Wednesday, April 15, 2015

Consumption Taxes Are Not a Good Idea

I have a tax day piece in The Week making that point. To elaborate: the theoretical economic argument for taxing consumption and/or exempting saving from personal income taxation is that full-income taxation penalizes savers by taxing them twice (the first time they earned the money, and the second time they received an income from accumulated capital), while economic growth depends on expanding the capital stock through saving. There is a wide range of economic models that are based on one or both of these two essential ideas. They have nothing to do with reality, and Mike Konczal demolishes them here.

It's pretty clear there's a value judgment going on here, against "irresponsible" people who don't save. It's evident from this blog post by AQR Capital Management Professor of Finance John Cochrane, in which he compares his “thrifty poor” in-laws to Michael Jackson, with his $100 million amusement park and petting zoo. 
Finally, on the policy side, doing social policy through the tax code, with a proliferation of tax-sheltered savings accounts for retirement, healthcare, college tuition, etc, 1. hasn't worked as policy in each  of those cases, and 2. contributes a great deal to rising inequality. I also think the policy-making paradigm that says that sort of thing is better than, you know, actually taxing people to pay for programs that do these things, is premised on a kind of economics ideology. Supposedly it's better if people freely choose to save for retirement than if they're forced to do so via Social Security. It's a major case of making policy on the basis of economics-esque "free market" philosophizing, rather than empirical reality, and if we're going to have good policy (or go back to having good policy) in this country the economists are going to have to be the ones to point out where this thinking goes off the rails.

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