Progressive consumption taxation
The Maryland state budget office recently announced new estimates for the budget deficits in FY 10 and FY 11, as well as a structural deficit of $2 billion. With no end in sight to the national economic depression, and limited hopes for a second federal stimulus, we need to grapple with this crisis and take advantage to rebuild our state tax system. As the President said in a Post op-ed today, it is time to “build something better.”
In 2007 we added somewhat to the progressivity of the income tax, but increased the regressive sales tax 20%. It’s time we looked squarely at the underlying faults of this system — we are taxing labor, savings and investment, and still encouraging consumption. While China and India are investing in their economies, we are still locked into an economy where consumption makes up 70% of GDP. As long as workers at Wal-Mart take more pride in buying cheaply rather than being paid a fair, living wage, we will have a problem. To compete globally we need to change that, and change it radically.
Taxes pay for public services, but they also encourage certain activities and discourage others. Our current system taxes labor, savings and investment, and encourages ever more conspicuous consumption. A solution would be to preferentially tax consumption, while encouraging saving and investment, which leads to job creation.
What would this solution look like? According to Cornell University’s Robert Frank, It would be a progressive consumption tax, which would tax the difference between a family’s earnings and its savings. As an example, a family that earned $100,000 and saved $20,000, would be taxed on a consumption of $80,000, minus a standard deduction of, say, $40,000. A tax rate of 10%, less than most VAT rates in the industrialized world, would leave a tax of $4,000.
This tax could replace the income tax, or the sales tax, or it could be used as an add–on and kick in only at a certain level of consumption, say $100K. In contrast to a national sales tax or VAT, it would not be regressive. If introduced slowly, it would not inhibit demand driving a recovery. It would also have the benefit in the future of being modifiable to encourage consumption when the economy slows, and discourage it when the boom returns.
And the most interesting political twist? The Republicans, the party that never met a tax they liked, would have a hard time arguing against a tax system proposed by the patron saint of free–market conservatism, Milton Friedman. |
