Income Taxes vs. Consumption Taxes

I’ve always had an internal debate about the issue of Consumption Tax and whether it is ultimately more fair than the income tax. Looking at the issue from a general perspective, consumption tax makes more sense. You pay for what you consume. This proportionally taxes the rich since they theoretically buy more expensive goods, and rewards savings, as people will think twice about spending money on frivilous items.

Looking more into the issue, however, there are many other facets to this debate as described in the article below. I was not really thinking about the transition issues but obviously those issues would be great, as I’d imagine any major shift in tax policy would have. The middle and the lower income classes would be the ones mostly hurt by this policy, an issue I did not really think all the way through. With a pure consumption tax, all the deductions, tax breaks, interest write-downs would be eliminated, in a sense making those that didn’t have to pay taxes under the current system pay taxes as they consume. This would either further deteriorate the economic welfare of the poor or force them to live in sub-standard conditions, trying to save while foregoing basic consuming. The other issue is how much would the actual consumption tax have to be to replace current income tax revenue. I think the article estimates that the tax would have to be about 60% - impressive. And this rate would be applied to all consumables including health care, housing, etc.

The authors did mention that there are hybrid tax plans that can negate the negative effects of consumption tax. I’d be really interested in seeing what those tax theories are because I still think that in theory, consumption tax makes sense.

Original Article