Friday, 22 September 2017

"Why a consumption tax may not make any sense at all"

A splendid article, spotted by BenJamin' in the Nigerian Government & Business Journal (but equally applicable to all countries):

The devil in the (accounting) details – and the economic effects: You often hear calls out there — mostly from Right economists but also from some on the Left — for a consumption tax in the U.S. As presented, it’s a super-simple idea: tally your income, subtract your saving, and what’s left is your consumption. You pay taxes on that.

We want to encourage thrifty saving and discourage profligate consumption, so what’s not to like?


Worth a read in full. No point trying to summarise but he points out that the measurement, administration and enforcement will be a nightmare; "the empirics over many decades bear that out: higher saving rates have pretty much nothing to do with investment rates"* and finishes off by explaining why such taxes (for example VAT) are a huge drag on the real economy.

When people promote this idea I always try to make the very same points but they are just brushed aside.

* As I have explained before, household "saving" and business "investment" are two more or less completely different things, one has very little to do with the other.


mombers said...

Great article - key point is a consumption tax is a production tax. It discourages production and funnels money into things that aren't taxed, e.g. rents

Lola said...

M. Agreed. As The Man said, 'the purpose of all production is consumption'. If you try and restrict 'consumption' like this it will make a mockery of Say's law - and even Keynes.

Mark Wadsworth said...

M, L, ta, exactly.