The recent debate about a "progressive consumption tax" got me to thinking. This thinking got me to reflecting on the fact that all the Market Monetarists are also dyed in the wool Supply Siders. All of them. Know none who aren't. I don't think that's an accident.
For the debate over a progressive consumption tax and my claim that it's a contradiction in terms
On the point that Market Monetarism always comes coupled with Supply Side economics see
Now while Sumner was claiming that my claim that a consumption tax is necessarily regressive shows that I am wholly ignorant of "public finance" he did have a few goes at explaining it. I wonder if the reason who was so testy is that he has trouble explaining it?
"I don’t recall names (I studied public finance 35 years ago), but the progressive consumption tax is quite popular among public finance types. It’s also a popular idea in Europe, where taxes are more aimed at consumption than in the US."
If it's quite popular among the public fiance types that must be because "public finance types" is just another designation for "Supply Siders."
But as for his point that it's popular in Europe, well again, notice how he always resists details? How much time would it take him to tell us what European countries he has in mind? The main countries I can think of are the Baltic states-basically Latvia,, Albania, etc. that is the former Soviet Union's satellites.
What you find is that Supply Siders tend to like the following kinds of taxes-a national sales tax, a flat tax, a "value added tax" and a wage tax. All of these ideas have been tried in Europe. The GOP during it's primary gave us a great example of the appeal of consumption and flat taxes. Again the people who support consumption taxes are the same people who support flat taxes. Herman Cain was the ultimate case of this.
His ultra regressive 9-9-9 plan gave us the worst of all worlds. In theory it was supposed go impose a flat tax of-what else?-9%. On the other hand he also had a 23% sales tax-and in effect capital gains taxes are close to abolished.
So there was both a flat tax and a sales tax. Cain had insisted that his plan was revenue neutral. Of course if that's true it means that someone's taxes has to go up. In his plan that someone was mostly everyone who isn't rich. Then too it should be pointed out that in a way this is being redundant, for te flat tax is in reality a value added tax:
"The flat tax is a VAT, not so different from the taxes popular around the world. Under one variant of VAT, called a “subtraction-method VAT,” businesses deduct the cost of inputs from gross receipts and pay tax on the difference—the value added. It is basically a sales tax where the tax is collected in stages from each producer on the supply chain rather than all at once from retailers (as in the retail sales taxes that are common in the US). A flat tax adds one more wrinkle: businesses are allowed a deduction for wages paid, but the employees pay the “flat tax” on their wages directly. If that’s all that happened, the tax burden would be identical to the VAT (assuming the same level of compliance), but the flat tax also allows an exemption for every worker. Wages are only taxed above that exemption level, typically set at around the poverty level, so that wages up to the poverty threshold are exempt from tax."
I can't resist touching on something else in the above quoted article-I will withhold the publisher monetarily, you'll see why when I reveal it. Listen to what is says regarding the oft repeated Republican talking point that one of the great virtues of the flat tax is it does away with awful "complexity" we have to deal with every tax day:
"A really comprehensive flat tax would be simpler than our current system because there would be no deductions or credits, and only the one exemption. But our income tax would also be much, much simpler under those circumstances. It’s true that calculating tax when there’s only one rate is simpler than calculating tax when there are multiple rates, but most people look up their tax in a table or use software or a paid preparer so the value of this simplification is also pretty negligible. Since capital income (interest, dividends, etc.) would be exempt from tax, that would simplify reporting and recordkeeping for most taxpayers. Overall, a flat tax would be somewhat simpler than a similarly comprehensive income tax. But the same pressures that make the current tax system riddled with deductions and credits would apply to the flat tax. It is not clear that it could stay pristine."
In reality then our current tax system is not so very complex after all! Now here's the publisher: this appeared in Forbes magazine! Forbes of course ran on a flat tax back in 1996
Sider's delight. His game was a 15% flat tax. Remember this gem during the campaign season?
"But a new analysis by the Tax Policy Center showed that Gingrich’s plan, which would set an optional flat tax rate at 15 percent while maintaining numerous tax deductions and exclusions, would trump them all. It would reduce federal revenue by $1.28 trillion or 35 percent in 2015 (assuming expiration of all the Bush-era tax cuts), shrinking the federal government tax take to about 13 percent of GDP, which would be its lowest level since the year the U.S. entered World War II."
"In other words, if Grover Norquist’s goal of drowning the federal government in a bathtub is your goal, or blowing a huge hole in the federal budget, then the Gingrich tax plan is for you. “The Gingrich plan would by necessity result in much lower spending,” said the Urban Institute’s Roberton Williams, who analyzed the plan for the Tax Policy Center. “His plan would reduce revenues by 25 percent beyond what Perry proposed. And Cain’s was basically revenue neutral.”
"While former frontrunner Mitt Romney has attempted to portray Gingrich as a secret liberal, Gingrich has a proven knack for appealing to conservatives who dominate the early Republican primaries, especially the Iowa caucuses that are just three weeks away. His plan hits most of their hot buttons."
"It would give most of its tax relief to better-off Americans in the upper middle class and above. It would repeal the alternative minimum tax, which hits high-income earners, even as it preserved the home mortgage and charitable tax deductions, which go disproportionately to the well off."
"The Gingrich plan would also totally exempt from taxation long-term capital gains, dividends and interest, which would provide a permanent tax holiday for those Americans who earn most of their income from revenue-generating stocks and bonds, including many retirees. Besides the well-to-do, that would be a huge boost for the retirement incomes of the half of the Baby Boom generation with substantial savings in their 401(k) plans, since they will most likely be converting them to dividend- and interest-bearing investments. The other half of the baby boom generation without substantial savings, on the other hand, would not benefit from the plan since the current tax rate on Social Security earnings already is 15 percent."
The beauty of Cain's was it's blatant clear repressiveness. It lowered taxes wildly on the wealthy and corporations. But even more impressive was it's raising taxes on the rest of us. On the other and Newt's scheme gave bigger tax cuts than Cain for the 1%. However, it kind of hid the true costs to the rest of us by not even attempting to make it revenue neutral.
But the huge shortfall in revenue could only imply draconian cuts in government expenditures. While he might not have run on ending Medicare as Ryan does it's implicit in his proposal.
But both are Supply Side schemes and I'd argue the Market Monetarists would opt for either one.