgent life, then we disagree.
But that sort of discussion is what I was trying to get with this post.
@Andreas
“………we also should tax investors on their unrealized gains on stocks and bonds, not just on those they realize when they sell. That is, those gains are not hypothetical in your view……….”
Under an income tax system, the money the investor uses to make more money on the stock market has already been taxed as income. So I have not much problem if he is only taxed on his gains when he sells his stocks, that is when the gain is realised.
But what if the stocks are never sold? Diogenes, being the miser he is, might never sell his stocks, and the person he leaves his money to when he dies, might not sell them either. So these gains would never be taxed.
To get around this, Diogenes, in addition to being taxed immediately when he gets his original wealth, should also be taxed on his gains after a stipulated number of years, even though he has yet to sell his stocks.
“…….Money being invested as opposed to spent is there for other people: Investing means lending it out, so somebody else has it to spend (and to pay tax on those spendings) or to build a factory to produce something to sell (and then to pay tax) and so on………”
This is your rationale for Diogenes never ever paying tax if he never buys anything, right? Diogenes, instead, lends his money to someone who builds a factory with it. The factory, when built, makes goods and sells them, and tax is charged on these sales. Hence Diogenes’ original wealth is ultimately taxed. So, if he was also taxed on his original wealth, that wealth would in effect be taxed twice, right?
Let’s now assume that there are no sales taxes, so there are only income taxes, and that Diogenes has $10 million on which he pays 30% income tax. This leaves him $7 million which he lends to someone who builds a factory with it.
The factory-owner isn’t taxed on the $7 million because it isn’t income to him. He will only pay income tax on the profit that he makes on the $7 million. Thus he pays income tax only on the additional wealth generated by the $7 million. Hence no double taxation.
Also, the income tax route ensures that wealth is ultimately taxed to the benefit of the land where the wealth originated. If Diogenes lived in a land with no income tax but only sales tax, and he decided simply dig a hole and bury his $10 million in it (because this is his unique way of enjoying his wealth), the $10 million would never be taxed.
Even if Diogenes, in his land with no income tax but only sales tax, were to lend his $10 million to someone who wants to build a factory, the factory-owner and his factory, given today’s global economy, would likely be in a foreign land. Therefore Diogenes $10 million would never be ultimately taxed in Diogenes own land, for the benefit of Diogenes’ fellow countrymen.
Hence it isn’t sales taxes, but income taxes which ensure fairness.
We’re definitely drilling a lot deeper into the subject now — both you and John above, especially.
This is what I was hoping to do in this post.
Incidentally, I notice that you’ve had an interesting progression in views in these comments. You start at the top quite intrigued (“brilliant proposal”), then you turn negative. But it’s only been a couple of days. I’m curious where we’ll end up in a week. 😉
Now, same question (brevity encouraged) to you as to John:
Since you don’t like THIS proposal,
1) what do you think of America’s current system and
2) what would you replace it with?
the obectives are to maximize freedom, simplicity, efficiency and fairness.
“………1) what do you think of America’s current system and
2) what would you replace it with………?”
– Retain the income tax, but rewrite the Act and Regulations from scratch, so that ordinary people can understand the bits that relate to them.
– Introduce a national sales tax.
– Try to get the states to harmonize their taxes with Federal taxes, so to make things less complex all around.
Rewriting and simplifying the Federal income tax would remove a big source of people’s anger against the Federal income tax.
A national sales tax would raise more revenues of the sort that are needed to tackle the spiraling budget deficit, which, unless something is done, will become worse as the average age of the general population rises (think only health costs).
A big problem with your sales-tax-only proposal is that it is too different from the tax regimes of America’s major trading partners. With money moving around the world faster, and in rising amounts, it becomes easy for people to play one country against another, to the detriment of the populations at large, if the tax regimes of different countries are too different from each other.
In one of my comments I gave the example of Americans who might want internet-deliverable services, but who would be motivated to get them mostly from foreign suppliers in order to avoid your proposed tax.
This wouldn’t happen even if you had a national sales tax, but only one with a rate similar to those of other countries. You can only have a similar rate if you retain the income tax.
Another big problem with your sales-tax-only proposal is that it is too ideologically right-wing, and, as such, is inherently divisive (think only the regressive tax issue). Thus, having both a national sales tax, as well as a national income tax, would be the sort of middle-of-the-road solution which goes best in a democracy.
Democracies, need it be said, are inherently messy.
I forgot to add in my previous comment that, before the complete re-writing of your income tax act and regulations, your Federal elections campaign finance laws need to be completely re-written as well, since they are the main cause of your income tax act’s incomprehensibility.
I love biking around.
I Challenge your idea of fairness.
I suggest that a “fair tax” is one in which the benefits received from their use (by government) is roughly proportional to the taxes paid.
By that measure your proposal is grossly unfair.
The function of government includes funding a military to protect our domestic resources, both wealth and people; funding police, fire, and other protective agencies as well as a judicial and penal system to support them; funding education; funding a civil legal system which defines and enforces contracts and property rights including real property, intellectual property, etc; funding and regulating a peaceful and efficiently functioning transportation system and a stable financial system;funding social safety nets like medicare, medicade, unemployment; enforcing our Constitutional Rights.
All of these functions provide a per capita benefit to individuals, but they also provide additional benefits proportional to the wealth of individuals and to the assets of businesses. Wealth is not income… it is accumulated income that has passed some barrier and becomes property of an individual or a business by laws enforced by government; it is thereafter used to generate more income and more wealth. Those with lower incomes accumulate no significant wealth. The benefits mean that corporations don’t have the costs to arm themselves as part of doing business and part of protecting their assets (as was the case for early British and Dutch Corporations), and individuals don’t have to do so either (as in Feudal Times).
Taxing on the basis of income is inherently unfair, but so to is a sales tax or VAT tax. The fairest would be an annual per capita tax plus a wealth tax on individuals and businesses. The ratio between the two is subject to other issues like maintaining a dynamic economy…. which favors exemptions for individuals and placing more of the burden on wealth…which is how the Greeks (among others) did it.
I’ll argue that the default condition of the economic system is control of all wealth and economic decisions in the hands of a few, hardscrabble lives for almost everyone and an efficiency that supports a tiny fraction of today’s population; like the default condition of an unmaintained building is a pile of rubble. The Feudal System, the ante-bellum South and most of the underdeveloped world are examples of those economies. A second purpose of the tax system is to slow down the concentration of wealth into the hands of a few, and later the transfer of that wealth by inheritance rather than merit. One of the keys to a modern economy is having widely distributed leadership whose competence is tested in the marketplace, not concentrated leadership determined by heredity…a filter that greatly lowers the average competence of leadership. One of the requirements for maintaining competent leaders is to disperse decision making in subsystems which test and develop the next generation of leaders on the basis of merit. It’s a problem China faced after 40 years of Mao…it set up special Economic Zones modeled on Hong Kong to develop risk takers, who now hold key positions in China’s government. Russia did not do that, and its only risk takers were crooks.
I write on extensively about these things.
Welcome Edwin. I’m very intrigued by your proposal of a per capita tax + a wealth tax.
It’s similar to a property tax, which Milton Friedman considered one of the best taxes available, would you agree?
The par capita tax is simple.
the wealth tax would be more complex: we’d need endless definitions of wealth and the same vast auditing and enforcement machine.
Andre:
The point of your article was tax fairness…. the wealth tax would be the fairest. The definition of wealth would be tricky, but not impossible. I suggest you read “The Origin of Wealth” by Eric Beinhocker for some of the latest thinking on this subject. The annual tax on wealth would be in the vicinity of 2%.
A graduated income tax is fairer than a flat tax since an income tax only taxes wealth only once, as it is being accumulated, therefore should be heavy at the high end to compensate for the subsequent years of a free ride at the expense of others. This graduated tax would have a secondary effect of reducing compensation explosion for executives, as it salaries and bonuses would be an inefficent way of accumulating wealth. (The salary and bonus explosions came after tax rates were significantly lowered in the 1980’s and later.) A level income tax or consumption tax gives accumulated wealth a free ride… while government must bear the costs of protecting wealth.
My other point, which you didn’t comment on, was a second purpose of taxes: to keep the distribution of wealth in the range conducive to modern economies. Too much concentration in the hands of a few, private wealth or behemoth corporations, will take us back to pre-Industrial Revolution economies and greatly reduced populations.
A wealth tax can be very unfair to senior citizens who are asset rich but have very low incomes.
I won’t be as long winded as some other commentators. All I have to say is “Let’s do it!” The positives vastly outweigh the negatives.
Incidentally NZ is making a move in that direction with a proposal from the government to greatly reduce marginal income tax rates and increase the GST (sales) tax. There’s is no talk of going all the way and the issue is a political football because of the ‘regressive’ argument.
“positives outweigh the negatives”: That’s the test, NOT whether there are any negatives at all. Thanks, Thomas
Andreas–Since you bring up the tax system and your area of interest is leadership and success/failure, you might want to talk about Alexander Hamilton one of these days. I’m not sure where you would put him on the curve, but he certainly peaked early, could/should have been president and probably had some serious EQ issues. (Always behind the curve, I’m finally reading Ron Chernow’s Hamilton biography–great stuff).
Hmm. I don’t know enough about him. I’ll queue up Chernow….
I had a synchronicity moment regarding the positives outweighing the negatives and Alexander Hamiliton. I’m working my way through Chernow and during the debates on the ratification of the Constitution Hamilton said:
“If mankind were to resolve to agree in no institution of government until every part of it had been adjusted to the most exact standard of perfection, society would soon become a general scene of anarchy and the world a desert.”
Great quote, and pertinent here.
Can’t wait to get into Chernow myself. But I’ve got to finish a few books first. More about that in a post soon…
47% of Americans pay no federal income tax at all. Having a flat tax would mean everybody pays not just half of us. No need for the IRS. That it itself would save billions. I heard the average IRS worker salary was 85,000 dollars a year for heavens sake.
Good point. But that’s exactly what some of the other commenters are protesting here: They feel that those 47% SHOULD not pay.
It all comes down to our gut feeling of what is “fair”
Wealth is defined more by how may times currency changes hands as opposed to the volume of it. That being said, a tax system that punishes the consumer for moving money would seem detrimental to the economy overall and long-term.
Also, think about the realistic application of a 30% consumer tax. A $1,000 TV in the US would cost $1,300 because of “consumer” tax. The same TV from Canada, shipped, would be $1,050 or so. The bigger the cost, the bigger the margins, and the less likely that purchase would be domestic. We’d essentially be reallocating our GDP to neighboring countries; the economic equivalent of NAFTA. This alone would be enough to put the kibosh on the whole thing.
I like the idea if for no other reason than the fact that it really gets the wheels turning. It’s a big “What If…” I agree our Tax system is broken, but with anything else, a gradual change is safer and a lot more plausible. 🙂 The real problem is finding the direction in which we want to go before actually going there, and fresh thinking like this is at least a good start.
Work with me here: Wouldn’t the TV in Canada cost the same? The Canadian company has to make a profit, then pay a tax on that profit, then pay dividends to shareholders who have to pay another tax on their dividends.
the American company has to add sales tax but does not need to pay profit twice.
If anything, the American TV maker now stands to poach the Canadian market, since it will manufacture without fear of income tax and can then export to Canada, where it adds no (or less) sales tax.
Am I wrong?
Let’s assume in both Canada and the US, a pre-tax selling price for the TV of $1,000 (ignore the exchange rate).
An American purchasing this TV from Canada would be charged $1000. He would pay a further $300 when it crossed into the US (I’m assuming the 30% Fair Tax would apply to imported goods).
Therefore the American would pay the same for the TV (assuming zero shipping charges) whether he bought it in the US or imported it from Canada.
But an American exporting the TV to a Canadian customer would be disadvantaged, for he would have to charge the 30% Fair Tax (which would bring the de facto selling price) to $1300.
When the TV crossed into Canada, the Canadian importer would have to pay a further 12% (Canadian GST plus PST). This would bring the cost of the TV to $1456. So the Canadian may as well buy it in Canada for $1120.
So you can see why the Fair Tax would hurt American exporters. On the other hand, American exports could be exempted the Fair Tax (to encourage exports). To ensure that exporters aren’t disadvantaged, is why Canada exempts the GST and PST from exports.
Since American exports, to be competitive, would almost certainly have to be exempted the Fair Tax, this would add COMPLEXITY to the Fair Tax plan. It would also mean that the 30% Fair Tax rate would have to be raised, so to make up the tax loss from exports.
As I’ve said in previous comments, the Fair Tax wouldn’t be nearly as simple as made out.
Based on Canada’s experience with its GST, there are other large areas of the American economy, like the finance and banking sector (because of its internationalism) which would have to be exempt the Fair Tax.
This would require the Fair Tax rate to raised yet more, and would add yet more COMPLEXITY to the Fair Tax.
But then, nothing is as simple as it seems.
“…the Fair Tax wouldn’t be nearly as simple as made out.”
aha! but it would be that simple for me. and that’s what i want.
If there’s a consumption tax, I’m guessing that barter and service exchange will become an even larger part of our economy. A solution might be to corral those IRS accountants… they can travel the country giving out tickets for bartering infractions. Hmmm, it might be that we replace one set of inefficiencies for another set.
I propose that all the IRS accountants should get taxpayer-subsidized re-training in massage techniques.
Auditors: deep-tissue
clerks: Swedish
execs: Thai
et cetera
Your idea is, well, horrible. Flat taxes are regressive – so you must think that regressive is fair. If you think Europe is one of the evil -isms, you’d have that in spades with a US VAT.
The solution in the US is to return the graduated income tax rates to pre-Reagan status. No need to worry about excessive bonuses again. the US gov’t would get 70% of it and they could return it to the American people – from which it was stolen to begin with.
Actually, a tax on consumption is not regressive. Ideally, things like food, especially healthy food, and utilities would be exempt so everyone would be on the same playing field with respect to the necessities of life. After that it’s all life choices. If you make $25,000 a year and want to drive a Ferarri, then yes, the tax is regressive. But that’s not the government’s (and since we are a democracy, I’m defining the government as the people) problem.
Well put, Jim.
I suppose I should accept exempting certain goods and services (even if, i suspect, that opens the tote bag, and every provider will lobby to be exempted as well)
This sounds great I must admit, jowever we had someone look into this systemhere inAustralia, the reccomended tax rate was approx 4% if i recall right, thereby encouraging people to spend in theory.
However, whatever the rate happens to be the end result is a much fairer tax based on consumption, or as we term today ‘ user pays’.
One aspect was not discussed though, and this was what happens to Companies and Trust funds etc, who’s primary existence is to move money around and avoid tax ??
Its a great debate and one well worthy of liberal discussion.
4% would be very low. I assume Australia was not planning to scrap its income tax entirely?
What happened to that plan?
Regarding trusts: there would be less need for them, right? That’s a good thing, I would guess.
Initial thoughts:
1. Every financial transaction contains two sides, the consumption side and the income side. I don’t see an inherent difference in which side is taxed- but…
2. Tote bags exist in both systems. You can either say which types of income are taxed or which types of consumption are taxed.
3. Which system makes brightlines easier both for tax categorization?
4. Why not make a larger prebate and tax absolutely every form of consumption?
5. What are empirical state by state results of income tax vs. sales tax? This should be measurable, as Washington state has a 8% sales tax, no income tax, while other states are only income tax.
6. What happens with property tax?
7. If I spend nothing, do I keep the prebate?
8. Is one’s contribution to society the economic value they bring to customers or the economic contribution given for community gain (tax)?
9. Who is more a burden on society? Croseus or Diogenes?
10. Would inheritance/gifting be a taxable financial transaction?
I’m not expecting answers, this is really ‘notes to self’ if I do try and take a plunge into this conversation, so I can go to sleep now and not have to read all the comments again tomorrow 😉
Those are great ‘notes to self’. You caught on right away.
You probably found the idea less alien than some others here because you’re from a state that has a sales tax but no income tax (Washington State).
2) The FairTax explicitly states ‘no exceptions’, hence no tote bag.
4) We ARE taxing every form of consumption.
5) WA and OR are a great comparison. The first has a sales tax but not income tax, the latter an income tax but no sales tax, and they’re neighbors. The problem is that they are only STATES, so that residents in both still ahve to file federal taxes. The Washingtonians therefore do not have the full simplification/freedom effect.
6) Property tax is a local revenue. I happen to think that it is also a better tax than the income tax, but I’ve already raised enough issues here as it is. In any case, we must let local government raise revenues, so no change….
7) yes. you get to keep the prebate.
8 your economic value to society: that’s immeasurable. Far more than the tax you pay. You teach and mentor people, you have ideas that improve processes, etc etc.
9) Croesus is a burden to society, Diogenes is not. I am saying this from our modern perspective, where our carbon footprint and claim on resources = “burden”. Diognes’ footprint is his barrell.
10) inheritance: ONLY sales are taxed, so inheritance is not a taxable event. Nothing changes (well, except a death)
I have read this entire post out loud to two entities who live in my household: Judge Blah and Dinah.
One of them agrees 100% with you.
Amazing.
That is extremely naughty of you. Some commenters here will know that one of those two is a dog, the other a judge, and now everybody will assume the dog is for the consumption tax.
I’m on board.
On point 5 though, I have to disagree with you.
We washingtonians do get the full (state) simplification effect. When I filed my taxes this year, my state income taxes were 0, no calculating required. My coworkers at the embassy, who live in states like Virginia, and DC, still do have to pay state income taxes with all the subsequent complexity.
Thought you might be interested in my latest post on American tax policy. I mention your advocacy of the FairTax as an alternative but question its political feasibility. I absolutely love that you find a place for a Greek cynic and the “ancient King of Lydia” in your post on tax policy.
very late to the game here. I’d say it was because massive rain fall got Mass taxpayers a late may filing date, but I filed my taxes on time, and was traveling (sadly, I was in LA and forgot that you had moved there, or I would’ve pinged you). couple thoughts I may have missed in the comments: the IRS budget is only about $12 billion.
http://www.centerfortaxstudies.com/blog/taxnews/2009/07/20/p6822
That won’t really get rid of much of the cost of operating government.
This fairtax may work well for consumers, at least in theory. But how do you account for business spending? Do you only tax what businesses spend here? And how do you define ‘consumption?’ if I produce coal, or paper, or oil-and-gas, do i get taxed for ‘consuming’ resources?
Also, do we tax government spending? The pentagon is probably the largest single purchaser of goods in the country, for instance.
best,
mike
Hi Mike,
For the cost savings, you should add to the IRS budget all fees to private tax accountants. That is to say: the new system would be so simple that we would no longer need professionals to “do our taxes” for us.
Businesses: They no longer have to pay corporate taxes but now pay sales tax on everything they buy, like the rest of us. But only when they purchase in America.
If you “produce” coal, you’re actually just digging it out. You pay sales tax on you shovels etc. But anybody buying the coal from you pays sales tax on that.
Government spending: Yes, government pays sales tax just as we do (to keep everything simple). Of course, those taxes then go … to the Government.
But what happens if someone who is earning a lot of money hoards it, i.e. doesn’t reinvest into the economy. Presumably with such a high competition for lending money and also a prebate cover most ‘reasonable’ expenses, interest rates would be low, so that would encourage wealthy owners to invest outside the country….how would an ‘only’ consumption tax handle this drain?
Hi Liam.
You’re worried about a) hoarding and b) investing abroad.
Hoarding is indeed the equivalent of “burying” capital, ie of making it useless to society. But why should there be MORE hoarding under such a consumption-tax regime than there is now, or than there has ever been? If anything, the opportunity cost of hoarding goes up with the tax system we’re discussing here, because investment income (ie, the return on SAVING as opposed to HOARDING) would be free. You would forego more return.
Investing abroad: Same logic. We want people in a free country to be able to invest wherever they please. We want foreigners to invest here, too. I don’t see why a good tax system should encourage an outflow of capital. It might do the opposite. In any case, no matter where an American resident would invest, he would still spend it, at some point, at home, and then pay the consumption tax.