six very good ideas (and the one big idea behind them)

Listening to this recent episode of NPR’s Planet Money reminded me of how much I liked its predecessor episode, in which the hosts got five economists from across the political spectrum to propose some economic reforms that they could all agree on. The economists ranged from Dean Baker on the left to Russ Roberts on the right, with a couple of moderates and Luigi Zingales thrown in for a little European sophistication. (His quote? “I would say I’m pro-markets but not necessarily pro-business.”)

Anyway, they came up with six ideas that they think almost every serious economist would agree with, but that are, for various reasons, losers in the American political scheme. Here’s the list:

  • Eliminate the mortgage interest tax deduction.
  • End the tax deduction companies get for providing health-care to employees.
  • Eliminate the corporate income tax.
  • Eliminate all income and payroll taxes.
  • Tax carbon emissions.
  • Legalize marijuana.

Obviously, there’s a little redundancy here — if you eliminate the income tax, you don’t need to worry about the mortgage interest deduction. But all six of these policy ideas really boil down to one simple idea: tax the things you want less of, and don’t tax the things you want more of. Want more jobs and income? Don’t tax those things. Want less carbon? Tax gasoline and other carbon-producing activities. Even the last proposal (legalize marijuana) can be framed this way: move pot out of the shadow economy and into the real economy, and then let pot smokers fight with the legislature about “sin taxes” the way smokers and drinkers do.

Or maybe they won’t bother. Because this is the other, unspoken policy proposal lurking behind all these tax cuts: tax non-essential consumption instead of income. There are several reasons why this is a good idea. One is that, if you actually want to be able to generate the amount of revenue you need, you want a tax that doesn’t irritate people in a specific and noticeable way. People hate filing income taxes every April, but they hardly notice the sales tax they pay at the store every week. That means it’s harder for Grover Norquist to rally anti-tax sentiment, and it also means people devote less energy to tax avoidance and tax evasion.

Another reason taxes on non-essential consumption are good is that they force consumers to choose between saving and consuming. Once your basic needs are met, if you’re taxed on additional purchases, you may decide to save your money instead. And most forms of saving (i.e., anything that’s not a coffee can buried in the back yard) are really forms of lending to, or investing in, businesses. That is, more saving = more capital available to business = more jobs and innovation and stuff.

Edward McCaffery makes the argument in “The Uneasy Case for Wealth Transfer Taxation” (available at JSTOR, but it’s behind a paywall) that what we really dislike about the wealthy is their extravagant consumption. That is, we dislike John Kerry when he goes windsurfing, but we like that Theresa Heinz-Kerry makes ketchup and employs people. This isn’t an economic argument, exactly — McCaffery was describing a gut feeling — but there’s an economic principle lurking in the background.

Specifically, the goods most of us depend on and want more of — food and other basic necessities — make up the bulk of the economy and, for the most part, would be untaxed or taxed only lightly. An ordinary citizen will likely only feel the big tax bite on a few major purchases like cars and computers. But a rich person, who spends a much greater percentage of his or her income on non-exempt luxury goods, will feel the bite much more. There are two benefits to this. First, fewer John Kerry windsurfing photos. Second, you can create a truly progressive tax regime without being vulnerable to the charge that you’re penalizing job creators. After all, if the wealthy wish to create jobs, they can always save and invest. If they’d rather spend their money on yachts, then they get hit with the big tax bill. Nobody’s twisting their arm to buy that yacht — they can choose to do it or not. It’s freedom — and isn’t that something we want more of?

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3 Responses to six very good ideas (and the one big idea behind them)

  1. Philip says:

    Isn’t it also true that the wealthy spend a much smaller percentage of their income, period? Since the wealthy earn or accumulate much more money than they need or would typically want to spend and none of this additional income would be taxed, wouldn’t a sales tax, even on luxury items, ultimately be regressive?

    • thehandsomecamel says:

      I think it depends on how you structure it. There were other proposals that didn’t meet with the approval of all five economists that might address some of these concerns, such as a very small per-transaction tax on things like stock purchases. Such taxes would be so small that they would be almost no impediment to investment, but they could generate revenue exclusively from the wealthy — and also, perhaps, put the brakes on speculation.

      But I think the argument of a guy like McCaffery would be something like, “Who cares if the wealthy aren’t being taxed? A consumption tax would give them an incentive to do what we want them to do (saving and investing), and they wouldn’t waste money doing things we don’t want them to do (windsurfing, spending a lot on creative tax avoidance schemes).” I think he essentially sees the rich as potentially being a kind of bank for the nation, if we can give them the right incentives. (I should say, his primary concern in the article I cited is the moral degradation and wealth-dissipating ways of those who inherit wealth. He would see, say, Paris Hilton as a problem not so much because of her inherited wealth per se, but because she uses it frivolously.)

      And, of course, the current system isn’t particularly progressive on the wealthy anyway.

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