A Trivially Bad Argument Against A Consumption Tax

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There are good arguments in favour of a consumption tax--the idea that you pay tax upon that portion of your income you consume but not what you save--and they are based upon economic efficiency. Investment is a good thing, it grows the future economy, savings do indeed finance investment, no, sorry MMTers, they really do, so why tax people on what they're saving which will make us all richer in the future? This is, of course, the flip side of the tax deadweight argument, that different taxes destroy different amounts of economic activity for the same revenue raise. Capital taxes having higher deadweights than consumption taxes--those two definitions of consumption tax there not being wholly and exactly the same.

There are also good arguments against consumption taxes or a consumption tax. Given the manner in which capital is concentrated among higher income groups--well, D'Oh--they do tend to be regressive which might not be something we want to do to the tax system.

As it happens we do sometimes trade that equity argument, regressive or not, for economic efficiency, as with having sales taxes or VAT. At other times we trade the other way, as with very low incomes paying no income tax and high ones rates quite possibly over the Laffer Curve peak to make up the needed revenue. Well, no one ever said that economics was perfect, only that it can aid in describing the trade offs that the real world forces upon us.

Then there are bad arguments against a consumption tax like this one:

Yves here. A consumption tax is one of those ideas that keeps being bandied about as a sort of magic bullet. Fortunately, it never seems to get beyond the occasional 50,000 foot article touting its supposed virtues and into tax bills. This article explains why the hidden premise is bogus. And that’s before you get to the fact that a consumption tax, which is basically a broader implementation of sales taxes, would be regressive.

I share very few views with Yves Smith but she is usually a little more perceptive than this. The argument boils down to:

What if this family leases its car with an option to buy at the end of the lease, instead of buying? How do you account for that? And this doesn’t even touch the troublesome issue of health care: is it consumption? That’s how it’s tallied in the national accounts. But if Americans didn’t invest in maintaining their health, how prosperous would our country be? Should we tax health spending? If you get sick, your taxes go up. Hmmm.

I’ll leave it to my gentle readers to consider the details — what’s consumption, what’s saving, and what’s neither? Just to say: I can’t quite see how this family would do their taxes without a complete balance-sheet accounting every year, or some quite complicated rules for 1040 filing that result in essentially the same thing.

We're told that a consumption tax would be a bad tax because it would be complicated. There are ways of making it rather simple of course, we could, for example, define savings as "anything you can currently hold in an IRA" which would get us pretty lose to the Platonic ideal. But perhaps more importantly, arguing against a tax proposal because it is complicated comes up against the question "OK, sure, it's not really simple, but it's complicated compared to what?"

The what we should be comparing to being the US Code Title 26, as close to a general compendium of US Federal tax law as we have. Which seems to come in at some 10,000 pages. And of that, Subtitle A is income taxes, at some 1564 pages. Of which Chapter 1, at 1,400 pages apparently, is just normal taxes and surtaxes. So, err, sure, we might have a little difficulty in defining consumption for the purposes of a consumption tax. But compared to what, the current tax code?

There are arguments from economic efficiency and equity both for and against a consumption tax. But given the pig's ear of a tax system we have at present complexity of a consumption tax isn't a reasonable argument.
