Thursday , November 26 2020
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If you are not taxing consumption . . .

Summary:
. . . then you are not taxing who you think you are taxing. I was reminded of this point by a recent tweet I saw: Progressives tend to favor higher income tax rates on the rich.  I prefer a progressive consumption tax.  It might be worth noting that if the top rate of income tax were increased, President Trump still would have paid roughly 0 in income taxes in 2016.  In contrast, he probably would have paid much more in taxes with a progressive consumption tax, at least if his lifestyle is as lavish as has been reported. Just to be clear, I don’t believe that tax policy decisions should depend on how it impacts Trump—that would be absurd.  My point is that when people get outraged about what they see as a gross inequity, it’s important not to just lash out

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. . . then you are not taxing who you think you are taxing. I was reminded of this point by a recent tweet I saw:

If you are not taxing consumption . . .

Progressives tend to favor higher income tax rates on the rich.  I prefer a progressive consumption tax.  It might be worth noting that if the top rate of income tax were increased, President Trump still would have paid roughly $750 in income taxes in 2016.  In contrast, he probably would have paid much more in taxes with a progressive consumption tax, at least if his lifestyle is as lavish as has been reported.

Just to be clear, I don’t believe that tax policy decisions should depend on how it impacts Trump—that would be absurd.  My point is that when people get outraged about what they see as a gross inequity, it’s important not to just lash out blindly, rather one should think clearly about who actually bears the burden of different types of taxes.  In general, it’s NOT the person (or company) that writes the check.

There are technical problems with taxing consumption.  But there are often even bigger technical problems in taxing income, wealth and other alternatives.  For instance, there is the question, “Is X a consumer or an investment good?”  But the exact same dilemma crops up with income taxes.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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