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. Read more