From the Wall Street Journal Feb 2. After 30 days I can post full text.
A Consumption Tax Is the Shock Our Broken System Needs
Something remarkable happened last month. On Jan. 9, Georgia Rep. Buddy Carter introduced the “Fair Tax” bill to the House of Representatives, and secured a promise of a floor vote. The bill eliminates the personal and corporate income tax, estate and gift tax, payroll (Social Security and Medicare) tax and the Internal Revenue Service. It replaces them with a single national sales tax. Business investment is exempt, so it is effectively a consumption tax. Each household would get a check each month, so that purchases up to the poverty line are effectively not taxed.
Mainstream media and Democrats instantly deplored the measure. Mother Jones said it would “turbocharge inequality.” Rep. Pramila Jayapal called it a “tax cut for the rich, period.” The New Republic asserted that consumption taxes are “always a dumb idea”—but presumably not in Europe, where 20% value-added taxes finance welfare states—and called it a “Republican dream to build a wealth aristocracy.”
Even the Journal’s editorial board disapproved, though mostly on politics rather than substance, admitting a consumption tax “might make sense” if Congress were “writing the tax code from scratch.” The board worried that we might end up with income and sales taxes, like Europe. And the tax change won’t pass, making it is a “masochistic vote” that it will “give Democrats a potent campaign issue.”
But our income and estate tax system is broken. It has high statutory rates with a Swiss cheese of exemptions, immense cost, unfairness and distortion. Former President Trump’s taxes are Exhibit A, no longer making headlines because we learned that he simply aggressively exploits the complex rules and deductions that Congress offers to wealthy politically connected real-estate investors.
A consumption tax, with none of the absurd complexity of our current taxes, is the answer. It funds the government with the least economic distortion. A consumption tax need not be regressive. It’s easy enough to exempt the first few thousand dollars of consumption, or add to the rebate.
More important, the progressivity of a whole tax and transfer system matters, not of a particular tax in isolation. If a flat consumption tax finances greater benefits to people of lesser means, the overall system could be more progressive than what we have now. A consumption tax would still finance food stamps, housing, Medicaid, and so forth. And it would be particularly efficient at raising revenue, meaning there would potentially be more to distribute—a point that has led some conservatives to object to a consumption tax.
Others complain that the rate will be high. An effective 30% consumption tax, added to state sales taxes as high as 10%, could add up to a 40% or greater rate. But taxes overall must finance what the government spends. Collecting it in one tax rather than lots of smaller taxes doesn’t change the overall rate. It’s better for voters to see how much the government takes.
A range of implicit subsidies will disappear. Good. Subsidies should be transparent. Money for electric cars, health insurance, housing, and so forth should be appropriated and sent as checks, not hidden as tax deductions or credits. They can still be as large as Congress and voters wish. However, it is vital to keep the tax at a flat rate and not try to redistribute income or subsidize industries by different tax rates.
Will there be some problems of compliance and evasion? Probably, but sales taxes or value-added taxes are hardly new, untested ideas. The Fair Tax bill addresses many objections and real-world concerns, and more refinements can follow. A value-added tax or personal-consumption tax can achieve similar goals.
This is a big moment. For a long time, consumption taxes have been debated in academic articles, books, think-tank reports, administration white papers and so forth. When the U.S. eventually decides to reform the tax code, consumption taxes will be the obvious answer. It is great news that real elected politicians like Rep. Carter get it, and are willing to stick their necks out to try to get it passed.
No, it’s not likely to pass this year, or next. All great reforms take time. The 8-hour workday and Social Security started as wild-eyed dreams of the socialist party. Civil rights took bill after bill being voted down. The income tax took a long time. But if we never talk about the promised land and only squabble over the next fork in the road, surely we will never get there.