Resolved: The United States Should Implement a Progressive Consumption Tax

C1) The tax code needs reform The American people spend 7.6 billion hours working on filing taxes and $140 billion per year to keep the IRS off of their back [1]. That means the average American spends 23 hours working on filing taxes rather than doing other economically productive activities. And the number is probably higher than I estimated because many Americans do not pay taxes. Our current tax code unfairly harms investors which are central for economic growth. The current tax system has many layers of taxation that, when added together, impose a tax rate of 54% on investments. This is an issue because investors invest only when they think they will obtain a profit. If they are destined to lose at least half of that profit no matter what, many business deals which would be mutually beneficial for both parties are canceled because the investor fears the cost of high taxes. The tax code also has many deductions, credits, and and exemptions which are crafted to favor one group over another. This distorts how the market allocates resources. Some tax preferences actually harm businesses. As the Heritage Foundation explains, “the tax preferences for renewable energy sources make it more difficult for entrepreneurs to develop a type of energy that does not qualify for the tax preferences. This further reduces the opportunities for families by reducing the dynamism of the economy. ” [2] The Heritage Foundation isn’t defending some fringe viewpoint. The liberal NY Times and leftist Joseph E Stiglitz argue that the current tax system is deplorable. “[T]he wealthy have been enormously successful in getting special treatment, shifting an ever greater share of the burden of financing the country’s expenditures — defense, education, social programs — onto others. … One of the reasons for our poor economic performance is the large distortion in our economy caused by the tax system. ” [3] If bossy and I will agree on one thing in this debate, it is this: incentives matter. Human nature never goes away. People are influenced by incentives, it is a fact. If you decrease the cost of something more people will consume that product. The current system disincentivizes innovation which causes young people who enter the job market to not innovate. People do not want to deal with 73,000 pages of tax forms before they start their business. 70,000 pages plus of tax code does not cause equality. It causes economic manipulation at the hands of statist bureaucrats [4]. Both liberals, conservatives, and libertarians agree [2][3][4]: the tax code needs a fix. Whether it is to spur growth, reduce income inequality, or simply cut back on government power, the tax code must be thrown out in order to achieve any of those goals. C2) Consumption taxes are better than income taxes Many different groups of people want to fix the tax code. Where disagreement begins is when people propose their solutions. The Heritage Foundation supports a flat tax; liberals want to take out the loopholes to make the rich pay more. But the reforms all have one thing in common: they focus on income taxes. Income taxes are always growth constricting. Sales taxes, on the other hand, tend to promote more economic growth. Taxable income is equal to labor earnings plus capital income. Income taxes are applied on all of your taxable income, whereas consumption taxes affect taxable income minus saving. Unlike income taxes, consumption taxes do not affect what you are not spending, and thus encourage you to spend, invest, and save. Many households will save more because the current income tax code punishes them. Under a consumption tax this will *never* happen. Under an income tax, not only does current capital income get taxed, but any earnings from that transaction are taxed. According to the Federal Reserve Bank of Kansas City, “Under the income based system, households face a higher overall tax burden on capital income and have less incentive for new saving. ” [5] Of course, savers do not permanently avoid taxation. Over time the savers or the heirs of the savers will use the money for consumption, and this means it becomes taxed. Since savings gain value over time, and saving increases under a consumption tax, long term consumption is higher than it otherwise would be. Any investments are also untaxed until the money is spent. This means long-term investment and consumption increases, leading to economic growth. Income taxes tax both savings now and any profits later, and thus have a much larger burden on both the common people and the producers in the economy. To again quote the Kansas City Federal Reserve, “Most research suggests that switching from the current federal income tax to a consumption tax would raise real GDP in the long run. ” [5] The studies assume revenue neutral reforms, which is rational because deficits reduce long term growth [6]. Any consumption tax that does not increase the deficit would significantly boost economic growth. Instituting a regressive income tax (or just a flat income tax) actually biases the result the Kansas City Fed is talking about, and even then such reforms increase output by 9.4%, capital stock by 25.4%, and increase the labor supply by 4.6% [5]. Even using a system which depresses growth relative to a progressive consumption tax, we still see massive gains in economic output, the amount of capital stock, and increased labor supply (means more incentives to work). Consumption taxes consistently outperform flat tax reforms when it comes to spurring economic growth, though flat taxes still spur more growth than the current tax code. Another study by Altig et al. in 2001 found that consumption taxes produced the most income gains when compared to other variants of progressive income and flat income taxes [7]. The International Monetary Fund looked into income, property, and sales taxes. If you decrease income taxes but increase consumption taxes to make up for it, growth increases. This suggests that even though the tax burden may be the same, consumption taxes are better suited to increase growth. This holds even when controlling for endogeneity, which is a serious problem in tax research [8]. The consumption tax erases pretty much all of the flaws I pointed out in C1. Just like the flat tax, consumption taxes reduce complexity--and have the benefit of not being income taxes. According to the CATO institute, “The chief source of federal tax complexity is the income tax on individuals and corporations … replacement of the income tax with a retail sales tax would reduce compliance costs by 95 percent. ” [9] All the complexity related to compliance would disappear. According to businessmen surveyed, one of the largest complaints was that the income tax was complicated in the manner which it timed taking money. The consumption tax is reliable. Of all of the complaints business leaders had, CATO says that “[n]early all of those sources of complexity would be eliminated or greatly reduced under a consumption-based tax. ” [9] I have convincingly proven that (1) consumption taxes fix the problems of the current tax code, (2) that consumption taxes are better than income taxes, and (3) that consumption taxes would create huge amounts of economic growth. But why a progressive sales tax? C3) Progressive consumption tax > Fair Tax The Fair Tax is a flat consumption tax. I have proven that even a regressive sales tax trumps the current income tax proposals. But the question is why should we favor a progressive tax over a regressive/flat one? I just gave it away: progressive taxes aren’t regressive. The main negative to a sales tax is that it increases the burden on the middle class. According to the Center on Budget and Policy Priorities, FairTax proposals would lead to “an overall tax increase for [the poor]. ” [10] This has the negative of preventing consumption in both the short and long term for the middle class. Since they cannot afford to pay the brunt of the taxes it would be unfair to have a flat rate. Progressive consumption taxes have the benefit of being both consumption taxes, proven to cause growth, and also not reduce middle class spending. This means a progressive tax is even better than the normal flat consumption tax--which has been proven to grow the economy. The leading progressive sales tax reform is the X-Tax, which was invented by the American Enterprise Institute. The X tax is a modified VAT tax. It works by having two taxes: an individual tax and a tax on business firms. The taxes on individuals only apply to incomes, it does not affect savings. The corporation part is oriented towards business firms like corporations. It would not apply to their income but instead their business cash flow. The X tax is progressive because there are different tax brackets. Workers with higher wages pay higher consumption taxes; workers with lower wages pay lower taxes. The taxes are highest for those who get money from from huge business investments as well as higher wage workers, so it is *not* regressive [11]. It still has appeal because it still encourages savings and investment through the use of consumption, not income, taxation. The X tax has all of the benefits of a consumption tax and does not have the down side of harming American workers that a flat consumption tax does. Conclusion: 1. We need to reform the current system 2. Consumption taxes are the best reform option 3. Progressive consumption taxes have all of the benefits of consumption taxes and they do not harm the middle class 1. . http://tinyurl.com... 2. . http://tinyurl.com... 3. . http://tinyurl.com... 4. . http://tinyurl.com... 5. . http://tinyurl.com... 6. . http://tinyurl.com... 7. . http://tinyurl.com... 8. . http://tinyurl.com... 9. . http://tinyurl.com... 10. . http://tinyurl.com... 11. . http://tinyurl.com...;