vol. 47, no. 12 (December), 1997,
pp. 758-59
The USA Tax: A Progressive Consumption Tax
by Laurence S. Seidman
Cambridge: MIT Press,1997. Pp. 160
Hot dogs, baseball, apple pie and the USA Tax: What is the relationship
among these pieces of Americana? The fourth-listed one imposes a tax on
the other three. USA stands for Unlimited Savings Allowance. Taxes are
to be imposed only on consumption, as set out in the 1995 USA Tax bill
sponsored by Senators Domenici, Nunn, and Kerry. Professor Seidman of the
University of Delaware has written a book to argue the case for this progressive
consumption tax and to defend his relatively pure version of it against
the version in the actual legislation. The 1995 bill involves a few needless
complexities and inequities, but these legislative quirks do not unduly
distract Seidman or his readers from the more fundamental issues.
Although the transition
from an income tax to a consumption tax would involve radical change, the
proposed tax system would be the same as the existing one in several important
respects. The total tax burden would be the same, the distribution of that
burden across the different income classes (or consumption classes) would
be about the same, and the computation of the tax liability for each individual
and for each firm would be complex—though maybe not as complex as it currently
is. Some of the distinctive features of the proposed system are in serious
conflict with the basic principles of liberty. For one example, taxes themselves
would be treated as consumption (public rather than private) and thus would
be subject to further taxing (pp. 72-73). For another, all deposits and
withdrawals of cash, the key determinants of consumption-tax liabilities,
would be reported to the government by financial institutions (p. 7).
The supposed appeal
of the USA Tax lies in its favorable treatment of saving and investment
and in its "fairness." The favorable treatment of saving and investment
is achieved simply by excluding these activities from the tax base; the
"fairness" (so judged on the basis of survey results believed to reflect
the majority opinion among Americans) is achieved by the progressivity
of the marginal tax rates. In comparison with the USA Tax, our current
income tax is found inferior because it taxes both consumed income and
(with some exceptions) saved income. A national sales tax and the Hall-Rabushka
Flat Tax are found inferior because they do not allow for enough progressivity.
The two main features
of the USA Tax, (pro-saving and progressivity) are presented separately
in Seidman's book. Weighing strongly against this tax scheme, however,
is the conflict between these features—a conflict that Seidman does not
notice (or, at least, does not mention). The steeply progressive tax schedule
may well discourage saving and/or encourage borrowing. A simple example
can make use of the tax schedule to be applicable for the year 2000 and
beyond together with an assumed interest rate of 10%. The marginal tax
rates for the four consumption brackets are 0%, 8%, 19% and 40%, the top
rate applying to consumption levels of $24,000 and higher. Suppose our
taxpayer is in a position to consume $24,000 worth annually. He could,
instead, spend only $23,000 this year so as to be able to spend $25,000
(plus some interest) next year. This year's $1,000 reduction in consumption
allows our taxpayer to take advantage of the tax-free status of savings.
He would pay $190 less in taxes this year (19% of $1,000). Next year, after
collecting $100 in interest, he can spend $25,100. But the taxes he owes
on that last $1,100 worth of consumption is $440 (40% of $1,100). For the
two-year period, his initial saving has allowed consumption to go up by
$100, but his corresponding tax liability goes up by $250! In this example
(and in others where consumption levels are close to the bracket breaks)
the anti-saving effect of the "fairness" feature swamps the direct effect
of the pro-saving feature. This net anti-saving bias is even stronger when
incomes (and levels of consumption) are increasing over time—as they generally
are. A temporal smoothing of consumption to avoid high marginal rates requires
borrowing—dissaving—in the lean years.
If considerations
of fairness keep people from saving this year in order to consume next,
maybe the more farsighted among us can take advantage of tax-exempt saving
by waiting until retirement to consume. But this is the one component of
saving that is exempt even under the existing system. Further, retirement
years are low-income years, not necessarily low-consumption years. Many
people in their 60s and 70s travel extensively as they never could before.
They consume. Many in their 80s and 90s pay dearly for their daily keep
in a retirement center. Should these people pay even more dearly on April
15? Our hapless taxpayer may once again be foiled by fairness.
In comparing income
and consumption as alternative tax bases, there seems to be no clinching
argument that allows for an unambiguous preference. Each is deficient when
judged by the standard set by the other. If we take consumption as the
appropriate base, we see that an income tax is applied to some of it twice.
If we take income as the appropriate base, we see that a consumption tax
lets some of it go untaxed. Ultimately, Seidman's case for the pro-saving
feature of the USA Tax is itself based on considerations of fairness: "[I]t
seems fairer to tax a person according to what that person subtracts from,
rather than adds to, the economic pie" (p. 56). It is true—and seems eminently
fair—that when we "subtract from the economic pie," we pay, and when we
"add to the economic pie," we get paid. But this truth, which reflects
the ordinary working of the market system, leaves unanswered—and unasked—the
question about how much each of us should pay for government and about
how much government we should have. The holistic notion of the "economic
pie" provides little or no scope for claims about fairness. The size of
the pie is a consequence of the various preferences of market participants—for
enjoying leisure rather than supplying labor and for consuming now rather
than consuming later. What seems fair is that each of us should make his
or her own choices in this regard. The notion of fairness, however, provides
no clear link between changes in the size of the pie and obligations
to pay for government.
Opponents of the current
tax system who base their criticism on the tenets of classical liberalism
will be equally critical, if not more so, of the USA Tax. For the classical
liberal, meaningful reform is better aimed at reducing taxes and, more
generally, at reducing government.
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