The Consumption Tax – A Non-Starter


The Consumption Tax – A Non-Starter

By Duncan Whitmore

In a recent essay published on this blog1, the present author proposed a short series of aims that would reduce the burden of taxation on economic prosperity, in comparison to a programme proposed by the Adam Smith Institute (ASI).2 Part of the ASI’s programme consists of “replacing [the] income tax with a progressive consumption tax, so savings are not taxed”.3 In relation to this, we explained, briefly, that all taxes are paid for out of one of two sources of production – either income or wealth – and that

The individual names of all of the different taxes refer not to fundamentally different types of tax; rather, they denote either the specific kind of good to be burdened (i.e. property, alcoholic beverages, etc.) or the particular event that triggers the tax liability. For example, within the category of taxes on income, an income/payroll tax taxes the income at the point it is earned; a VAT or sales tax, on the other hand, taxes the income at the point it is spent.

Consequently, we concluded that a proposal for a consumption tax amounted to little more than simply moving a tax burden around and calling it a different name rather than eliminating its depressing effects upon economic prosperity:

Changing the precise moment when a tax is levied ultimately does nothing to ameliorate the effects of the tax – it simply means that you might be able to hang on to your money for a little bit longer before having to give it up. Neither also does changing the triggering event have any effect upon who, ultimately, pays for the tax. All taxes must be paid for out of production and so the burden of any tax always falls upon producers.

This essay will elaborate on why, for a programme that wishes to give a serious boost to economic prosperity by reforming taxes, the proposal to switch to a consumption tax from an income tax is a relatively pointless endeavour which should not be considered as a priority. We will also explain why the claim that “savings are not taxed” is utterly fallacious before exploring some particular difficulties that are inherent to introducing and operating a consumption tax. Although this essay concerns, mainly, the effects of a consumption tax upon economic prosperity, we will then move on to highlighting some further problems this method of taxation presents from a purely libertarian perspective. Finally, we will conclude by pointing out that any benefits a consumption tax could bring are unlikely to be realised in the absence of fostering a general government commitment to lower tax rates. Continue reading

Economic Myths #12 – The Deflation Danger


Politicians and mainstream economists are persistent in their warning of the so-called “deflation danger” – the idea that falling prices are calamitous for economic progress and that a perpetual, ceaseless price inflation is needed in order to bring us back to prosperity. Often, a deflation figure as small as 0.6% seems to be sufficient to trigger alarm – something of an hilarious travesty when, regardless of the merits of the deflation thesis, this figure amounts to little more than a rounding error.

The typical argument against deflation runs something like this: with continuous price deflation people expect prices to be lower tomorrow than they are today so that, as a result, they put off their purchases until a later date. This, in turn, causes prices to fall further and further and so we end up in an endless downward spiral of depression and impoverishment. Inflating prices, however, cause people to buy today so that they may insulate themselves from future price rises, thus bringing about economic prosperity and an increase in the standard of living. Continue reading

Economic Myths #11 – The Mixed Economy


The world’s political systems today are, generally, neither fully despotic on the one hand nor completely free on the other. Instead, most of us languish under so-called “social democracy”, a curious mixture in which a degree of sovereignty in the form of voting rights reside in the citizenry while political leadership and control remains distinct in the form of various functionaries such as Presidents, Prime Ministers, Congressmen and Members of Parliament.

A libertarian might contend, of course, that such a social democratic system ends up being worse for individual liberty than a dictatorship or monarchy. The important point, however, is that the ideological extremes have been blended into some kind of soup which, at least from the de jure point of view, represent neither total freedom on the one hand nor total despotism on the other.

In exactly the same way, neither do our economic systems represent any ideological purity. We are neither fully capitalist nor are we completely socialised. Instead we have to put up with some kind of “mixed” economy that contains both capitalistic and socialistic elements. Continue reading

Economic Myths #2 – Consumption Boosts Growth


The belief that economic progress is boosted by consumption is based upon the kind of misunderstanding that could be made only by intellectuals – the product of theorising that is completely detached from the common sense that everyone else possesses.

The misunderstanding is based on a conflation of the desire to consume on the one hand with the act of consumption on the other – or, in other words, it confuses motive with cause.

All economic progress is motivated by the desire to achieve consumption – in other words, to satisfy as many of our ends as possible. Without any desire to consume or to satisfy any ends there would never be any economic activity whatsoever. Thus, the bigger our desire for consumption then the greater will be our efforts to speed up economic progress.

However, economic progress is not caused, or brought into being, by the act of consumption. Rather, the act of consumption is the result of economic progress (i.e. of increased production). Actually consuming is what we to do in order to reward ourselves once we have produced something – it is not what we do in order to start production in the first place. Indeed, as is so often the case with realities that are hidden by myths, this truth is intuitive – you cannot consume a good unless it has first been brought into existence by production. Continue reading