## Monday, November 10, 2008

### Just some friendly advice for the new guy...

The New York Times ran a series this weekend asking five of the country's top economists for advice for our new president. Here are the links, courtesy of Economix:
There's a lot of interesting and important advice in these columns. Specifically, I'd like to highlight the argument made by Robert Frank, who advocates a "consumption tax":

The first reform that Barack Obama should consider is replacing the progressive income tax with a progressive tax on consumption. A family would report its income to the Internal Revenue Service as it does now, and also its savings, as it now reports contributions to retirement accounts. Annual consumption would then be calculated as the family’s income minus its savings. Its taxable consumption would be that amount minus a large standard deduction — say, $30,000 for a family of four. A family that earned$60,000 and saved $10,000, for example, would have taxable consumption of$20,000. Initial tax rates on consumption would be low, and would then rise steadily with consumption, topping out at higher levels than the current top rates on income.

Such a tax could raise more revenue than the current system, yet would be far less burdensome for families at nearly all income levels. Because of the large standard deduction, middle-income families would pay less than they did before, and high-income consumers could limit their tax increases by saving more.
The argument is very simple: if you want less of something, tax it, thereby making it more expensive. Since the government needs to raise at least some revenue, it has to decide what to tax and still maintain economic efficiency. Given our current spending habits, it seems odd that we tax savings at the federal level, rather than consumption.

#### 1 comment:

Mike LP said...

Though it has been a long time since I have taken an economics class, this seems somewhat counter-intuitive to me. As a nation we have a negative savings rate, meaning that we all spend more than we make. The only people that seem to be saving any money in our economy (by in large) are the wealthy. Though a high deductible - like \$30,000 - does alleviate any burden the consumption tax might have for the lower and lower middle classes, the deductible is not close to high enough to compensate for the average spending of the middle class, who it seems to me would be most effected by such a policy. The real winners in this type of scenario are the upper and upper middle classes, making this system work in a quasi-regressive manner.

Furthermore, though savings is beneficial on the individual level, spending is what drives our economy and creates both jobs and wealth. Because of the proposed deductible, there would be no tax incentive for people with incomes below the deductible to save . . . and these are the people that we should be providing incentives to save for. An additional incentive to save is provided for the upper and upper middle classes, though it would be significantly healthier for our enconomy (and, as a result, for the lower classes) for the upper classes to spend more and save less.

In a country where average wages have been on a steady decline since the mid-70's largely due to the outsourcing of many industrial and manufacturing jobs, the lines between rich and poor are larger now than they have ever been. Not so coincidentally, tax rates on top income earners are near all time lows as are capital gains taxes.

Though Arthur Laffer might disagree with me, I do not think that our tax system needs to be completely revamped. Just raise taxes on the wealthy. If we do that and stop wasting unspeakable amounts of tax dollars on military spending - which is typically the least effective way to stimulate the enconomy through spending - we just might start to see the economic barrier shinking for the first time in three decades while experiencing economic growth at a sharper rate than we have had in recent history.

America is supposed to be the land of opportunity for everyone. If you ask any economist that knows, please excuse the expression, their asshole from his earhole, there are significant barriers to entering a higher class than you were born into. If you look at the current inflation rates on the cost of a college education over the last decade, you will clearly see that these barriers are not only alive and well, but also becoming harsher and less surmountable. I am not proposing that our nation becomes a social democracy and I do appreciate the fact that our (almost) capitalist system - which I do sincerely love - will inherently create economic disparity in society. All that I am saying is that to keep the American Dream alive and to provide others with the benefits that our ancestors had, we must move a little more to the middle.

Also - Dan, saw this blog on Facebook a few months ago and have been reading it pretty consistently. Fantastic job, love the commentary.