The Progressive Consumption Tax
A win-win solution for reducing American income inequality.
First, by committing ourselves to a larger revenue stream in the future, we’d reassure those who worry, justifiably, that the government cannot forever spend more than it takes in. Second, by encouraging additional investment, we’d foster more rapid growth in productivity and income. Third, and most important, knowledge that the tax was coming would stimulate a burst of private spending that would help get the economy back on its feet. Anyone who was thinking about buying a bigger yacht or building a bigger mansion would rush to do so before the tax took effect.
Of course, that’s hardly the best way to stimulate a depressed economy. Far better would be for the government to spend hundreds of billions of dollars on desperately overdue infrastructure repairs. But conservatives in Congress have consistently demonstrated their ability and willingness to block such measures.
In contrast, conservatives have always been responsive to proposals to tax consumption instead of income. They generally favor a flat tax, but because flat taxes would make inequality dramatically worse, they are unlikely ever to be adopted.
So a progressive consumption tax may be our only politically realistic hope for ending the downturn quickly and limiting the growth in consumption inequality that has made life so much more difficult for the 99 percent.
In my recent book, The Darwin Economy, I defend the claim that taxes on activities that cause undue harm to others could generate more than enough revenue to end our budget woes once and for all. The progressive consumption tax is such a tax. The wealthy family that builds a bigger mansion or stages a more lavish wedding celebration almost surely had no intention of harming others. But its actions nonetheless harm others, by shifting the frames of reference that shape what they must spend in those domains. The progressive consumption tax creates an incentive to take those external costs into account.
For exactly analogous reasons, we should tax congestion, noise, and pollution. We should tax passenger vehicles by weight. In contrast, our current system generates most of its revenue by taxing useful activities. The payroll tax, for example, discourages hiring. The income tax discourages savings. As every mature adult realizes, we have to tax something. Every dollar we can raise by taxing activities that cause harm to others is a dollar less we must raise by taxing beneficial activities.
Many on the right are quick to denounce taxes on harmful activities as "social engineering"—which they usually define as using the tax code "to control our behavior, steer our choices, and change the way we live our lives." But that's what virtually all laws do. Stop signs are social engineering, as are prohibitions against theft and homicide. Laws restrict behavior because individuals often choose to behave in ways that cause harm to others. For someone who cares about personal liberty, discouraging harmful behavior by taxing it should be far less objectionable than prohibiting it outright.
As economists are fond of saying, there’s no free lunch. An important exception to that rule, however, is that when existing arrangements are grossly wasteful, it’s possible for everyone to have more of everything. We must not allow mindless anti-tax rhetoric to prevent us from implementing tax reforms that would create enormous benefits for citizens all along the income scale.
Growing income disparities, which are largely a consequence of market forces, have made it far more expensive for middle-income families to achieve many basic goals. The OWS movement has performed an invaluable service by helping to focus public attention on this problem. Members of the movement have wisely refrained from making specific policy demands for the moment. But now that inequality has reached the top of the agenda, it’s time to discuss what to do about it.
Robert H. Frank is an economics professor at Cornell University’s Johnson School of Management, an economics columnist for the New York Times, and a distinguished senior fellow at Demos. He is the author, most recently, of The Darwin Economy.