I actually came across this article about a week ago, I just hadn’t gotten around to posting it. According to the New York Times, several governors have recently become taken with the idea of shifting the tax code so that a greater proportion of state revenues come from taxes on consumption rather than income.
There are two reasons why Republicans governors would be interested in such a thing at this time. The first is that many have their eye on the next presidential election, and as conservatives, “reducing” taxes would look good on their record. The other is that they believe that this policy would encourage savings and investment and thus would boost the economy. The article mentions that most economists agree with this viewpoint.
Democrats point out that greater reliance on sales taxes would also be inequitable, since the wealthy spend a smaller share of their income. One Dem dismissed the trend as mere “shell games.” Another problem pointed out in the article is that the economy is more serviced-based than it used to be, so the definition of what is taxable would have to be expanded to account for this.
On the whole, states currently receive 42% of their revenues from personal and corporate income taxes and 46% from sales taxes. I consider myself wholly ignorant of this subject, so I have a lot of questions. I wonder who is right in this case? Would increased sales taxes really be better and more efficient than income taxes? If so, is there a way to make them more equitable? Is there a detailed economic argument behind it? It will be interesting to see how this trend develops.
You can access the article here.
I enjoyed the article because I am from Oregon one of the few states in the nation that still does not have sales tax. We overcome this by having higher income taxes than other states. Equality is an important part of policy and I think it is important to consider that the middle class is spending the most in the economy while the wealthy save more. I believe that although it seems unequal it is also important to note that an increase in consumption tax will also lead to a decrease in income tax so it is important to look at the opportunity costs of switching to this situation. The economic growth and curbing of government spending that the policy would result I think will help push this proposal to a forefront since fiscally we need a lot of help.
I agree this is a very interesting article to highlight the efficiency and equity impacts of any policy change. One thing the article could have explained more clearly is that a sales tax is not the only way to tax consumption. A sales tax is regressive because at people with lower incomes generally spend a larger share of their income. Another way to tax consumption is to tax that part of income that is not spent. This would allow for tax rates to increase with consumption as income tax rates do now. One challenge for this alternative consumption tax would be the administrative costs, at least initially.