America Should Move to a Consumption Tax

Originally posted: August 12, 2005

The 16th amendment to the US Constitution, ratified in 1913, allows the federal government to tax income. I believe the 16th amendment should be repealed. The federal income tax should be replaced by a national consumption tax.

The concept of taxing consumption rather than income has been discussed for nearly 500 years. In 1651, Thomas Hobbes wrote in The Leviathan that taxing what citizens consume is more just than taxing that they earn. Consumption, Hobbes thought, represented what people take out of society, while earnings demonstrate what they contributed.

Around the same time, Sir William Petty argued for taxing consumption on the grounds that the goods and services that individuals consume are a better measure of their well-being. He wrote in 1662, “Every man should pay according to what he actually enjoyeth,” and taxes should be low on those “who please to be content with natural necessities.”

In the 18th century, Scottist philosopher David Hume asserted that a principal benefit of consumption taxes is that they are somewhat voluntary, because consumers can decide whether to consume the taxed commodity. This argument was endorsed by Alexander Hamilton in Federalist No. 51

A growing number of economists and politicians are concluding that the United States should replace the income tax with a tax on consumption. Most prominently, Congressman Linder and Senator Chambliss, both Georgia Republicans, have introduced the “Fair Tax” (HR 25/ S.25).

In my view, a consumption tax offers numerous advantages over the income tax:

-Individuals would have more money in their weekly or monthly paychecks.

-Taxpayers would have some ability to control their tax liability, based on their consumer spending.

-A consumption tax rewards savings, thus increasing thrift and investment.

-The costs of tax compliance are greatly reduced. At present, federal income taxpayers spend $225 billion and 5.4 billion hours per year filling out federal income tax forms. With a consumption tax, these figures would be zero.

-IRS intrusion would be eliminated. The current income tax code allows the IRS to audit your records and maintain massive files on your activities. With a consumption tax, such federal meddling would be gone.

-Reduced special interest favoritism. The federal income tax code is riddled with favors, loopholes, and sweetheart deals for special interest groups, all of whom have high-powered, high-priced Washington lobbyists. A uniform consumption tax would eliminate this public ripoff.

-US manufacturers would benefit. Foreign companies would be forced to compete on even terms with US companies.

-Restored public confidence in the tax system. Instead of a federal income tax system beset with loopholes, favoritism, complexity, and intrusion, a consumption tax should produce fairness, honesty, and simplicity.

A less-radical approach to reforming the tax system is the flat tax, championed by former Republican presidential candidate Steve Forbes. Under this proposal, all income earners would pay the same tax rate–with no (or few) deductions).

This proposal pales in comparison to the consumption tax. Practically the only advantage over the current system is that the cost of filing would be somewhat reduced.

However, under a flat tax, withholding would continue; individuals and businesses would still need to track income and file income tax returns. A flat tax system would still be open to manipulation by special interests. A flat tax would still tax US goods and not tax foreign imports, thus creating unfair competition for US businesses and manufacturers. A flat tax would provide no improvement in the funding of Social Security and Medicare. A flat tax would do little or nothing to improve savings.

At the Constitution Convention in in Philadelphia in 1787, the Founding Fathers made no provision for the federal government to tax income. Maybe they knew what they were doing.

Ted Rueter is an assistant professor of political science

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