The History of Consumption Taxes Shows GOP Won't Eliminate IRS
Consumption taxes are having a moment, as they do every 20 years or so. They are never a good idea, but the current iteration, which House Speaker Kevin McCarthy has promised to bring to the floor, is a worse idea than usual.
Under the Fair Tax bill sponsored by Representative Buddy Carter, a Georgia Republican, all income, capital gains, estate, gift, corporate, and payroll taxes would be eliminated. They would be replaced by a flat 30 percent national sales tax on everything you buy. Even Grover Norquist, the hard-right president of Americans for Tax Reform and flat-tax advocate who famously said he wanted to shrink government “to the size where I can drag it into the bathroom and drown it in the bathtub,” told Joseph Zeballos-Roig of Semafor this week that the Fair Tax bill was “a political gift to Biden and the Democrats.” Elsewhere Norquist has called it “one of the stupider ideas that have been put forward.” If the “fair tax” passed in the House it would still have no chance of becoming law, of course, because the Senate and the White House would stop it. That makes a purely symbolic House vote all upside for the Democrats.
Consumption taxes can be worthwhile if they’re targeted narrowly to specific things that we legitimately want people to buy less of. That’s the logic of the gasoline tax, which is 18.4 cents per gallon and ought to be at least twice that to curb carbon emissions, and of the cigarette tax, which is about $1 per pack. But you have to be careful with consumption taxes, because unless they target luxuries available only to the affluent, they’re going to be regressive. You also have to be careful because such taxes are wildly unpopular.
Broad-based consumption taxes like what Carter has proposed are always a dumb idea. Interestingly, liberals fancied such consumption taxes before conservatives did. The leading advocate four decades ago was Lester Thurow, a celebrity economist at MIT who in 1981 proposed curbing double-digit inflation with a consumption tax. This was, Thurow argued, preferable to then-Fed Chairman Paul Volcker’s approach to curbing inflation, which was to slam the brakes on the money supply and bring on a severe recession (which of course is what happened in the end). Thurow may have been right that his dumb idea was better than Volcker’s cruel idea. He was certainly right that President Ronald Reagan’s idea, which was to slash away at the income tax, was terrible.
Thurow made large claims for the consumption tax. It would curb inflation, he said. It would boost the national savings rate. He even said it would pay for Reagan’s military buildup, which, at the time, Thurow feared would be paid for with horribly deep domestic spending cuts, which never materialized. (Instead, the military buildup was paid for with—well, it wasn’t: Reagan tripled the deficit.) Thurow said that his consumption tax (he proposed various kinds, including a European-style value-added tax) could be made progressive through rebates or other methods. But to the limited extent that consumption taxation has been tried (indirectly, through the creation of tax-free college savings and health savings accounts—shelters for savings rather than taxes for consumption), it has tended to redistribute wealth upward.
The consumption tax had appeal to liberals back in the 1980s because it was an assault on the materialism that many liberals had deplored since the 1950s, as advertisers created consumer desires supposedly out of thin air. Also, banks were handing out credit cards like penny candy, causing an alarming rise in consumer debt. The personal savings rate had been declining since the 1970s (and would continue to fall until 2005, when it started to climb again), and liberals worried that the ethos of thrift was vanishing (a virtue that conservatives, to whom thrift was previously sacred, stopped caring about as Reagan’s deficits piled up). It’s touching now to remember that in the 1980s, lefties deplored “yuppies” for consumer indulgences like Melitta coffeemakers and Sony Walkmen and Kaypro personal computers—all items whose successor technologies we now consider straightforward necessities.