Meme Watch: Consumption Tax Gambit

Taxing the poor by stealth?

In December, Jonathan Weisman reported in the Washington Post that the White House Council of Economic Advisers’ forthcoming “Economic Report to the President” would “include a section arguing for new methods to calculate the distribution of tax burdens on various income groups.” That sounded ominous, because R. Glenn Hubbard, chairman of the CEA, had expressed sympathy for a burgeoning conservative movement (kicked off by a Nov. 20 Wall Street Journal editorial) to shift the income-tax burden toward the poor and the middle class. At a Dec. 10 conference sponsored by the American Enterprise Institute, Hubbard had griped, “The increasing reliance on taxing higher-income households and targeted social preferences at lower incomes stands in the way of moving to a simpler, flatter tax system.” Rough translation: Tax Tom Joad.

Now the White House has released this year’s “Economic Report to the President,” and Chatterbox can’t find the section Weisman described. What he does find is a chapter arguing that the current progressive income tax be scrapped in favor of a new federal consumption tax. A consumption tax is generally viewed as being highly regressive, because poor people spend a larger proportion of their income on consumption—that is, buying stuff, as opposed to making investments—than rich people do. That caricature isn’t necessarily fair, because one can conceive of a consumption tax that would exempt subsistence goods. Lester Thurow, a liberal economist, made the case two decades ago for a consumption tax that would include a generous income-based refundable credit to help people at the lower end of the income scale. More recently, Cornell University economist Robert Frank, author of Luxury Fever, proposed a consumption tax that would exclude all families earning less than $20,000.

But the “Economic Report to the President” doesn’t ponder ways its proposed consumption tax could be made progressive, presumably because the whole (unspoken) idea behind the plan is to lower taxes on rich people and raise taxes on poor people. The CEA report barely addresses so-called “distributional” questions at all.

The “Economic Report” does concede that “the benefit of not taxing capital income accrues largely to those with higher incomes.” But it argues that this regressivity diminishes somewhat “when viewed from a lifetime perspective” as opposed to “an annual perspective.” That’s mainly because some people at the lower end of the income scale are young folks just beginning their climb toward affluence; today’s starving medical student is tomorrow’s wealthy M.D. But other people at the lower end of the income scale are unskilled laborers. As they get older, they won’t make much more money, after inflation, than they do now. Why punish them?

The Economic Report further argues that the consumption tax is less regressive when one takes into account that some forms of capital income would be counted as consumption rather than as investment. “Future cash flows resulting from extraordinary profits, due to innovation or the return to risk taking, are all generally subject to tax,” the CEA says. But not many rich people make especially brilliant or risky investments. In combination with Bush’s ambition to make permanent the elimination of the inheritance tax, a tax policy that deliberately rewarded cautious stewardship of vast fortunes could easily be construed as a deliberate scheme to make American society more aristocratic. Surely that notion is repugnant to the third-generation Bonesman in the Oval Office.

Meme Watch archive:
Jan. 22, 2003: “Follow the Money”
Jan. 21, 2003: “Tax Rates Are Already Flat”
Jan. 20, 2003: “Return of the Lucky Duckies”
Jan. 16, 2003: “Tony Snow Says Tax the Poor!”
Jan. 14, 2003: “A Payroll Tax Rise?
Jan. 2, 2003: “Bushies Get Cold Feet
Dec. 16, 2002: “Bushies Take the Bait
Nov. 27, 2002: “Introducing the Meme Watch