Pethokoukis

The uncanny X tax

New York Times Columnit David Brooks

Photo Credit: Miller_Center (CC BY 2.0) (Flickr)

David Brooks does a pretty fair job describing the X tax, a progressive consumption tax championed by AEI’s Alan Viard:

What is the single biggest problem with the tax code? It’s not the complexity, bad as that is. The biggest problem is that it rewards consumption and punishes savings and investment.

You can’t fundamentally address that problem within the 1986 paradigm. You can address it only through a consumption tax. …

But isn’t a consumption tax regressive since poor people spend a bigger share of their incomes than rich people? The late David F. Bradford of Princeton University effectively solved that problem with his so-called X Tax, which has recently been championed by Alan D. Viard of the American Enterprise Institute and others. Under the X Tax, you wouldn’t pay the consumption tax at the cash register. Businesses would be taxed on their cash flow, taking an immediate deduction for investments rather than depreciating them over time. Households would pay tax at progressive rates on their wages but would not pay tax on income from savings.

The X Tax effectively taxes the money you spend right now and rewards savings and investment. The government could raise a chunk of revenue this way and significantly boost growth with little or no change in how tax burdens are distributed between rich and poor. Most economists vastly prefer consumption taxes to income taxes.

This is true pro-growth tax reform for the real world. Most flat taxes are consumption taxes, this just adds a progressive component so that, like, a) it might actually pass a Congress that is not 100% Republican, and b) not either be totally regressive or a huge revenue loser.

The only big drawback with the X tax is that by not taxing investment income at the individual or household level, it makes it look like people who consume out of their past investments pay no tax. But that is an “optical illusion” as Viard explains:

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41 thoughts on “The uncanny X tax

  1. Count me as one who hates the idea.

    A basic tenet of property rights is that the owner of property has the right to do with that property as he or she wishes. Furthermore, government should not be in the position of declaring what is ‘good’ consumption and what is ‘bad’ consumption. No one should be punished (in the form of a consumption tax) based on the way he or she decides to spend the money that they lawfully possess.

    Nor do I agree that the current system rewards consumption and penalizes investment. Only in an Orwellian world am I ‘rewarded’ because I don’t have to pay a penalty when I choose to spend my money. When I spend $1, I (hopefully) get $1 of something in return, government doesn’t ‘reward’ me by throwing in an extra 5 cents of value. Imposing a consumption tax (as is the case with sales taxes) penalizes me, as I have to spend $1+ to get $1 of value in return. How does that make sense?

    And how can you say the current tax code penalizes investment, when the tax rate on investment income is lower than on other forms of income?

      • Yes, opposed to state sales taxes, and for the same reason.

        Not opposed to property taxes, but only to the extent that there is a relationship between the tax and the services the property owner receives (analogous to a homeowner association fee).

    • And how can you say the current tax code penalizes investment, when the tax rate on investment income is lower than on other forms of income?

      Steve, that money is taxed twice. Once when you earn it and again when you realize the gains from your investment. That is how the tax code punishes savings.

      • yes but….

        you pay income taxes on money you earn….

        then when you spend it…they tax it again with sales taxes….

        and if there were a nationwide consumption tax in addition to local/state sales tax that would be another tax on top of that…

        and if you bought real estate or a car … they’d charge you yet again with property taxes…

        or have I got this all balled up?

        • All that depends at the state level.

          Here in New Hampshire, we have no income tax and no sales tax. High property taxes, sure, but that’s really it. Since I have an apartment, really the only time I contribute to the state fund is when I buy from the liquor store (it’s state run). Conversely, when I lived in MA, they have taxes for everything.

          Your point is well taken, Larry. I wasn’t arguing against a capital gains tax (personally, I don’t mind it as much). I was just putting forth the argument that the tax does punish investors.

          My professional opinion on this matter is a VAT. I like the VAT. It’s efficient. Everyone pays their fair share: the rich, who by definition consume more, pay a greater tax than the poor, who consume less.

          My conditional statement on this, however, is the subsequent elimination of the personal income tax and corporate income tax.

          Now, there are plenty of arguments against the VAT. However, from an economic perspective of raising as much revenue as possible while creating as little deadweight loss as possible, the VAT is unequaled.

          • I like the VAT also…and taxes on consumption in general (but not basic necessities) because they do allow people to use discretion in what they want to be taxed and how much.

            But I’m curious – if you do not have a state income or sales tax – how do the things get paid for that other states pay for with their income and sales taxes.

            For instance, in Va – income and sales tax pays for things like state govt, state troopers, higher ED and about 1/2 of K-12 ed.

            I’ve always assumed that the state level taxes were needed to pay for state level services but obviously in your case – something else happens.

            can you educate?

          • Our property taxes are some of the highest in the nation. Property taxes also do not stay within the towns, strictly speaking. Some percentage of them do, but most go to the State House, where they are then distributed to towns based upon need. For example, Rye (a very rich town) will receive less tax revenue from the state from, say, Boscawen (a lower-middle class town).

            The liquor business is also a big money maker for the state. With the exception of beer and wine, alcohol can only be purchased by state-owned liquor stores. The liquor stores along the border with Mass do a great deal of business as prices are about 10-20% lower than in Mass (this is not due to government subsidies. The base price is about the same, but in Massachusetts there is a sales tax, bottle tax, and sin tax on alcohol).

            There is also a 9% meals tax. Our vehicle excise taxes are also somewhat high. Unlike most states, the tax is not based on the value of the car, but inversely on the mileage. The newer the car, the higher the tax will be. The logic being that a new car will, over the course of its life, do more damage to NH roadways than an older car.

            The New Hampshire state government also offers fewer services than many other states. Our State Police only number about 50 troopers. The vast majority of towns only have one or two cops in them. Even Concord, the capitol, has a full-time police force of about 10 officers. We don’t have nearly the number of regulatory agencies other states do. Most of our government services are the bare minimum the Federal Government allows us. We don’t really need them. There are plenty of charities to pick up the slack.

            I hope I answered your question, Larry.

          • very interesting Jon.

            so does the locality get to keep ANY of the tax money collected for various property and meals/other taxes or does it all go to the state to be redistributed?

            How are schools funded?

            do you have a earmarked tax devoted to schools?

          • so does the locality get to keep ANY of the tax money collected for various property and meals/other taxes or does it all go to the state to be redistributed?

            How are schools funded?

            do you have a earmarked tax devoted to schools?

            To answer your first question, the municipalities do keep a percentage of the state taxes raised, but not all of it. Most towns have other taxes (sewer, garbage, etc), that pay for town services.

            School funding is interesting. It is done through the courts. Towns are given funds out of the General Fund by a panel of judges based on need. What the towns do with those funds is up to them. This is a relatively new system. It used to be distributed by the Legislature, but that lead to rich towns having heavy influence in the process (since those rich towns tend to be heavily populated). I think the switch to the courts happened about 10 years ago.

          • Jon – who keeps the local property taxes?

            and… the business enterprise tax looks to function like a combination corporate / individual income tax, right?

          • By local property taxes, are you referring to taxes levied by the state or a town?

            And as far as the business enterprise tax is concerned, I have no clue how that works, to be perfectly honest.

            I am still fairly new to the New Hampshire scene. I’ve lived here about 18 months, so I am fuzzy on the details. Sorry I can’t be more help.

          • thanks Jon.. you’ve provided quite a bit but it does look at first glance that NH is violating the laws of fiscal gravity!

            Schools normally cost about 10K per student and comprise roughly 1/2 the revenues of the locality and/or the state.

            taxes and schools are a BFD in the overall scheme of things – when it comes to local/state taxes.

            Law enforcement is next in most states.. about 25%.

          • We are quite lucky up here in the frozen wasteland (it feels like that today).

            Most of the population is centered in about 4 areas: Manchester, Portsmouth, Concord, and Nashua-Salem. All these areas are relatively close to one another, and (with the exception of Portsmouth), located on Interstate 93. A small number of officers can patrol a large share of the population

          • yes… but I’m looking at this:

            http://www.nea.org/assets/docs/HE/NEA_Rankings_and_Estimates010711.pdf page 57 where Va and NH are fairly close in school funding per kid – NH 13.5K per kid…

            that does not square with the number in the report which was about 1/5 of that number so I’m missing something here…

            don’t forget – Va has a LOT of interstates and is about midway between North and South on I-95.

            Realistically it takes 4 troopers to deploy one trooper 24/7.

          • that does not square with the number in the report which was about 1/5 of that number so I’m missing something here…

            Huh…I cannot explain that, not without additional research.

            Given the large discrepancy, my initial reaction would be they measure different things, or use different measurements.

          • yup… I’m not questioning it.. I suspect that they do spend about what other states do – about 10K per kid but given the rather different ways of doing business, NH may well have a hard-to-understand funding approach.

            In Va – it’s about 10K with 1K coming from the Feds for at-risk kids, about 4K from the state and 5K locally…

            Va has elected school boards but they cannot levy taxes. They have to send a request to the County elected to be approved and the county elected do what is necessary with regard to taxes. Locally, property taxes and sales taxes fund schools. At the state level, income taxes fund schools.

            That’s why I was so curious as to how NH does it without income or sales taxes.

      • No, it isn’t.

        The corporation (a legal entity, and according to Romney, a ‘person’) pays tax on what it makes. The shareholder, a completely different legal entity, pays tax on what he or she receives. If the owners of a corporation want the legal benefits of incorporation, then it’s the definition of chutzpah (kill your parents, ask for mercy because you’re an orphan) to then bemoan the fact that the corporation and its owners are treated as two different people.

        • And my preference, at least in the theoretical world in which I was King, would be a tax based on ‘membership’ in the country. All citizens and residents of the country would pay a similar amount of tax, just like members of a swim club, congregation or country club pay the same amount of tax. You could tweak it a bit, give kids a discount of sorts, perhaps set a maximum number of years one has to pay, a discount for non-citizen residents (in effect, a guest fee).

          • That’s an interesting thought, Steve. Would that go for everyone residing in the country, regardless of their national origin? For example, would a British man, who is not a citizen of the US, pay the tax?

          • Jon: yes, everybody residing in the country pays a membership tax. Higher for citizens because we get more, less for foreign nationals living here. Perhaps a middle level for immigrants working to establish citizenship.

  2. It seems to me that all one is doing here is just eliminating taxes on saving income. We are still paying taxes on income.

    Is this correct? Or do I misunderstand what is going on?


  3. Businesses would be taxed on their cash flow

    Definitely more efficient collection process with less administrative overhead. Is efficiency the very kernel of growth? Who knows? One thing for sure, *our tax code has Ouija-slid into a twisted contortion.*!

    Do you think that USA is overly invested at the moment? Do we need more of a demand driven economy? By contrast, would the cash-flow-tax be very applicable to most of our trading partners? Thus aiding us indirectly? Are they reading this?

    What do you think
    ?

    • the largest number by far are those who get food stamps and kids on reduced lunches – about 45 million and a good number of them work full time and others have increased swelled the number as a result of the recession.

      the actual number who get ‘welfare’ is much smaller.

      As usually Juandos is playing a deceptive game and apparently with the help of the guy in charge of Welfare in Pennsylvania.

      but the most interesting thing is that there is no link to the Pennsylvania website and a search of their site for this material turns up nothing.

      so where are these charts cause they do not seem to reside on the Pennsylvania Department of Welfare website?

      • larry g apparently having a tough time with simple English says: “As usually Juandos is playing a deceptive game and apparently with the help of the guy in charge of Welfare in Pennsylvania“…

        The only response I can think of for that sentence is chuckle…

        but the most interesting thing is that there is no link to the Pennsylvania website and a search of their site for this material turns up nothing“…

        Let me guess, google doesn’t work for you, right?

        but the most interesting thing is that there is no link to the Pennsylvania website and a search of their site for this material turns up nothing“…

        Yep, English is a real toughie, larry g?

        • English is not the problem. The problem is depicting charts with no links to where they are sourced.

          which is a usual and typical thing for propagandists like Juandos who really do not care about credibility and facts as long as whatever is thrown up against the wall tastes good to him.

          • larry g whines: “The problem is depicting charts with no links to where they are sourced“…

            Yep, English is a toughie…

            Read the bottom of the graphics…

          • I read the bottom .. they do not specify the website link.

            and you cannot find that data on their website either.

            I doubt that these charts actually exist on the Pennsylvania website in the first place.

            If these charts were real – there would be a link to their exact location on the Penn website.

            instead.. it’s like AEI does often where they will give what looks like a credible reference but then try to actually find it… not surprised that Juandos and like-minded are still playing this game.

          • larry g says: “I read the bottom .. they do not specify the website link.

            and you cannot find that data on their website either“…

            You’re absolutely hopeless…

          • nope. I suspect we’re playing with bogus charts. Honest folks have no problem supplying the actual links…

          • larry g still grasping for straws says: “ I suspect we’re playing with bogus charts“…

            LMAO! Good one!

            Honest folks have no problem supplying the actual links“…

            Now that’s funny coming from wikipedia boy…

  4. “Most economists vastly prefer consumption taxes to income taxes.”

    “Most” and “vastly” in the same sentence! A double generalization. lol.

    Language anomalies aside, if this is true than perhaps most vastly have lost sight of the fundamental truth that you tax what you want less of. Perhaps generations of the hastily invented unfortunately flawed “income tax” has lulled economists (‘ brains) to sleep much like the lyrical but silly “ether” “vastly” tricked “most” physicists before Einstein set them straight.

    Pity.
    But it gets worse..
    ————
    “Under the X Tax, you wouldn’t pay the consumption tax at the cash register. Businesses would be taxed on their cash flow, ”

    So I pay 99 cents for the 99 cent burger without a line item tacked on called “sales tax,” but the “business pays. ”

    Utter nonsense. The consumer is still paying the businesses tax because that’s where the cash flow comes from. The “ism” of capitalism is “capital belongs in the hands of the people.” Businesses don’t pay taxes. Businesses collect taxes from their customers (for the govt). Geesh. No matter the catchy names or (wasted) fancy math the fundamentals are immutable (hence the name!)

    @DanFarfan

    • I disagree, Dan. Unless one is an anarchist, there is a need for government and government needs to fund itself.

      You are correct that when something is taxed, you get less of it. But government needs to fund itself, so the question becomes: how can a government fund itself while minimizing the deadweight loss (aka economic loss) in the economy?

      The income tax, I find, is very convoluted. By separating people into arbitrary brackets, it increases the need for tax collectors to work harder to make sure the right taxes are collected. Also, the door is left open for loopholes and special privileges, etc etc. You also need to define what income actually is, and how to treat it. The end result, as you can see, is a broken tax code that no one understands.

      A consumption tax is much easier. Taxes are collected by the businesses. This eliminates the need for the IRS, or at least for a large IRS. A consumption tax also allows each person to control his own tax burden. There are no surprise AMTs. The price you see is the price you pay. A consumption tax also limits the government’s ability to raise taxes substantionally for the same reason.

      A consumption tax also has the added benefit of being most fair. The rich, by definition, consume more. Therefore, they will be paying a higher tax than the poor. The rich also cannot circumvent a consumption tax (unless the do their shopping exclusively in a place that has no such tax, but with all the riches Bill Gates has, I do not see him flying out to Singapore to do his shopping).

      Where I disagree with you entirely is that businesses will just pass the tax along to the consumer. A business will attempt to pass some of the tax along, but the ability will greatly depend on how elastic the demand for a good is (in other words, how sensitive consumers are to price changes). If a good has inelastic demand (consumers are not sensitive to price changes), then a business will be able to pass along a greater proportion of the tax to the consumer. If a good has elastic demand (consumers are sensitive to price changes), then the business will have to absorb more of the tax.

  5. In my opinion, Jon has the right idea. With all the numbers crunched, let’s say that all present taxes are recinded and a national retail sales tax of say 10% enacted, a dollar item should drop in net price to about eighty cents. The 10% sales tax would bring the price up to about $.88, which raises everyone’s buying power about 12% most significantly benefitting the poor.

    This is a KISS proposal, not the so called “Fair Tax” which, again in my opinion, is not fair if not everyone pays his true fair share, an idea embraced in a way by Steve above. There would be no exceptions or exemptions; everything sold new would have it, everyone would pay it.

    Charities, just like businesses, would learn to live in such an environment or fold. Large ticket items such as houses would be taxed on the amount of the equity paid for each month until the original price of the house is satisfied.

    Think of all the money, about 10 Billion Dollars, the government would save by not having such a huge IRS department. Think of all the trees that would be saved when all the paperwork required by the present tax system is eliminated. Think of all the suicides, heart attacks, strokes and general grumpiness that would be avoided around April 15th when nature is beginning to brighten up and get happy. What’s not to like.


    • 10 Billion Dollars, the government would save by not having such a huge IRS department. Think of all the trees that would be saved when all the paperwork required by the present tax system is eliminated. Think of all the suicides, heart attacks, strokes and general grumpiness

      10 Billion saved is 10 Billion earned. Income tax procedures alone burn up as much every year as the gross product before taxes of the State of Kansas. That factoid is straight from the General Accounting Office.

      Taxation of things meant for health and survival is futile in light of increased welfare expenses generated. By contrast, taxation of things bought merely for status means less of status things, but less of status things does not change the hierarchy of the status ladder. Such a tax on Veblen Assets, Veblen Goods, Veblen Activities, and status symbols hits all status seekers equally thus generates tax revenue without changing anyone’s status. For example :

      Drop tax on life saving bags of rice and fire extinguishers but increase taxation on expensive concerts, charity balls, and Super Bowl tickets. Tell me something!

      Are gigantic pyramids impressive? Could a tax on pyramids have prevented the Egyptian Pyramid Bubble? Without actually changing any One Pharaoh’s status in relation to other pharaoh? Tell me something else!

      Can a hummer be useful at times? Usually a mere status symbol? Amphoteric items that are partly useful could be taxed less than purified show-off-items. Only tax cash flow of companies making pleasure yachts and similar companies?

      The extra efficiency of not taxing each individual taxable human would be enormous.

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