Thursday, April 2, 2015

Taxing Consumption Instead of Income

The political winds in the U.S. may favor a shift towards taxing consumption more and income less. We are out of step with the OECD on this:

15-03-30, WSJ, Tax Patterns of the US and the OECD

Taxing consumption is generally preferred to taxing income by most economists. The reason is that income is spent on either consumption or income. So in some sense we are already taxing consumption at the same rate that we tax income. The difference is that when we tax income we tax savings too.

Taxing saving is probably not the best idea if you’re interested in improving well-being. Improved well-being comes from utilizing more capital, and saving is how we pay for that. Further, technological improvements allow us to control more pieces of capital, so that technological growth means we need more capital, not less.*

Skim the whole thing, entitled “Tax Proposals Would Move U.S. Closer to Global Norm” from the March 30 issue of The Wall Street Journal. (Do note that I said “skim” rather than “read”, indicating that I think this topic is a bit less important than others).

* This is part of the reason that, say, repairing cars is more expensive than it used to be. Technology has allowed cars to contain more pieces of capital that are controlled by the driver (and sometimes by passengers). More capital in your car makes spending time in the car less boring … but it also means more things that can go wrong.

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