Academic journal article The American Journal of Economics and Sociology

Irving Fisher's Spendings (Consumption) Tax in Retrospect

Academic journal article The American Journal of Economics and Sociology

Irving Fisher's Spendings (Consumption) Tax in Retrospect

Article excerpt



IRVING FISHER'S REMARKABLE CAREER, and even more remarkable writings, left their indelible marks everywhere across what has emerged as the discipline of economics. From mathematical formalization to intertemporal optimization, general equilibrium, monetary theory, and public finance, the imprint remains sharp and strong. What is striking is that the deepest conceptual contributions repeatedly are driven by the most practical of concerns and presented in language that is aimed at persuasion for implementation of practical proposals, logically following from his conceptual or theoretical economic analysis.

In 1942, when he was an Emeritus Professor at Yale, Irving Fisher, together with his brother Herbert, published a 277-page book entitled Constructive Income Taxation that was subtitled "A Proposal for Reform." In it the brothers Fisher set out a proposal for what we call today a consumption tax, a progressive tax on income less savings, rather than a progressive tax on income alone. This was not a new idea for Fisher; rather, it built on his work on capital theory going back to 1896 and reflected what he saw as the logical implications for public policy of his long-standing notion that the term income had no economic meaning as an accounting term reflecting calculations of flows of cash. Income, in Fisher's view, could only be meaningfully thought of as "yields" or "cash flows." Yields were what led to benefits, and benefits came from spending (i.e., consumption). Fisher vigorously opposed using the term consumption (which he equated with destructive acts). Rather, he argued that spendings, not income as measured by accountants, should be the base of any progressive tax used for revenue-raising purposes. Fisher equated the term spendings with the term real income, which he based on economic welfare.

Fisher went to great lengths to show how taxing conventionally measured income resulted in the double taxation of saving, arguing that this was extremely socially destructive. Fisher wrote papers in Econometrica (1937) and the American Economic Review (1939) showing analytically how this double taxation, well known today, comes about. In his 1942 volume, he shows how with a corporate tax there is triple taxation, and even argued that there can be quadruple taxation by taking into account estate taxes and taxes on capital gains.

The Fishers also set out in great detail how their proposal would work. They provide a sample tax return, they discuss what would happen to the corporate tax and the capital gains tax under their proposal, how interest should be treated, how timing issues are to be addressed, how to treat bequests and inheritances, and other issues. Sections of their book are decades ahead of their time, discussing such matters as human capital, though the term is not used. They discuss the constitutionality of their proposal, all the while copiously documenting and citing the works of previous authors. While the book is written to be persuasive, it is extraordinarily closely argued and clear in its logic.

If there is one thing that is even more remarkable than the book itself, it has to be its fate since its publication. The consumption tax, as it has since been labeled, has had a series of academic advocates, but it has not been implemented in its full Fisherian form anywhere in the world to our knowledge. Even worse, it has come to be labeled by the term to which Fisher objected. In the decades that followed the publication of Constructive Income Taxation, the intellectual high ground of public finance tax reformers was occupied by the Haig-Simons concept of income as consumption plus the change in net worth, despite the timid and even confused efforts of public finance economists to refute Fisher's notions. Fisher's proposal was, and remains, easy (and even easier today) to implement simply by removing the caps on qualified savings accounts such as individual retirement accounts. …

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