Consumption Tax theory. Where should I go beyond the basics?
September 13, 2011 7:08 AM Subscribe
Consumption Tax theory. Where should I go beyond the basics?
I don't have much formal training in economics, just basic price theory. I'm intrigued by a lot of assertions I read from econ-y types about the superiority of consumption taxes. I have a number of questions that I don't see addressed in the first few pages of googling (most of the articles, like any political topic, are useless). Can you point me to some resources where there will be a critical, practical attempt to work out how a consumption tax should work?
The main issue that I have is figuring out what consumption vs investment is. None of the versions that I've seen make a principled distinction between investment into capital and investment into human capital, but treat human capital like consumption. For example, education is treated like consumption, but everyone I met in medical school thought of it as an investment (which it transparently is). Similarly, health care for working-age populations is kind of consumption kind of investment. Ditto housing (eg, I bought an apartment in Manhattan vs Buffalo because of the increase in labor value, not because I like NYC, but some people do like NYC), ditto transportation. Breaking out all the costs of producing labor seems intractable in practice.
Do people propose some plausible mechanism for imputing rental values onto all used capital?
Businesses (and people) with losses seem like consumption, but also can't pay. Wouldn't increasing tax on slightly unprofitable but fixable businesses send them into a death spiral?
How do you break off profitable business investment (which isn't taxed) from consumption hidden in a profitable business (unnecessary travel, meals, etc)? Seems like you need to know the marginal loss of every expense.
I don't have much formal training in economics, just basic price theory. I'm intrigued by a lot of assertions I read from econ-y types about the superiority of consumption taxes. I have a number of questions that I don't see addressed in the first few pages of googling (most of the articles, like any political topic, are useless). Can you point me to some resources where there will be a critical, practical attempt to work out how a consumption tax should work?
The main issue that I have is figuring out what consumption vs investment is. None of the versions that I've seen make a principled distinction between investment into capital and investment into human capital, but treat human capital like consumption. For example, education is treated like consumption, but everyone I met in medical school thought of it as an investment (which it transparently is). Similarly, health care for working-age populations is kind of consumption kind of investment. Ditto housing (eg, I bought an apartment in Manhattan vs Buffalo because of the increase in labor value, not because I like NYC, but some people do like NYC), ditto transportation. Breaking out all the costs of producing labor seems intractable in practice.
Do people propose some plausible mechanism for imputing rental values onto all used capital?
Businesses (and people) with losses seem like consumption, but also can't pay. Wouldn't increasing tax on slightly unprofitable but fixable businesses send them into a death spiral?
How do you break off profitable business investment (which isn't taxed) from consumption hidden in a profitable business (unnecessary travel, meals, etc)? Seems like you need to know the marginal loss of every expense.
Disclosure: I work in sales and use tax, and have studied this at some length.
Consumption tax theory as it's own corner of the world is not well researched. You'll find more business oriented studied through accounting firms, COST and IPT. Raj Chetty has done some empirical study on the consumption effects of the price increases associated with a sales tax. William Fox at University of Tennessee has spoken at a conference, and while I haven't read any of his papers, I was quite impressed with his breadth of knowledge.
That said, in the long run, consumption equals income. If there are no tax exemptions, the dollars spent on education would be taxed at either the income or consumption level. They would simply be taxed at different points in time.
If you'd like to know anything else, please memail me so I don't derail the thread.
posted by politikitty at 8:53 AM on September 13, 2011
Consumption tax theory as it's own corner of the world is not well researched. You'll find more business oriented studied through accounting firms, COST and IPT. Raj Chetty has done some empirical study on the consumption effects of the price increases associated with a sales tax. William Fox at University of Tennessee has spoken at a conference, and while I haven't read any of his papers, I was quite impressed with his breadth of knowledge.
That said, in the long run, consumption equals income. If there are no tax exemptions, the dollars spent on education would be taxed at either the income or consumption level. They would simply be taxed at different points in time.
If you'd like to know anything else, please memail me so I don't derail the thread.
posted by politikitty at 8:53 AM on September 13, 2011
Response by poster: I'm astonished that anything is not its own well - researched corner of econ. I thought that the motivation was that there is long-run net saving and that temporal distortion matters. I wouldn't worry too much about derailing.
posted by a robot made out of meat at 11:22 AM on September 13, 2011
posted by a robot made out of meat at 11:22 AM on September 13, 2011
There might be additional research, but I've found it fairly sparse. One practical problem is finding appropriate data sets. It is somewhat easy to find studies that use VAT, but VAT is only one type of consumption tax. In the United States, there are over 8000 jurisdictions with their own sales tax laws.
There is plenty of research on fairly practical matters. The impact of e-commerce on tax avoidance, tax incidence on business inputs, and the budget implications on the the economy moving from tangible personal property to intangible personal property and services are all well researched and engaging in their own rights. But for more theoretical matters, there's a bias towards topics that are either in fashion or have well established data sets.
I've found that consumption taxes tends to be the red-headed stepchild when it comes to both tax and finance. Few people find it interesting, because they believe there is little to it. It leads to a blind eye even in businesses where ignoring it has serious bottom line implications.
I have not heard any argument that there is a long-run net savings in taxing consumption. It would discourage consumption in the same manner that income tax discourages income. Temporal distortion also seems a weak argument. While consumption is more flat on an individual level, on a macro level, I'm not convinced it's a big enough issue to justify one tax versus another. But like I said, I've found little research that deals with those specific issues.
Keep in mind that US income tax does not tax corporations heavily, while state consumption taxes do. The US income tax is fairly progressive, while a consumption tax is regressive. Because states tax corporations heavily, consumers/investors indirectly feel the pain of taxation leaving the incidence of tax and distortionary effect unclear. These issues are not inherent to consumption versus income tax regimes, as it's possible to make a regressive, pro-business income tax, and a narrow consumption tax that only falls on disposable income.
posted by politikitty at 12:57 PM on September 13, 2011
There is plenty of research on fairly practical matters. The impact of e-commerce on tax avoidance, tax incidence on business inputs, and the budget implications on the the economy moving from tangible personal property to intangible personal property and services are all well researched and engaging in their own rights. But for more theoretical matters, there's a bias towards topics that are either in fashion or have well established data sets.
I've found that consumption taxes tends to be the red-headed stepchild when it comes to both tax and finance. Few people find it interesting, because they believe there is little to it. It leads to a blind eye even in businesses where ignoring it has serious bottom line implications.
I have not heard any argument that there is a long-run net savings in taxing consumption. It would discourage consumption in the same manner that income tax discourages income. Temporal distortion also seems a weak argument. While consumption is more flat on an individual level, on a macro level, I'm not convinced it's a big enough issue to justify one tax versus another. But like I said, I've found little research that deals with those specific issues.
Keep in mind that US income tax does not tax corporations heavily, while state consumption taxes do. The US income tax is fairly progressive, while a consumption tax is regressive. Because states tax corporations heavily, consumers/investors indirectly feel the pain of taxation leaving the incidence of tax and distortionary effect unclear. These issues are not inherent to consumption versus income tax regimes, as it's possible to make a regressive, pro-business income tax, and a narrow consumption tax that only falls on disposable income.
posted by politikitty at 12:57 PM on September 13, 2011
If you haven't seen it, here's the entry on consumption taxation in the National Tax Association's Encyclopedia of Taxation and Tax Policy. There are a number of references.
posted by Mr.Know-it-some at 7:17 AM on September 14, 2011
posted by Mr.Know-it-some at 7:17 AM on September 14, 2011
This thread is closed to new comments.
posted by grobstein at 8:06 AM on September 13, 2011