Taxation based on consumption is a horrible idea, because it impacts the people with low incomes much more than the people with high incomes. Everyone must spend a fraction of their income on consumption merely to exist. The poorer you are, the larger that fraction. Which means that a tax based on consumption is in effect a form of progressive taxation turned upside down where you pay less the more you earn.
Yes, it taxes people proportional to the benefit they receive rather than proportional to the value they create. Low/no income people tend to consume far more than they produce. Such a tax will stop penalizing investment which is a good thing.
Why would we want rich people to throw lavish parties rather than creating future productive capacity?
First of all, yes, consumption is almost always preferable to "letting your money work for you". Contrary to what you seem to think, most people who have more wealth than they need for consumption, don't use that wealth to fund new ventures. Instead they mostly just own assets that appreciate in value and/or pay a dividend. They do not create new wealth to any significant degree. While it is true to some extent that having money in the bank can help create new wealth, it makes no difference if it's one person putting a million dollars or a thousand people each putting one thousand dollars in the bank. The result in either case is that the bank can lend out a million dollars to someone starting a new venture. I mention this because when one person spends (consumes goods) a thousand dollars say, that money goes out if her bank account and into someone else's. The bank's ability to lend out money is unaffected. Meanwhile, thanks to the power of capitalism, money that is spent flows towards what society in aggregate deems most valuable, ensuring that more effort is spent on creating more of that valuable thing. This is in a nutshell why it's preferable for all, poor and rich, to prevent rampant inequality.
Secondly, I do somewhat agree that we shouldn't disincentivize investment or saving up. I am not familiar with the US tax system, but in some countries you can defer paying taxes on what you put into a pension plan until the time when you collect your pension. If the interest you earn on your savings is more than the inflation, this is a win/win situation: You will earn interest on a larger amount, and society will collect tax on a larger amount in the end too. I could probably be convinced that it would be a good idea to make all investment and savings tax free provided that all dividends as well as any amount liquidated was taxed as income. Buy a house? Fine that's tax deductible. Sell a house? Get taxed on the entire amount as if it were income.
it makes no difference if it's one person putting a million dollars or a thousand people each putting one thousand dollars in the bank. The result in either case is that the bank can lend out a million dollars to someone starting a new venture.
This is wrong because it focuses solely on imaginary numbers floating around. It's absolutely true that we can play any game we want with numbers in a bank computer.
However, a worker can either be building a new factory or they can be making a purse. The former is investment while the latter is consumption. If we encourage investment we get more of the former, while if we encourage consumption we get more of the latter. The constraint here is real resources, not money.
I could probably be convinced that it would be a good idea to make all investment and savings tax free provided that all dividends as well as any amount liquidated was taxed as income.
As I tried to get across before, most of what we think of as investment, doesn't actually create value. Buying land does not create value, buying stock does not usually create new value (unless it's from a new offering). Owning assets that appreciate in value does not create new value. So tell me again why any of these kinds of investment is something we should go out of our way to encourage? On the other hand, consumption in a capitalist society really does create value, because consumption is the all important signalling mechanism that tells us where to direct our resources, ensuring that more value is created. Consumption is not without problems, but it is unquestionably valuable.
So not only would a tax system based on consumption be hugely unjust from a social perspective, it also makes no sense from an economic perspective.
The issue isn't any individual act of saving (most of which are just reshufflings of investment assets), it's net investment. If the amount of money invested goes up, it buys more real investment resources. This means more workers and more physical resources are devoted to investment, and less to consumption.
Again, think of real resources because thinking of money is confusing you. A worker can either do biomedical research (investment) or they can provide massages (consumption). This fact doesn't change no matter what games you imagine are happening with money.
Yes, I probably am a little bit confused as to what exactly you mean when you talk about investment. Is buying a house an investment? How about a yacht? What about a vintage car? Stock? From a social point of view these are all more or less equivalent, as in they all result in money going out of your pocket into someone else's and some asset (which may or may not appreciate in value) being transferred to you. Depending on your point of view they can all be though of as both investment and consumption. This leads me to speculate if what you really mean is that it is spending that should be taxed and taking a profit that should be tax exempt? If not I would very much like to hear how you would define investment in such a way that it can unambiguously be separated from consumption.
But regardless, the intention behind your proposal still makes it a horrible idea. I can see that you will not be swayed by the argument that it is socially very unjust and would result a unimaginable inequality. But as I keep trying to tell you, consumption is the motor of capitalism. It is the demand part of supply and demand. Without consumption, there is no production. And production is what creates all the wealth. Everybody would be poorer.
Furthermore, while it's true the funding new ventures also contribute to wealth creation, and that lack of risk seeking capital would be a problem, it is simply not a problem that exists in our present condition as evidenced by the historically low interest rates. In fact there is an overabundance of capital in today's world. What is lacking is sound new ventures to invest in. If we were to further incentivize investment, we would only accelerate the formation of a catastrophic bubble.
Your understanding of macroeconomics is simplistic if you believe as you seem to do that more investing is always positive or that consumption is always negative.
Your entire argument is focusing on the micro, not the macro. Buying a house is an investment for the person who did it. But if the person you buy from turns around and spends the money on consumption, there is no net investment. One person shifted to investment, another shifted to consumption, the macro effect is zero.
A net investment in houses would involve more housing being owned than before. This would require more houses to be built, and this in turn would require people a shift of workers/materials/etc from other uses into housing construction. Present day consumption goes down in return for an increase in future consumption.
The result is that in the future, productive capacity has increased and more housing is available to consume.
If you want to see the result of a lack of real investment, look at SF. All sorts of games being played with money, but nominally wealthy people can't even afford a flat without roommates.
But as I keep trying to tell you, consumption is the motor of capitalism. It is the demand part of supply and demand. Without consumption, there is no production. And production is what creates all the wealth. Everybody would be poorer.
Why don't you explain the mechanism by which this occurs in real terms? I'm pretty sure you've wildly misunderstood Keynesian economics and are conflating the Keynesian cure for prideful workers (which we don't have now - full employment) for some sort of general growth prescription.
Your entire argument is focusing on the micro, not the macro
You were the one suggesting that investment should be exempt from tax. That requires a definition on the micro level of what constitutes investment, otherwise how do you determine whether or not some expenditure is to be taxed or not? From a practical point of view, how do you differentiate consumption from investment?
If you want to see the result of a lack of real investment, look at SF
Oh, so now there's more than one kind of investment, and only one is "the real kind"? As far as I can see, it doesn't get much realler than in SF: You've got risk seeking capital funding actual new ventures. As in actually creating new wealth. Provided of course that those new ventures succeed. Those rich people you talk of who can't afford to live there have the firstest of first world problems.
It's funny that you should mention SF, because it is a great example of what happens when there is an overabundance of capital and everyone is seeking to invest. You get investors taking on more and more risk to get a return on their capital and ultimately you get a bursting bubble. You see capital by itself does not magically cause value to be created, even when it is used to fund new ventures. If I build a house or a widget, or if I've performed a service, I've only created value, if that house/widget/service was needed in the first place. A man who invests in hotels on the South Pole or a sand selling business in the Sahara is actually destroying wealth. Just like everyone who invested in pets.com before the dot com bubble.
Why don't you explain the mechanism by which this occurs in real terms?
I'm not entirely sure what you mean by real terms? I can say it simpler terms if you like. It's not complicated: Imagine a supermarket. As people buy stuff, the shelves are gradually emptied. The shelves that are emptied first are the ones holding stuff that is most important i.e. valuable to people. Luckily the empty shelf is a great signal to whomever makes the stuff that gets sold in the supermarket to produce more of that stuff. There is of course a pricing component of that mechanism also, but that's basically how that works. If the producer of stuff is unable to keep up with the demand, then that's an opportunity to invest in a new factory that makes the same stuff. Of course not everything sold in supermarket is essential, but I'm sure you would agree that that doesn't mean it is without value. But if we were to tax everything sold in the supermarket heavily (and we would need to if we abolished other forms of tax), we would disincentivize buying anything except the bare necessities. If I understand you correctly, this is more or less the point. This then means that it becomes much harder selling anything other than the bare necessities, and as a consequence lots of businesses must close. Sure, there may be a tiny market selling motorized lawnmowers, but since everything becomes so expensive, most people will get by with a manual lawnmower. But this again means that people will have to spend more time mowing their lawns, and will have less time to do something else that could be valuable. And so on.
Look, I'm not saying that more consumption is always better. Clearly there comes a point at which people buy shit they don't need, and there is also a very real sustainability issue. It's a good idea to tax things like fossil fuels and cigarettes. But most of everything that's valuable gets produced because someone is willing and able to consume it.
"Real" = physical resources. "Nominal" = money. Standard econ terms.
Consumption is differentiated from investment in that consumption is stuff you intrinsically want, while investment is things you don't want except because it gives you other things later.
Again, standard economic terms.
Imagine a supermarket. As people buy stuff, the shelves are gradually emptied. The shelves that are emptied first are the ones holding stuff that is most important i.e. valuable to people. Luckily the empty shelf is a great signal to whomever makes the stuff that gets sold in the supermarket to produce more of that stuff.
How can they produce more? They haven't devoted any physical resources to building that new factory or otherwise upgrading their productive capacity.
But if we were to tax everything sold in the supermarket heavily (and we would need to if we abolished other forms of tax), we would disincentivize buying anything except the bare necessities. If I understand you correctly, this is more or less the point.
Consumption is differentiated from investment in that consumption is stuff you intrinsically want, while investment is things you don't want except because it gives you other things later.
That’s fine, but as I've argued previously, almost any purchase can be argued to fit either description. People do actually buy e.g. fine wine as an investment. How will the IRS determine if a purchase is an investment or consumption?
How can they produce more? They haven't devoted any physical resources to building that new factory or otherwise upgrading their productive capacity.
Presumably they make a profit from selling the stuff. And maybe they produce less of the stuff that doesn't sell well. But how do you even get that from what I wrote? Consumption is not antithetical to investment. I am not arguing against investment. It's not clear to me if you understand that investing does not automatically create a market. All those Chinese ghost towns we hear about are the result of investing in something for which there is no market.
This is completely NOT the point.
In that case I apologize for misunderstanding you. Still, it's an empirical fact that taxes act as a disincentive. And you would need to tax consumption very heavily if it were to replace current forms of tax. A large part of the population would simply not be able to afford anything but the bare essentials (if that) let alone have any money left for investment.
Read the Scott Sumner link I provided above.
I enjoy our discussion, but I am not interested in reading someone else make your argument for you.
The point is that a capital income tax penalizes consumption in the future relative to consumption today. A consumption tax treats them equally.
I am sure that's true, but so what? It's such an arbitrary point to make. It doesn't point towards any real world problem that we are having. The economic challenges that faces us today are not caused by people consuming too much today and saving too little for the future. Quite the opposite in fact. There is also no indication at all that there's any lack of risk seeking capital. It's never been easier to get funding for a new venture. In fact there are sign that it's become almost too easy, and that investors are taking on too large risks in order to get a return.
What then would you tax? Yachts and jewelry? At what rate? Do you think you could run any society on what could be collected on taxes on non-essential consumption?
