Steven Landsberg's Alternative Tax Plan

Though I doubt that he was the formulator of this tax plan, Steven Landsburg, writing in the Wall Street Journal, mentioned a brilliant formula for making the consumption tax progressive rather than regressive. The Rochester University-based economist suggested that, at the end of the fiscal year, the IRS could add up the amount of money that a citizen earned during the previous twelve months and, from this number, subtract the amount that the citizen saved. The difference to this equation should be, roughly, equal to the amount that this citizen has spent on consumption. In summary, you could write the equation something like this:

Earnings - Savings = Consumption

The consumption would be the number used to determine that citizen's tax amount, but the total amount of earnings could determine whether their consumption amount should be multiplied by a fraction or integer. In other words, as Landsberg says, this is a consumption tax which can be made as progressive as we want.

Of course, this raises the question of why we would want to change our tax code to begin with. Isn't it already progressive enough? Well, yes, but that isn't really the point. Growth and individual ethics, as well as communal fairness, should also be factors in determining how we tax, and, by this standard, a consumption tax significantly more justifiable than a income tax.

As Landsberg points out, it is simply crazy to tax people for saving (which is what we do now) rather than spending (we also do this, but not as much); this is because saving is a common good, whereas spending only benefits the consumer and the producer; the third men (the society in general) actually lose because of the consumption of others, if only slightly. Income tax, on the other hand, is nothing short of a tax on productivity. Essentially, it is a punishment for working. To state the principle more simply: citizens should be charged for what they take from society, not for what they give to society.

This tax would also very likely lead to greater economic prosperity as it would influence more citizens to spend wisely, save and invest by eliminating all the annoying taxes on stocks and bonds.

This doesn't, of course, establish that this consumption tax would be superior than a that could be collected at the point of purchase. That is because there are other reasons for the superiority of this tax over the consumption taxes that currently exist. Just last year, Mike Huckabee had to assure everyone that he would first eliminate the black market before he implemented his plan for an across-the-board consumption tax, but the beauty of Lansberg's system is that there is no need for the government to do so; the invisible hand does so automatically. Because the amount of money that does not show up in savings is used to determine the citizen's taxable assets, rather than using the amount of money that does show up in the grocery store, all consumption is taxed, whether it is on the black market or not.

The same principle applies to services. Many economists who favor consumption taxes believe that services, as well as goods, ought to be taxed, but realize that this would require an enormous bureaucracy so that the services could not, by and large, be performed under the table. Again, because this tax collects from the consumer rather than the producer, it would not matter whether the service provider were a licensed carpenter, part-time worker or illegal alien, because the service will be taxed, no matter who it is.

There are several drawbacks to this plan, as there are with any plan. One of these may be that it would discourage enormous purchases, such as housing. This is only a tentative problem, though. Obviously, borrowed money would not be taxed under this plan and, in the same way that we currently allow real-estate purchasers to write their debts off on their tax forms, a set of laws could be passed to exclude such purchases from taxable consumption. (They could even be categorized as an investment, which they most certainly are.)

Another drawback to the plan is that it taxes people who hide their money under their mattress more than it does people who put it in a bank. To this objection, though, I would have to say that this is a reasonable group to tax more highly. Their use of money does neither themselves, nor their society in favors, and, therefore, they should be more taxable. That being said, people of this demographic who are over the age of sixteen compose of very small minority of the population and, as this tax plan would provide further incentives to abandon this boondoggle, the numbers of such ardent individualists would significantly decline.

Naturally, I don't expect anyone ever to implement these policies in this country, but I hope that they might be implemented elsewhere. Isn't it pretty to think so?