That's a post title that can only make my audience think, "wheeee!" I await my inevitable MTV Reality Show. Even so, though I'm convinced that singling out particular goods for taxation is probably a tough policy to sustain, there's no doubt that consumption taxes -- which the high-performing Nordic countries already have -- are perfectly plausible. And they can be made progressive, ratcheting up the rates as the level of consumption increases. The economist Robert Frank, in fact, has an idea for doing exactly that. Families would report not only their income, but their savings. Subtract the one from the other and you'd get their consumption. Rates would start low. As spending increased, so would the tax. It's not a terribly hard thing to do, nor a tough tax to administer -- indeed, if you simplified the code and took out some of the deductions, it would be far easier. And, particularly at the high end, it would dampen the incentives for ever more consumption, while increasing the attractiveness of savings and investment. That would be a good thing. We currently have a system that incentivizes pretty damaging positional competitions. We know, for instance, that housing is a positional good -- that consumers see the size of other houses as a critical factor when evaluating their own purchase. And we amplify this impulse. The mortgage deduction is a regressive deduction that incentivizes larger and larger houses. As the rich take advantage of it, the near rich have their frame of reference shifted, and stretch their mortgages to keep up, as does the group right under them, and on, and on, and on. And, particularly with the staggering jump in inequality, which has given the rich astonishing amounts of money to blow, we know that they're setting off expenditure cascades all over the economy, in everything from housing to cars to Viking stove tops. It may be that we want to encourage that through our tax code. But I don't really see why. The income tax, in theory, raises revenue sustainably, has a progressive structure, and is aimed at an inelastic enough need (more money) that it doesn't create very large disincentives. But there's nothing more "natural" about taxing income than consumption. And if you think it would be good for our tax system to put some soft disincentives on high-bracket spending, then a consumption tax is smart way to go. For those interested, Robert Frank has a full explanation of the proposal, and the rationale for it, here. Warren Buffett proclaims his support for a progressive consumption tax here. It's worth talking about.
