A Consumption Tax: More Injustice for the Poor

By Etzioni, Amitai | The Nation, October 10, 1988 | Go to article overview

A Consumption Tax: More Injustice for the Poor


Etzioni, Amitai, The Nation


If Michael Dukakis wins in November, and if he heeds the advice of many liberal economists, he will introduce a tax on consumption in 1989. Indeed, Fortune recently forecast that regardless of who is inaugurated in 1989, "consumption taxes are almost inevitable." It is an odd policy for liberals to favor, as it will tax the entire income of poor and near-poor worker (who consume all that they earn), most of the income of the working class (which saves very little), but only a fraction of the income of the rich (who save considerably). In short, it is a regressive tax. How could liberals favor a consumption tax?

While I have heard liberal economists argue for a consumption tax on several occasions at the Brookings Institution, its potential role in 1989 became clear to me during last April's bipartisan meeting on the American economy, chaired by former President Jimmy Carter and President Reagan's Secretary of Labor, Ann McLaughlin. Presidential candidates George Bush and Michael Dukakis have each agreed that,if elected, they would consider the group's recommendations. The meeting included a typical crosssection of economists, chief executive officers, inteUectuals and community and Labor leaders. During the financial panel discussions, conservative economists ugued adamantIy for reducing deficits by further cutting public expenditures after the elections, and they opposed raising taxes. Liberal economists accepted many of the Federal expenditure cuts suggested by conservatives but sought additional ways to reduce the deficits. They proposed additional taxes, including one on consumption.

Along with their urgent concern about reducing deficits, the economists favor a consumption tax because they are worried sick about the low level of American saving. Economists reason that if people are penalized {with taxes) for consuming, they will presumably save more. Indeed, one version of the consumption tax would not only require Americans to report their income each year but also their toW assets as of January I and December 31. Whatever income had not been used to acquire more assds (whether property, stocks, bonds or gold) would be assumed to have been "eaten up," and people would be taxed accordingly.

Everyone who took Economics 101 knows that consumption taxes are regressive, because the poor consume a far larger proportion of their income than the rich. But now liberal economists who favor a consumption tax argue that its regressivity can be overcome. A doser look at #hat they suggest shows that their remedies tend to be based on highly unrealistic assumptions, or else they only make a consumption tax las regressive than it might be otherwise. Most important, this type of tax must be considered in the context of other recent changes in the tax system: It would add insult to injurious modifications made by the Reagan Administration.

Rebates to the poor are one means that economists have suggested to make a consumption tax less of a penalty on the underprivileged and less of a party for the rich. A typical rebate strategy calls for all individuals (or households) to file a tax retum regardless of whether they had any earnings. The poor would then receive an annual refund of all or part of the consumption tax they had paid. This way, economists claim, the poor would not be short-changed. The problem with this approach is that it assumes the poor will bank their annual refund and then use it at a few dollars a day to make up for the higher cost of milk, bread, health services and so on. But there is strong evidence from sociological and psychological studies that such annual refunds woWd be used for consumption sprees (a party, a flashy motorcycle); in this scenario, the poor would be forced for the rest of the year to buy fewer necessities, at an increased cost due to the consumption tax. If sent weekly, the rebate might work, but this would amount to an administrative nightmare whose costs would significantly reduce the revenues collected. …

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