On Consumption vs. Income Taxation

Quoth Megan McArdle, when asked why she doesn't support a shift from income tax to consumption tax in the form of unlimited IRAs:

Because with a decent tax code, there's no reason for the government to artificially bias peoples' choices towards savings and away from consumption. The bourgeois moral affection for savings is a socially useful cultural belief, but it is not actually a moral law. Savings is just time-shifted consumption. I see no moral difference between consumption now and consumption later.

I disagree for a couple of reasons. First, it's not clear to me that a consumption tax would artificially encourage savings any more than an income tax encourages current consumption. And by inflating the currency while not allowing taxpayers to adjust the cost bases of our investments for inflation (i.e., if inflation is 3% and I sell a bond which has earned a 5% annual return, my real annual return is only 2%, but I'm taxed on the full 5%), the government is arguably actively dicouraging saving.

Furthermore, investment, while not necessarily morally superior to current consumption, has positive externalities that we should be encouraging. A higher capital-to-labor ratio increases labor productivity and drives up wages. And certainly it's good for society--both in a practical sense and in a moral sense--if more people have enough money socked away to smooth over a rough spot or two without suffering the indignity of relying on the government for help.

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Not Necessarily...

Savings is just time-shifted consumption.

Only if you believe in a simplistic life-cycle model where you schedule your income and expenditure flows perfectly and die broke but debtless.

"Saving today to spend tomorrow" is not the same as saving today to have an income stream to spend tomorrow -- especially if you make a conscious decision to leave the unspent (i.e., never spent) corpus of your wealth to heirs, charity, etc.

KipEsquire, A Stitch in Haste

Okay then

How about time- and person-shifted consumption? If, rather than spending money on myself, I give it to my heir to spend on himself, then the consumption has been shifted in time and in person but is still consumption by somebody.

If you want to propose money that is never spent but is passed perpetually from heir to heir, first, in reality all great fortunes are spent, most sooner rather than later. Even if your family retains something, like a mansion, perpetually, this is in fact consumed - enjoyed - year by year, and must furthermore be maintained. I have read a few stories about British aristocracy who are having trouble making ends meet because of the cost of maintaining an enormous mansion.

So wealth that is never consumed is a pretty remote theoretical possibility.

[edit: I'm not taking her side in the larger argument, just talking about this point]

Saving is the root of the

Saving is the root of the process of civilization. It means turning away from the instinct of immediate gratification and use reason to form tools and all sort of capital to improve your condition. This accumulation of capital goods increase wages and thus allow more people in turn to save.

Saving might be one of the most moral activity there is, along with investing.