A progressive consumption tax

I say there's no right of inheritance. Tim replies that we shouldn't penalize people who abstain from consumption to give money to their children. These statements can be (partly) reconciled, by a variant upon a progressive consumption tax, as advocated by Laurence Seidman.
Because a PCT taxes consumption, not income, it doesn't penalize people who save to pass wealth onto others. Nor even does it tax inheritances if these are saved.
So far, so Tim.
But a PCT does tax inheritances to the extent that they are consumed, and does so at the highest marginal rate an individual faces. The effective threshold for taxing inheritances is zero, if these are consumed. And houses are a consumption good.
So far, so me.
Bringing me and Tim together is, however, not the only merit of a PCT. There are (at least) three others:
1. It encourages saving and capital formation. In the long-run, it would therefore raise wages by raising the capital-labour ratio and productivity.
2. It would internalize the sort of adverse consumption externalities decried by Robert Frank, and reduce the pressure people feel to keep up with the Joneses.
3. It would be green, as it would deter consumption more than income tax does - though this could easily be supplemented by Pigou taxes upon more polluting goods.
Of course, this is a mere sketch. There are loads of problems with such a tax - it would have to be phased in over years, to avoid hitting current pensioners, for example. But the idea deserves more consideration than it gets.

Comments

[Tim Worstall]

Ah, well, now we're talking. I'm in favour of a consumption tax anyway. All savings, all earnings from savings, are tax free. All spending (ie consumption) is taxable, whether it is from income or the reductions of previous savings.
Fine by me. So, when do you get to be Chancellor?

[Young man]

No one seesm to mention the blindingly obvious:

Inheritance taxes greater than the marginal tax rate cannot be enforced. Otherwise what is to stop the person who is about to die selling his assets and passing them on before they die.

A simpler approach is to treat inheritances above a certain theshold as the realisation of a capital gain by the benficiary.

[Robert Schwartz]

http://www.city-journal.org/html/17_1_oh_to_be.html

[james C]

Young man, you are rather confused.Selling assets does not reduce the estate.

Your idea of taxing the recipients rather than the estate is a non runner as the recipients may not be liable to UK tax.

[Young man]

James,

You obviously misunderstand. If I give my assets to my children before I die there is no estate to tax.

And any transfers in cash would be impossible to track if there was a gift tax (hence the sale of assets angle).

Treating inheritances as a capital gains event is a better option. By selling them or transferring during his life time the owner triggers a capital gains event. By dieing and leaving an estate the same occurs. This would approach would be behaviour neutral and unavoidable. In contrast an IHT would be both avoidable and encourage myriad behaviours to avoid it.

There is nothing to stop the government changing the law to make foreign beneficiaries liable for the capital gain triggered by being a beneficiary on an estate.

[Roger Thornhill]

For a while there I really though I would have a serious disagreement with you over IHT, which I consider State theft of the worst, envious and spiteful kind. It should have 0%. The best person to decide how their weath is to be redistributed is the person who earnt it, not the State.

I am in favour of consumption taxes and we have that now with VAT. I am very much in favour of flat+exemptions as this makes things simpler and more efficient, thereby allowing the rate to be lower. Of course a total flat tax would be even simpler, but I do not see why people should be taxed for essentials just to survive - raw food, water, rent. I do not consider occupying a house as "consumption", however, which you appear to suggest (though I may be wrong in my understanding).

Green taxes? Best thing is to ensure people are aware of the damage and who produces it. E.g. once people really know how battery eggs are produced they don't buy them. People will buy electric cars as soon as someone can make one run for 250miles on a charge, the charge taking only 5 mins or so for a top-up and the price not outrageous. The problem with green taxes is once they work, the government needs to find another 'evil' to torture us with to maintain revenue - very very bad mindset. It is going to be bad enough if electric cars do become practical due to the loss in fuel duty. I expect to see some kind of a 'vehicular electric tax' on the high tension megawatt recharge stations to make up the shortfall.

Flat-essentials consumption and flat income with fat personal allowance of £12k to take minimum wage earners out of income tax to me would be the ideal. Oh, and normalise the rates as they do in Hong Kong (at 16%) so no need to pretend income is one kind or another.

p.s. HK has no sales tax either.

[Mark Wadsworth]

You are mad to think that there is any real distinction between income taxes and consumption taxes, consumption taxes are by and large TURNOVER taxes.

You could in theory scrap income tax/NIC and increase VAT to 66%. So people have more money to spend but they get less bang for their buck.

If (e.g.) the market price/value of a unit of service (four haircuts, one hour's plumbing and so on) as things stand our service provider has post-VAT income of £85 for every £100 spent by consumers. And on the £85 the hairdresser or plumber pays 30% odd income tax and NI, so their post-tax income is £60.

If you make VAT 66%, then their post-VAT income is £60, no more tax to pay.

What's the big difference?

VAT is an awful awful tax, along with employer's NI.

[Roger Thornhill]

"VAT is an awful awful tax, along with employer's NI."

I agree. Awful, but not as awful as IHT. We need to move to a "less bad" alternative. I am not interested in "change", but improvement.

There is a difference between income and consumption taxes and it is timing. Income tax is taken up front. Consumption tax occurs later, when spending. I agree that if it is all pushed to consumption tax, the incentive to bypass is massive. High consumption taxes make for black markets.

Ideally we flatten and lower income taxes, which has proven to create increases in revenue. That should allow a reduction in consumption taxes and further reductions in income taxes as a virtuous circle. If it is to the detrement of neighbouring European countries, then so be it.

I'd like the UK to be the HK of Europe - low tax, strong rule of law and an efficient hub linking Europe to the US, the Commonwealth and the World.

[Mark Wadsworth]

Roger, one man's spending is another man's income - there is no deferral at all, especially with services (two thirds of our economy).

When you pay for services you trigger a tax liability - either there is a consumption tax due on the price of the haircut or plumbing repair, payable there and then, or the hairdresser or plumber sticks the money in the cash till or the bank account, knowing that the Treasury will take some of it at the end of the tax year.

As to IHT, this is a despicable tax and will be got rid of as part of the move to Land Value Tax that I have pencilled in for the bottom of the 2010 property price crash.

[Roger Thornhill]

Mark, the difference occurs in IHT example. If you pay tax on an income, it gets taken immediately. If it is paid on spending, then that could be years into the future.

Although I get your point about one man's spending is another man's earning, you (or I, come to that!) might be mixing cycles. Organisations do not propagate all their earnings to individuals and offset much against expenses. When they do, the tax for income is paid at that point, but the tax on consumption, the spending of that income, happens later. Chicken-Egg or Egg-Chicken? What you are saying is a SALES tax, not a CONSUMPTION tax. Sales refer to taxing of the income of a business, consumption tax is the taxing of the spending of an indivudual.

Try discussing with a Social Crediter...they get very worked up about cycles, A+B etc!

[Mark Wadsworth]

Roger, the government has to balance its books. If people somehow by magic defer spending years into the future, then the government will have to increase the tax rate NOW to make up for lost revenue, and so on.

[Roger Thornhill]

Mark, yes - so surely this indicates a zero sales/consumption tax and all on income, which is a little more predictable and I suspect far more manageable/collectable, (unless it is IHT which will result in people doing anything to avoid the State double taxing).

And a great way to reduce the marginal rates on income tax - flatten it. Oh, yes, and reduce the employer payments.