RE: taxes

[Bruce McFarling <brmcf@xxxxxxxxxxxxxx>]

On Sun, 2 Apr 1995, Alan G. Isaac wrote:

> On Sat, 1 Apr 1995 15:44:45 -0700 Bruce McFarling said:
> >On Sat, 1 Apr 1995, Alan G. Isaac wrote:
> >
> >> This appears to be a fallacy of composition. The question
> >> is whether a consumption tax will successfully tax
> >> _individual_ stocks of wealth. ...
>
> Bruce responded:
> >	Why would that be the question?
>
> Because, Bruce, this is the particular point on which we were
> disagreeing. In any case, you have not indicated whether you
> agree taht your claim involves a fallacy of composition?
	(a) That wasn't the point on which I was disagreeing and (b), sorry
if I hadn't responded to the Fallacy of Composition question: no, it's not
a fallacy of composition.  The critique wan't elaborated, but then perhaps
my point wasn't either.  Shifting from income taxation to consumption
taxation in the special case under consideration shifts from taxing the
individual income which provided the means to buy the wealth to taxing the
share of the proceeds devoted to consumption.  Let's have Buyer devote all
non-consumption to buying financial assets and Seller live off the sale of
financial assets

	Tax less here            Tax more here
Seller           --------------> Consumption
                /
Buyer  Income -----------------> Consumption

	My position is not that it is inconceivable that relatively
wealthier high income individuals might end up paying more and
relatively less wealthy high income individuals pay relatively
less.  Its that I am skeptical that the game is worth the
candle.
	To try to say this precisely (ahem) this is *not* a tax on
wealth, but a tax on a behavior that is in part correlated with wealth:
_ceteris paribus_, wealthier people spend more than less wealthy people.
However, _ceteris paribus_, higher income individuals tend to spend a
smaller share of income on consumption than lower income individuals.
	Now, income and wealth are positively correlated, and the
aggregate affect is likely to be that higher income, wealthier people
spend a smaller share of their income on consumption than lower income,
less wealthy people.  I don't see the strong benefit on that side to
justify shifting to the regressive affect of a consumption tax.  And in
shifting tax away from income that is not consumed to a regressive tax,
you are in aggregate effect subsidizing wealth aquisition by high income
individuals by increasing the tax burden on the lower 60% of income
earners.  I need to see awfully strong evidence on the benefits of such a
policy to turn off my welfare for the rich alarm buzzer.

...
> >	If the question were permitted to be how to tax stocks of wealth,
> >then why not do as proposed by Carroll and ??? in _How Rich is Too Rich?_
>
> I have no objection to this, but it is not adequate unless it is
> implemented as a tax on total lifetime gifts. No one I know of
> wants to try to do this, but if you don't you just get lot's of
> tricky wealth transfers over time instead of a big one at death.
	Yes, their proposal is on cumulative lifetime gifts.
>
> Again, an advantage of the consumption tax is that you don't
> need to depend as much on individuals to correctly report
> the measure you are attempting to tax.
	That's where you hit my standard case defending a consumption
tax.  In the context of a low income nation that needs to finance
programs with strong progressive affects, this can be a critical
advantage.  For example, in Grenada in the early 1980's, a majority of
individuals with salaries and wages reported to Inland Revenue were
government workers.  In cases like this, I'd say you might have to bite
the bullet, put in a broadly based VAT with lcoally produced food
exempted, and focus on the impact of government expenditures.

Virtually,

Bruce McFarling, Knoxville
brmcf@xxxxxxxxxxxxxx