Had an interesting and to my mind very productive conversation with W. Peden over at Money Illusion.
It started from a Sumner post "Zero Fiscal Multiplier Watch, Example #843." Yeah, whatever, Scott. Let's hope it's better than examples 1-842. Sumner said one thing in particular that I pushed back on. There's actually a lot I could have pushed back on however I keyed in on this:
"My dream is that in a few more years I’ll be able to do a post entitled “We’re all zero fiscal multiplier, market monetarist, progressive consumption tax, supply-sider, neoliberal Yglesians now” so that I can retire to some place warm and sunny."
Hey he can dream. But it will happen only over my dead body-long as I have breath in me we won''t all be " fiscal multiplier, market monetarist, progressive consumption tax, supply-sider, neoliberal Yglesians now."
But I pushed back on just one part of this Sumnerian future. Isn't a progressive consumption tax a contradiction in terms?
"A progressive consumption tax is a contradiction in terms. Is your future utopia any different than Paul Ryan’s?" I ask him.
Sumner gave a rather terse, cursory answer that didn't settle anything:
"That will come as a big surprise to all the experts in public finance who support progressive consumption taxes."
That does nothing to answer my point. If public finance experts support it fine. Explain to me why they do and how a consumption tax could possibly be progressive. I don't know if Sumner simply mistook-as perhaps he often does-my pointed question as simple hostility for the sake of. He does have a way sometimes of responding to a rather tangential point in a comment too which is why I usually practice economy when asking him something as I did in that very short comment-give him just one thing to answer the thing you actually want answered. If you put anything more he'll answer that even though it's not the main point.
In fairness he may simply be very busy sometimes. He does produce a lot and read through lots of comments. I won't necessarily read bad faith in it. In any case, while Sumner didn't give me a satisfying answer, his Market Monetarist buddy, W. Peden certainly did. He and I ended up with a good exchange which at least enabled me to understand the case for a consumption tax a little better.
W. Peden made some very interesting arguments. For one he explains that for him there are other types of consumption taxes than only sales taxes:
"A progressive payroll tax is just like an ordinary payroll tax, except with progressive rates. To make it revenue-neutral, you’d have to greatly raise the overall amount of tax from payrolls in order to accommodate the abolition of income tax and capital gains tax."
"I wonder if the confusion about the supposed inherent regressivity of consumption taxes comes from the fact that when people talk about consumption taxes, they usually mean a sales tax (and VAT in particular). A sales tax is almost always regressive."
I admit that's what I usually have in mind which is why the idea of a consumption tax have very negative connotations in my mind. However, W. Peden admits that a sales tax is almost always regressive. This is good, it means that we occupy the same planet at least-we're not discussing alternate universes or playing to mutually exclusive "language games." For me when I hear "consumption tax" I reach for my gun-because I think "Herman Cain's 9-9-9."
His idea about a progressive payroll tax is actually a wonderful idea. In the US tax system, the payroll tax is very regressive. You pay payroll taxes at a rate of 7.54% on your first $106,000-in truth the employer side is paid by the employee too so really it's double this-but any wage income above this is not taxes at all.
Still I argued with W. Peden, why is there this preference for investment over consumption? Why do we want to discourage consumption even of the rich? His answer:
"Especially the rich. I’d say there are three main reasons-
(1) Western economies have chronic imbalances in favour of consumption over investment*.
(2) Consumption inequality is arguably the worst kind of inequality, especially because of its effects on consumer debt behaviour-
(3) At low levels of income (i.e. those who already aren’t paying any income tax) greater capital abundance would change the capital/labour compensation gap more in labour’s favour, which would deal with some of the problems of the secular pattern of much greater investment-income compensation in recent decades in the West."
I did question (1) and he gave me a link to back that up. But reasons (2) and (3) are certainly food for thought. No question a big part of the problem of the economy recently has been the ever rising consumer debt. It's a real drag on the economy. It hurts not just individuals but has great externality costs on the economy.
He pointed out to me that it's even worse in that not only do many nonrich Americans consume all their income they have been consuming more than their income.
About my point that while it's true that 45% of Americans pay no income
"I agree on non-income-tax taxes, though in the EU those are generally either mandatory (VAT at 15% or more) or desirable (alcohol and tobacco taxes). Of course, even if those 45% weren’t paying any tax, my response would be Friedmanite: good! If only the highest-earning 65% of the population are paying tax, then that’s great! Sadly, as you say, it’s an illusion in the US."
"Will certainly drink to that with you and Milt. No matter what anyone may think of Friedman on other issues he certainly deserves some gratitude from the poor for designing the Earned Income Tax Credit (EIC).
"What you say about Europe is well taken-it’s not necessarily true that Europe is superior to the US on tax progressivity. Actually as I understand it what Europe does at least in many countries is have high and fairly regressive taxation however with a much more generous welfare state than in the US. So part of it is that the bargain is different."
"For me Friedman’s attitude on taxation for those with little or modest income is the right one because in my view what the US represents at it’s best is not equality of outcome but of opportunity.
At our best we don’t guarantee anyone great wealth but they at least have the realistic chance. Note the key is realistic."
"For this reason we want to make the tax burden very light-I’d be happy with none for many-so that “gravity is wekaer” and the chance of upward mobility is higher. I do feel we’ve gone away from it in recent years."
"An interesting point-again I appreciate your-and Friemdan’s-attitude on taxes and the poor, but many conservatives these days seem to feel that the poor are somehow getting a free ride and they falsely conflate income tax with taxes-as we both agree is totally wrongheaded."
"Yet when the US income tax originally started it was only levied on the rich. It really wasn’t until 1942 when income taxes-and more fatefully payroll taxes-started being levied on everyone.
So those who bemoan “45% pay no tax” actually miss the point. Historically the nonrich have seen their total tax bill go up year after year. Income and payroll taxes used to only be for the rich."
Overall he gave me some food for thought. I'm not entirely sure about his call for eliminating a tax on investment but this largely due to my skepticism that this would end up being revenue neutral. He argues that the properly structured progressive payroll tax would be. I'll say this, if it really is it's worth thinking about.
Honestly I'd probably be willing to consider any number of things if it will make our deeply regressive payroll taxes progressive. I believe that's a serious drag on the economy and a cap on upward mobility. The fact is that the nonrich are very overtaxed.