There is Nothing Wrong with Consumption

Brandon came up with an interesting way to tax consumption, and someone commented about the FairTax. These are interesting proposals, but they naively assume that somehow we'll be better off with less consumption and that taxes somehow impact consumption.

Consumption is the reason people make money in the first place. Well, that and power. We buy a big house so we can use the house. We invest in companies either because we believe in the company (and hence will accept less yield) or because we want more money later so we can consume.

Let's assume that we came up with a perfect consumption tax, and such a tax was the source of all government revenue. For the moment, we'll ignore any issues about progressivity or regressivity, as this has no impact on the ultimate effect. Why would such a tax system cause someone to defer or forego consumption? When I choose to put money in the bank instead of spending it right away, it's either because I have something I'm saving up for or because I think I'll get more out of it if I spend it later. But the consumption tax would be exactly the same later as it is now, so it would have no bearing on my decision about whether to spend the money now.

Ultimately, it's people's time preference that determines how much they save or invest. The government may control short term interest rates, but that really only biases people between keeping their money in dollar-denominated securities or in other assets, since interest rates below the "natural" rate of interest will simply cause the other assets to appreciate, shifting yield into real estate, equities, and commodities.

In fact, if a consumption tax were effective for a while in causing people to put more money into their savings accounts or other dollar-denominated securities, over time the central bank would just lower interest rates until the savings rate was right back where it was. And even if people decided to invest the money instead, eventually they would realize that they were going to have to pay the same tax no matter when they spent the money, so they might as well spend it now.

Taxes *do* have an impact on people's behavior, but there is really no difference in terms of behavior (other than the ways people skirt the tax) between taxing income on the front end or on the back end.

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There is Nothing Wrong with Consumption | Sean Lynch | Catallarchy ...if a consumption tax were effective for a while in causing people to put more money into their savings accounts or other dollar-denominated securities, over time the central bank wo...

You're looking at it the

You're looking at it the wrong way. Taxing consumption isn't really to discourage it (although that may be a positive benefit).

The whole idea is to simplify the tax system, make it more transparent, and do things that will make our economy more competitive on a global scale. The idea being that taxes discourage corporations to set up here, hurt manufacturing by embedding taxes into the cost of production that hurt our ability to export products, etc.

More people may save and invest under the FairTax, but the main goal is to destroy the behemoth of a tax code we currently have, replacing it with something that is simple and transparent. Beyond this, it is expected to have very tangible economic benefits (making the US the world's largest tax haven, as Boortz is known to say), and may improve saving and investing.