I think one could make the case that a consumption tax would reward middle aged and old people and hurt young people just starting their careers and forming families. You'd very likely be taxing young poor couples more than rich middle aged families who've already acquired everything they might need or want. And there would be ways of getting around the consumption tax. Buying second hand stuff. Going to Yard Sales. Hell, we can't even tax new stuff that's sold online. We used to have a luxury tax on fancy boats and cars, but scrapped that. There is no will to tax consumption, and I don't see how such a tax could be rendered progressive, aside from a luxury tax. What America has determined to tax is tobacco, but even alcohol has a pretty low tax in most states. So even 'sin taxes' are hardly a raging success story. We're still consumption-oriented.

I think we need to start taxing wealth, and we need to treat capital gains as income, adjusted perhaps for inflation. Inheritances should be treated as ordinary income, and bases should not be stepped up! The first $30K or so should be exempt from federal taxes, and progressive rates should be at least 50% on over $1 million incomes. We should scrap the $500K capital gains tax exclusion, and we should also scrap the mortage interest deduction, as both of these impelled so many to get deep into debt that they cannot now pay. In compensation, capital losses should be allowed on homes.

Genedio: I think one could make the case that a consumption tax would reward middle aged and old people and hurt young people just starting their careers and forming families. You'd very likely be taxing young poor couples more than rich middle aged families who've already acquired everything they might need or want.

LeRoy: This is a fair critique. I think you could actually make an argument that people under 30 should be taxed at a somewhat lower rate than those over, regardless of whether you are taxing them on their income or their consumption. The American tax system has never been designed that way, of course, and I am not aware of any nation that has ever discriminated on the basis of age in their taxation system, until you get to retirement age...but I don't see any fundamental reason why you couldn't introduce some relatively simple way of doing this.

Genedio: And there would be ways of getting around the consumption tax. Buying second hand stuff. Going to Yard Sales.

LeRoy: Not sure I understand this criticism, though. I think it would be fairly easy to keep track of the level of people's saving. Say I make $40,000 next year, and spend $30,000 of it. I am saving $10,000 somewhere. We already keep track of IRAs and 401K plans and so forth. You would simply report your income and your saving to the government, and would be taxed on the difference, which is consumption, and you would not be able to 'hide' consumption by buying stuff second-hand or at garage sales or flea markets.

Genedio: Hell, we can't even tax new stuff that's sold online.

LeRoy: I have mixed feelings about exempting Internet purchases from state sales taxes. The argument for doing this was to help nourish a technology that we thought was going to help the economy a lot (and it probably has). It does benefit those who have Internet access at the expense of those (mostly very poor) who don't. In a few years, almost everyone will have Internet access, I would think. I don't know that this is really as big of an issue as some people have made it out to be; but perhaps you could convince me otherwise.

Genedio: We used to have a luxury tax on fancy boats and cars, but scrapped that.

LeRoy: I was in favor of the luxury tax, and opposed to scrapping it. I remember posting here (in Moneybox, probably) on Gregory Mankiw's critique of the luxury tax in his introductory economics text, which I thought was utterly missing the point of the tax. Mankiw complained that the tax was not bringing in much revenue, because the demand for luxury goods tends to be very elastic. He complained that it was reducing the demand for yachts, and thus reducing employment in the yacht industry. To me, that was exactly the point of the tax: to force a reallocation of resources away from producing yachts to producing more, well, perhaps, low-cost housing. More of what America actually needs.

LeRoy: To me, the art of leadership is to change the will of the people, and a good leader will convince the public to do what is right. Thus I don't buy this as an argument. It is like saying 'there is no will to improve education' or 'there is no will to find alternative energy sources'; so we might as well not even try to do those things. I don't think you would agree with a person who was making those arguments...

Genedio: and I don't see how such a tax could be rendered progressive, aside from a luxury tax.

LeRoy: This critique, I do not understand at all. As I suggested before, simply have every individual report both their income and their savings to the government. The difference is consumption. You could have brackets just as we do with the income tax. I would suggest the first $15000 of consumption for an individual, and perhaps $25000 for a family, should be utterly tax-free. Tax the first $10,000 of consumption above those levels at a rate of, say, 10%. And the next $20,000 of consumption at a rate of, say, 15%. And so forth, at progressively higher rates, until levels of consumption above $100,000 are being taxed at levels of perhaps 40% and consumption above $250,000 could be taxed at almost prohibitive levels of 60%. That in itself would function very much like a luxury tax, only on all goods. [One complaint about the old luxury tax was that it only applied to some luxuries and left others untaxed. We were taxing yachts and luxury automobiles, but a fellow could still go out and buy a $100,000 audio amplifier for his extravagant home 'stereo', without paying any luxury tax on it.] This kind of tax system would, in my prediction as an economist, lead to a very large-scale reallocation of resources away from luxury good production towards the production of basic necessities...and investment goods, funded from the increased level of savings that would result, at all income levels.

As you probably know, I agree with most of the ideas in your last paragraph. I see no reason why capital gains should not be taxed at a (slightly) higher rate than ordinary income, if we are not going to switch to a consumption tax; and I would certainly count it as ordinary income, if we do. Likewise with inheritances. [I never cease to be amazed that such a large portion of the public seems to be in favor of the favorite Republican idea of scrapping or at least greatly reducing the inheritance tax, at least to judge by the polls; I really don't think the public understands this issue, at all.] And I have always thought the mortgage interest deduction was a mistake, and one that greatly benefits the highly affluent who are buying multi-million dollar homes (and vacation homes), at the expense of the less affluent and especially renters. I would, however, phase it out, as opposed to simply canceling it overnight.

Comments:

1. Introducing a new variable (age) to the tax system would be a real non-starter. It would be perceived by a large majority ( those over, say, 30) as unfair, and the tax scheme is already too complicated.

2. "Say I make $40,000 next year, and spend $30,000 of it. I am saving $10,000 somewhere."

You have the good fortune to live in Fort Collins, CO and not San Francisco, CA. You can save, but many can't really. Of course they could if they lived at home for many years after they entered the workforce and remained single--as many Asians still do. They could if they ate rice and chicken wings. Still, it seems unfair to tax someone making $30K who spends $25K as much as a one in a couple who make $60K and spend $50K. The couple are individually much better off. I guess this is an argument for the marriage penalty.

3. A big loophole: people would just invest and spend money overseas.

4. Re: IRAs and pensions: Phil has pointed out that you end up paying a higher tax rate on withdrawals from tax-deferred plans than you would if you simply paid the capital gains taxes as they occur. We are still not rewarding savers. We reward gamblers--particularly gamblers who gamble with other peoples' money, like hedge fund managers.

5. The poor not only suffer from lack of internet access, they also rarely have credit cards, which are pretty essential for online purchases, and what credit they do have is at higher interest rates.

6. Agree with you about the yachts, but what we ended up producing were Mcmansions in the exurbs and SUVs. We really need more goddam apartments in the inner cities. But there's no glamour there.

7. My saying that there's little or no will to tax consumption is exactly what your friend George Carlin said about contemporary American life: that it's all about consumption. I think this has been true for my entire lifetime, and probably Carlin's, as well. But we used to know how to do education.

8. "We were taxing yachts and luxury automobiles, but a fellow could still go out and buy a $100,000 audio amplifier for his extravagant home 'stereo', without paying any luxury tax on it."

As a former audiophile and music afficianado, I'm unaware that any amp ever sold for $100K. $20K was close to the upper limit, and they were mostly built in the good old USA. I made due with a second hand amp for about $750 (new price, $1,500). Hi-end audio stuff is one of the few consumer electronics sectors in which the U.S. still leads. I wouldn't want to kill it off. A good amp can last for years. I think it's akin to orchid afficianados, or perhaps devotees of rare books. Certainly we're not talking rare Stradivarius violins. Not all luxury goods are created equal IMO. We should extol culture. GHW Bush's cigarette boat was a luxury good which got 1/6 MPG. That should be taxed.

"GHW Bush's cigarette boat was a luxury good which got 1/6 MPG. That should be taxed."

Even better; it should be sunk! There are a lot of things, like the Governator's eight(?) Hummers, which would serve mankind better if they were sunk offshore to form artificial reefs where baby fish could hide as they grew.

Genedio: As a former audiophile and music afficianado, I'm unaware that any amp ever sold for $100K. $20K was close to the upper limit, and they were mostly built in the good old USA.

LeRoy: There is a company based right here in Boulder, Colorado, that makes very high-end amplifiers. The price range is from $40,000 up to $100,000. Their mono-block amplifier weighs 240 pounds. It is a monstrous thing. Stereophile (I think) reviewed it and concluded that it was the best-sounding amplifier they had ever heard. I think that's the one that goes for a hundred cool ones. I am an audiophile myself, but since I will never be in that price bracket, I don't even lust for it. Would be pointless. [And think, you would need two of them, just for stereo!!]

Genedio: I made due with a second hand amp for about $750 (new price, $1,500). Hi-end audio stuff is one of the few consumer electronics sectors in which the U.S. still leads. I wouldn't want to kill it off.

LeRoy: I agree with you on this. Since I enjoy multi-channel sound and home theater, I bought a Yamaha home theater receiver for about $1200 a few years ago; it was not their top-of-the-line model. Comparable American equipment would have been much more, probably at least double that price. The Japanese are still superior in making the middle-of-the-road equipment for audiophiles who are less well-heeled. IF I had the money (i.e., if I was making $80,000 a year), I would search out and buy American-made audiophile equipment...

1. Introducing a new variable (age) to the tax system would be a real non-starter. It would be perceived by a large majority ( those over, say, 30) as unfair, and the tax scheme is already too complicated.

2. "Say I make $40,000 next year, and spend $30,000 of it. I am saving $10,000 somewhere." [This was LeRoy's comment.]

You have the good fortune to live in Fort Collins, CO and not San Francisco, CA. You can save, but many can't really. Of course they could if they lived at home for many years after they entered the workforce and remained single--as many Asians still do. They could if they ate rice and chicken wings. Still, it seems unfair to tax someone making $30K who spends $25K as much as a one in a couple who make $60K and spend $50K. The couple are individually much better off. I guess this is an argument for the marriage penalty.

LeRoy: But, our current tax system suffers from the same problems, and I am not aware of any proposed solutions that would not greatly complicate our tax system. America's 20-somethings are really struggling in today's economy to get their feet on the ground; the current tax system does not take this into account. If someone who is 25 years old is making $30,000 a year, they are taxed at the same rate as a 62-year old making the same amount. So...what is your solution to this? And, there are of course wide variances within the United States in regard to the cost of living. A person living in Manhattan who is making $50,000 a year is taxed at the same federal rate as someone living in Jackson, Mississippi who makes the same amount....AND has to pay higher state taxes as well. Ronald Reagan's simplistic answer to this is that people should "vote with their feet"...but the hypothetical person in Manhattan making $50,000 a year would likely not be able to find an equivalent job in Mississippi...I think some people have proposed that the federal tax system should somehow take into account these differences in the cost of living, but they have always gone nowhere, due to the complications they would introduce into the tax system.

"Ronald Reagan's simplistic answer to this is that people should 'vote with their feet'"

I accepted the invitation, but I never got him where I could kick and stomp him.

The very fact of the variation of cost of living and wage scales across this nation shows that, after hundreds of years, we are still pretty provincial. Allowing, even cherishing, states' rights no doubt has a good deal to do with that. I think there is more to support fixing that than trying to distort the tax code to compensate for the inequities.

As I have posted before, life can be divided up into four basic periods, each around 21 years long:

1. Birth through school graduation, with no significant income and support provided by the parental generation.
2. Family building, during which the members of the previous group are supported and a household is established.
3. Middle age, the period during which there is the greatest likelyhood of there being surplus funds available for savings.
4. Retirement and the dying process, during which the funds saved in the prior period will hopefully pay the way.

It would not be unreasonable to have a tax system which recognizes these periods. However, to some extent, we do. The exclusion of some income protects those in the first group from paying taxes. The granting of exemptions for childcare to mainly the second group compensates it somewhat for the expenses of child-rearing. The third group, considered the most able to pay taxes, is not sheltered from them. The fourth group is compensated for the burdens of old age and unemployment by the provision of Social Security and Medicare benefits. So, we are, at least partially, taxing by age, at least statistically.

I have also, at some point, suggested that conscription, the requirement that you be a worker for the government, for several years of your life, Because the distribution of life expectancy is extremely narrow compared to the distribution of either income or wealth, it is likely to ve a fairer distribution of the tax burden.

So, there!