Consumption Taxation

Some Americans recognize the cold hard truth that we need to pay for our government others assume that someone else, anyone else, will pay for government. Unfortunately this is a myth, the only people that pay for government are the consumers of government.  The real question is how to pay.  The federal government was funded through ad valorem or value-based taxation for most of her early history when spending and government were small.  This all changed in 1913 with the passage of the 16th amendment.  From this point forward receipts have swelled, the tax burden multiplied and unfortunately spending has ballooned right along with and beyond our receipts.  In addition to adopting a tax on productivity, the United States implemented the withholding concept, a means of grabbing cash from its citizens.  This ensures both a steady revenue stream for the government and a numbing effect of the cost of governance to its citizens since they never see their money.
But there is a far more problematic issue with the taxation of productivity.  The problem is the adverse impact that a productivity tax has on our economy.  Assume the blue line represents theSlide03 demand for products inside the US economy. Assume that green line represents a supply of products and the demand for labor or better stated jobs; as well as the total cost to produce those products and jobs.  The current progressive tax code of the United States is one of the highest in the world. Making it difficult for companies to compete.  Unfortunately some have stopped, others have left our shores and for the survivors, we are making it difficult for them to produce jobs…in America.  In addition to tax a company’s productivity, we tax one of the largest inputs to productivity…labor.  We tax labor in the form of Social Security, Medicare, unemployment and other labor related taxes.  Not only does taxing labor through payroll taxes increased the cost of productivity but the programs are poorly designed and administered.  The largest labor tax, Social Security, is projected to become bankrupt in our near future.  What will the prescribed solution be?  Increased the burden even more on productivity? Probably.  Finally, the direct taxation of labor itself increases the cost of productivity because individuals base their livelihood on disposable cash not gross income.  The withholding practice both numbs the labor to the cost of governance as well as increases their demand for greater wages.  Ultimately to increase their disposable cash but due to withholdings their demands must be greater to cover the cost of government.  These factors embedded into our productivity drives up costs, reduces our competitiveness and depresses our employment base.  Or stated another way taxing productivity kills jobs and diminishes prosperity.

Slide08Assume the yellow line represents a foreign competitor.  Under a system that targets productivity, the foreign competitor realizes a substantial benefit.  Today the imputed tax burden on domestically produced products is estimated between 20 and 25% as a result of our taxing philosophy.  Is it the foreign competitors fault that its government does not place an excessive burden on its productivity?  Of course not, it is the responsibility of each government to fund itself in such a way not to depress its own industry.  Let us assume that we too changed our philosophy and resisted the temptation to tax productivity but instead taxed consumption.  The artificial disadvantage created by productivity taxation is eliminated.  What is left is a structural disadvantage the United States needs to minimize.  Some challenges, like wages need to be compensated for with efficiency and innovation; other structural disadvantages such as regulatory issues need to be minimized or eliminated.  If we opt to tax consumption instead of productivity then both our domestic and imported products share the burden of governance equally.  By taxing consumption instead of productivity, the tax base is expanding and the domestic burden minimize.  One final benefit to consumption taxation is the ability to correctly and precisely apply fiscal policy.

Under productivity taxation as it is currently deployed in the United States applying fiscal policy is like firing a shotgun, a broad blast of stimulant, which may or may not stimulate the economy.  Additionally, because productivity taxation is so repressive, special interests and everyone else who can, seek adjustments resulting in a Swiss cheese tax code, devoid of logic. In a consumption tax environment there is no incentive for business to seek relief because there is no burden on business. Should the government decide stimulate the economy through the use of tax holiday or temporarily reduced rates, the government can specifically target areas of the economy experiencing weakness.  The effectiveness of any targeted stimulant can be quickly measured and adjusted if necessary.  Broad untargeted stimulants are too costly and far too clumsy.  Recently across two presidents and two parties, we spent billions and borrowed trillions and stimulated little.  The free market, which we have yet to fully suppress, will out produce all of our socialistic efforts.  For the sake of liberty and prosperity, we need to reject the handcuffs of productivity taxation and embrace the promise of consumption making America the preferred environment to build a business, create jobs and develop prosperity.

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4 thoughts on “Consumption Taxation

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