Quick 'n' Easy Consumption Tax

It seems to me that a rough approximation of a consumption tax could be implemented quite simply just by eliminating the cap on IRA contributions. In theory, allowing unlimited traditional IRA contributions should ultimately have more or less the same effect as uncapping Roth IRA contributions, though the latter may be more politically feasible since the former would result in a dramatic fall in current tax receipts, which would have to be made up for by heavy borrowing for a couple of decades.

Thoughts?

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Many people who (supposedly)

Many people who (supposedly) advocate a consumption actually want most consumption (i.e., food, clothing, diapers, healthcare) exempt (as is the case for food & clothing under most state sales taxes), so as to make the tax "progressive" and amenable to nanny-state controls (i.e., "this will be taxable but that won't").

Stated differently, most purported advocates of a consumption tax really want a luxury tax, with a very expansive defintiion of "luxury."

I'm not sure your proposal accounts for that.

I've argued the same: if you

I've argued the same: if you allow people to deduct all investments, you will have the same effect as a consumption tax with the addition of some compliance cost. Excluding food remains feasible in the form of a "food deduction" from income.

Kip, The most prominent

Kip,

The most prominent consumption tax around at the moment (the FairTax) has no excluded products. It does have a "prebate", which is designed to make sure no taxes are paid up to the consumption level of someone living at the poverty line, in order to make it non-regressive and slightly progressive at the low-to-mid income levels.

Unfortunately, my plan is

Unfortunately, my plan is also progressive (a large portion of income is exempted from taxation) and subject to nanny-state controls (via deductions). Heck, the whole thing is a nanny-state control insofar as it encourages saving.

Or I suppose the nice way to say it is that it doesn't discourage saving. In which case I have to admit that it discourages consumption.

Brandon, You need to catch

Brandon,

You need to catch up with the lefty talking points. Their redistribution is still protection. They're protecting rich people from the "revolution"...

You know, I used to be

You know, I used to be against progressive taxes but after some thought I don't think they are so bad. The main purpose of government is the protection racket. Why shouldn't the people with the most things to protect also have to pay the largest fees.

Cornelius: The primary

Cornelius:
The primary advantage of a consumption tax, to me, is that it doesn't interfere with the accumulation of wealth the way income taxes do. See Greg Mankiw's explanation for details.

Brian:
A flat income or consumption tax meets this criterion as well. I suspect, though, that the cost of protecting someone scales sublinearly with consumption---i.e., protecting someone who makes $1,000,000 per year probably costs less than 50 times what it costs to protect someone who makes $20,000 per year.

So assuming that the government uses all tax revenues to provide protection, a regressive tax system would be the most "fair." Of course, as you probably know, the government spends only a small fraction of its revenues on protection (say, 20-25%), and most of the rest is redistributed. The primary effect of the progressive tax system is to enable redistribution, not to spread the costs of government more fairly.

Brandon, what's your goal

Brandon, what's your goal with this tax?

Why shouldn’t the people

Why shouldn’t the people with the most things to protect also have to pay the largest fees.

That's the nature of percentages, no progressivity needed.

The primary advantage of a consumption tax, to me, is that it doesn’t interfere with the accumulation of wealth the way income taxes do.

That may be an advantage (some might argue it's a wash between paying at the front door or the back), but it doesn't answer what your goal is with the tax..

Then my goal is to live

Then my goal is to live under a tax regime that doesn't interfere with the accumulation of wealth. I guess. I'm not sure what you're asking.

And those who argue that it's a wash would be wrong. The problem with income tax is that it reduces the rate at which capital compounds. Suppose you make $10,000 and invest it for 40 years at a nominal return of 10%. If you have a 30% tax rate (on both wages and capital gains) and a 3% inflation rate, then you start out with $7000, and your real, after-tax rate of return is 4%, which means that after 40 years you'll have $33,600 in today's dollars.

But if you put it in a traditional IRA, you start with $10,000, and it compounds at a real rate of 7%, and after 40 years you have $150,000 in today's dollars, and $105,000 after the 30% tax. The difference comes from the fact that you earn returns on the money you would have had to pay out in taxes.

The difference comes from

The difference comes from the fact that you earn returns on the money you would have had to pay out in taxes.

And that's precisely the flaw. Ypu ignore that the state is not going to accept a pay cut. Given that the annual tax revenue to the state is to be roughly the same between tax plans, it doesn't matter if the amount is calculated based on income or spending.

Quick-n-easy consumption

Quick-n-easy consumption tax
"A rough approximation of a consumption tax could be implemented quite simply just by eliminating the cap on IRA contributions"

Brandon, I agree with this

Brandon,

I agree with this statement:

"A flat income or consumption tax meets this criterion as well. I suspect, though, that the cost of protecting someone scales sublinearly with consumption—i.e., protecting someone who makes $1,000,000 per year probably costs less than 50 times what it costs to protect someone who makes $20,000 per year."

Sorry, I wasn't thinking about income taxes in that regard. I thought my reference to "most things" made that clear. I can see how you would misunderstand. I was thinking of a wealth tax.