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Should we replace the progressive income tax system with a progressive consumption tax?

Welcome to VoteFacts.   Bill Gates makes the suggestion that our nation replace our progressive income tax system with a progressive consumption tax system.  He says that,

"I do think tax structures will have to move away from taxing payroll because society has a desire to have employment...  I think economists would have said that a progressive consumption tax is a better construct at any point in history."  

(Quote begins at 46 minutes 20 seconds.  You can watch from the beginning by dragging the start button backwards).

Readers also voted on raising corporate tax rates here, and whether or not we should raise the federal minimum wage here, so cast your votes on those questions if you haven't already.  

But before you chime-in today about going from taxing labor to taxing consumption (which is taxing the purchase of goods and services), let's take this opportunity to focus on some facts relating to taxes in the United States as well as many other  nations.

Some History

According to the Office of Management and Budget (OMB)

From the beginning of the Republic until the start of the Civil War, our Nation relied on customs duties to finance the activities of the Federal Government. During the 19th Century, sales of public lands supplemented customs duties. While large amounts were occasionally obtained from the sale of lands, customs duties amounts for over 90 percent of Federal receipts in most years prior to the Civil War.

Prior to 1913, income taxes did not exist or were inconsequential, other than for a brief time during the Civil War period, when special tax legislation raised the income tax share of Federal receipts to as much as 13 percent in 1866.  

Since the enactment of income tax legislation in 1913, these taxes grew in importance as a source of Federal receipts during the following decade. By 1930, the Federal Government was relying on income taxes for 60 percent of its receipts, while customs duties and excise taxes each accounted for 15 percent of the receipts.  

A Founding Father and the first Secretary of the Treasury, Alexander Hamilton, wrote in Federalist Paper No. 21 that,

"It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit, which cannot be exceeded without defeating the end proposed—that is, an extension of the revenue...  If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them."

Our tax system compared to others

The Organisation for Economic Co-operation and Development (OECD) reports that

In many high-tax countries, taxes embody little progressivity - this is particularly the case in Denmark, Iceland and the Netherlands. And household taxes are more progressive in the United States than in most EU countries.  (OECD Pg 7)

According to another report by the OECD, the U.S. has the most progressive tax system compared to all countries they included.  In that report, Switzerland had the lowest share of total taxes paid by the richest decile and the lowest share of market income concentrated toward the richest decile (less tax progressivity and a lower income gap).  All other selected nations for that report show a lower total share of taxes paid by the top decile than is the case for the United States, including the UK, Canada, France, and Switzerland.   (OECD Table)

The OECD also reports that, personal and corporate income taxes are the most distortive taxes as they have sizable negative effects on labour use, productivity and capital accumulation. Shifting the tax mix away from such taxes and towards recurrent taxes on immovable property (the least distortive) and consumption taxes should thus raise living standards.  (OECD Page 10)

The OECD also shows that:

• Taxes on personal income as a percentage of total taxes collected are higher in the United States than most OECD nations. The only nations that are higher include Iceland, Australia, and Denmark.  

• Consumption taxes are the lowest percentage of all taxes paid in the United States than all OECD nations. 

• Taxes on income and profits as a percentage of total taxes paid are higher in the United States than many European nations, including Germany, Sweden, the UK, Netherlands, Italy, and Spain. They are lower than some including Switzerland, Norway, Ireland, and New Zealand. 

• Taxes on corporations as a share of total taxes paid were higher for the United States than the UK, France, Germany, and Italy, but lower than Switzerland, Norway, Australia, and Canada.  

The Debt Commission Report

"America's tax code is broken and must be reformed.  In the quarter century since the last comprehensive tax reform, Washington has riddled the system with countless tax expenditures, which are simply spending by another name.  These tax earmarks - amounting to $1.1 trillion a year of spending in the tax code - not only increase the deficit, but cause tax rates to be too high.

Instead of promoting economic growth and competitiveness, our current code drives up health care costs and provides special treatment to special interests.  The code presents individuals and businesses with perverse economic incentives instead of a level playing field."

It's time for you to chime in.  It is true that there are other things to consider that are not presented here, like a clearer picture of what that new tax structure would look like and how much revenue it would reasonably be expected to generate.  However, if our nation will engage in that debate, perhaps we can get some reports to consider.  But for now, cast your vote, let us know.


Resource Links

US Tax History - Office of Management and Budget, Page 6

Organisation for Economic Co-operation and Development (OECD), Page 7

OECD Table

OECD Table on taxing personal income

OECD Table on consumption taxes

OECD Table on taxing income and profits

OECD Table on taxing corporations

Federalist Paper No. 21

Debt Commission Report, Page 28

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