As the President's plan to privatize Social Security flounders, the White House is shifting its attention to "reforming" the tax code. One idea that's getting a lot of play is called a consumption tax. It's a tax on what you consume rather than on what you earn. Fed chief Alan Greenspan seemed to endorse it last week. The bipartisan tax reform commission is taking a serious look.
Those who are pushing a consumption tax say it's a way to stimulate savings. If you're taxed on what you spend rather than on what you earn, the logic goes, you'll be tempted to spend less and save more.
But consumption taxes are regressive. People with lower incomes naturally spend a bigger portion of their yearly earnings than people with higher incomes. So a tax on what people spend rather than on what they earn will obviously take more from the poor than the rich.
It's possible to come up with a progressive consumption tax. Big spenders would face a higher tax rate than smaller spenders, regardless of what they earn. For example, someone who spends $100,000 in a given year would pay, say, $30,000 in taxes -- a 30-percent consumption tax -- while someone who spends $50,000 would pay, say, only $10,000 in taxes -- a 20-percent rate.
To make this work, banks and credit card companies would report to the IRS your total purchases during the year, just like employers now report your earnings. The more you spend, the higher your consumption-tax bracket.
In some ways a progressive consumption tax like this would be fairer than a progressive income tax, because you'd pay taxes on the lifestyle you choose. High livers and conspicuous consumers would pay at a higher rate than their more frugal and modest neighbors.
A progressive consumption tax is better than a flat consumption tax. But neither gets at the problem of low national savings.
The real reason most Americans aren't saving more has nothing to do with taxes. Americans aren't saving because they're not earning enough to save in the first place. The hourly wages of non-production workers, who make up about 80 percent of the work force, have stagnated for years (adjusted for inflation). Their wages actually dropped last year. Last month, they dropped again.
If most peoples' wages are going nowhere while their bills are rising, they're going to spend everything they earn. They won't save a thing.
The answer to America's savings crisis isn't to tinker with the tax code. It's to boost wages.
Robert B. Reich is co-founder of The American Prospect. A version of this column aired on Marketplace.
