Consumption taxes are having a moment, as they do every 20 years or so. They are never a good idea, but the current iteration, which House Speaker Kevin McCarthy has promised to bring to the floor, is a worse idea than usual.
Under the Fair Tax bill sponsored by Representative Buddy Carter, a Georgia Republican, all income, capital gains, estate, gift, corporate, and payroll taxes would be eliminated. They would be replaced by a flat 30 percent national sales tax on everything you buy. Even Grover Norquist, the hard-right president of Americans for Tax Reform and flat-tax advocate who famously said he wanted to shrink government “to the size where I can drag it into the bathroom and drown it in the bathtub,” told Joseph Zeballos-Roig of Semafor this week that the Fair Tax bill was “a political gift to Biden and the Democrats.” Elsewhere Norquist has called it “one of the stupider ideas that have been put forward.” If the “fair tax” passed in the House it would still have no chance of becoming law, of course, because the Senate and the White House would stop it. That makes a purely symbolic House vote all upside for the Democrats.
Consumption taxes can be worthwhile if they’re targeted narrowly to specific things that we legitimately want people to buy less of. That’s the logic of the gasoline tax, which is 18.4 cents per gallon and ought to be at least twice that to curb carbon emissions, and of the cigarette tax, which is about $1 per pack. But you have to be careful with consumption taxes, because unless they target luxuries available only to the affluent, they’re going to be regressive. You also have to be careful because such taxes are wildly unpopular.
Broad-based consumption taxes like what Carter has proposed are always a dumb idea. Interestingly, liberals fancied such consumption taxes before conservatives did. The leading advocate four decades ago was Lester Thurow, a celebrity economist at MIT who in 1981 proposed curbing double-digit inflation with a consumption tax. This was, Thurow argued, preferable to then-Fed Chairman Paul Volcker’s approach to curbing inflation, which was to slam the brakes on the money supply and bring on a severe recession (which of course is what happened in the end). Thurow may have been right that his dumb idea was better than Volcker’s cruel idea. He was certainly right that President Ronald Reagan’s idea, which was to slash away at the income tax, was terrible.
Thurow made large claims for the consumption tax. It would curb inflation, he said. It would boost the national savings rate. He even said it would pay for Reagan’s military buildup, which, at the time, Thurow feared would be paid for with horribly deep domestic spending cuts, which never materialized. (Instead, the military buildup was paid for with—well, it wasn’t: Reagan tripled the deficit.) Thurow said that his consumption tax (he proposed various kinds, including a European-style value-added tax) could be made progressive through rebates or other methods. But to the limited extent that consumption taxation has been tried (indirectly, through the creation of tax-free college savings and health savings accounts—shelters for savings rather than taxes for consumption), it has tended to redistribute wealth upward.
The consumption tax had appeal to liberals back in the 1980s because it was an assault on the materialism that many liberals had deplored since the 1950s, as advertisers created consumer desires supposedly out of thin air. Also, banks were handing out credit cards like penny candy, causing an alarming rise in consumer debt. The personal savings rate had been declining since the 1970s (and would continue to fall until 2005, when it started to climb again), and liberals worried that the ethos of thrift was vanishing (a virtue that conservatives, to whom thrift was previously sacred, stopped caring about as Reagan’s deficits piled up). It’s touching now to remember that in the 1980s, lefties deplored “yuppies” for consumer indulgences like Melitta coffeemakers and Sony Walkmen and Kaypro personal computers—all items whose successor technologies we now consider straightforward necessities.
The consumption tax was reborn in the early 2000s as a conservative idea when President George W. Bush’s Council of Economic Advisers suggested “a shift from taxing income to taxing consumption.” Writing about this at the time, I observed that, given Bush’s desire to eliminate permanently the inheritance tax, adding a consumption tax to the mix looked like “a deliberate scheme to make American society more aristocratic.”
Now another two decades have passed and the Republican dream to build a wealth aristocracy in America persists. Carter incorporates into his national sales tax elimination of the estate tax and also the capital gains, gift, and corporate taxes. These all fall most heavily on the rich. Plus Carter’s bill eliminates the income tax. Actually, it eliminates the IRS entirely, leaving administration of his “fair tax” to magic elves at the Treasury Department who work for free (just as they do for Santa Claus). Speaking of magical thinking, Carter maintains that this national sales tax would amount to 23 percent of every purchase, but that’s basing the calculation on the percentage you pay on the item with tax built into the price, a method that’s obviously and deliberately misleading. If you base the calculation on how much tax you pay on the item itself, it’s a 30 percent tax.
Eliminating all existing federal taxes is not something that Thurow or any other liberal advocate for the consumption tax ever contemplated. Like Thurow, Carter would rebate his consumption tax to low-income people, but Carter’s plan is appallingly stingy; the rebate brings families only up to the federal poverty threshold, which is currently $30,000 for a family of four. For comparison’s sake, a family of four is today eligible for the Earned Income Tax Credit up to an income of $53,057 (single parent) or $55,529 (married, filing jointly). So essentially the “fair tax” increases the tax burden on low-income families above the poverty line and on middle-class taxpayers in order to provide huge tax cuts to the rich, for whom consumption is a much smaller proportion of their income.
It will be interesting to see how many House Republicans are suicidal enough to vote for the “fair tax.” Here’s Biden licking his chops last week:
They want to raise taxes on the middle class by taxing thousands of everyday items from groceries, gasoline, clothing, and cutting taxes for the wealthiest, because they want to supplant the money lost from taxes on the millionaires and billionaires with a sales tax on virtually everything in the country.… They want working-class folks to be paying another 10, 20 percent on their taxes, depending on where they live and how they’re spending the money. And they’re going to reduce taxes for the super wealthy.
The most intriguing critic of the “fair tax” is Norquist, who usually favors schemes to flatten progressive taxation. Not this one, though. His objection appears to be less wonky than political. “Let’s say you’re 20 years old,” Norquist told Dave Weigel, then of Slate, about the “fair tax” idea in 2011 (yes, the proposal has been kicking around a long time):
You don’t care what tax you pay—you haven’t paid any yet. But if I’m 65, I’ve spent my whole life paying income taxes. I’m about to stop paying them. What’s the benefit to me if you bring on a sales tax? Thanks—you’ve just made every retired person’s pension 33 percent less valuable.
A dozen years later, Norquist really is 65 (66, to be precise), and I imagine feels even more strongly about this than he did then.
The conservative movement is heavily dependent on the elderly. The Tea Party rebellion a decade ago was (to exaggerate only slightly) a bunch of white Social Security and Medicare recipients not wanting to share the federal teat with low-income Blacks and Latinos. Donald Trump appealed to these people in 2016 by promising not to cut Social Security and Medicare. Now we get to find out whether House Republicans want to kiss off that constituency—along with anybody else who’s offended—by shifting the tax burden away from the rich. This is going to be fun.