American Debt-Default...<sigh>

In economics, there is a concept called the Marginal Propensity to Consume (MPC). It expresses the fact that the more one consumes, the less one wants to continue consuming. This concept is what supports the notion of a progressive income tax. Those who can afford to pay more do so under a progressive tax regime. A regressive tax regime, one in which a disproportionate burden falls upon those who are unable to pay, or for whom payment of the tax is an unreasonable burden, is one that had been avoided for decades in the US (until recently). A consumption tax would by definition be regressive, as would a "flat" income tax.

My own view is that the very best piece of tax legislation to occur in my lifetime was the Tax Act of 1986. It lowered rates for everyone and broadened the base of taxation, giving corporations and the very wealthy far fewer opportunities to avoid taxation than they had previously had. Included in this simplification was the elimination of the rate differential between "ordinary" income and capital gains, which brought the US more in line with practices in the rest of the industrialized world. Every single piece of tax legislation since 1986 (with the exception of a few technical corrections in '87 and '88) has dismantled some part of the '86 Act, making our tax system increasingly confusing and increasingly unfair.

 

EdFromNY,
I bolded the comment I am responding to with respect to the Fair Tax. It is not regressive in that everyone, including those at the lower end of the economic spectrum, get a prebate (a check) that reimburses them for the taxes they pay for the essentials of everyday life. Thus, the poorest pay no taxes, meaning the Fair Tax would not be regressive by definition.

 

They said the same thing about state sales taxes. Yet many states now impose sales taxes on food, clothing and other essentials. And at least one state imposes a sales tax on prescription drugs. A consumption tax of as much as 23% would also encourage those with the means to do so to purchase outside the system so as to beat the tax. And they would.

A tax on income, if done properly, provides the greatest match between the tax paid and the ability to pay.

 

I don't buy it. The idea that the government wouldn't implement it properly is one thing, but if done correctly I think the Fair Tax would work well.

As for the income tax, if you have that then the rate should be flat across the board, with a baseline income below which people pay no tax.

 

But I don't think you can separate the two. The very terms of the so-called fair tax guarantee that it could not be implemented in a way that would result in adequate revenue generation. Put simply, it would be impossible to enforce on those who would be most likely to beat it (and tax enforcement is what I do...when I'm not writing ).

I also think there is nothing wrong with a reasonably progressive income tax. Those with the greatest ability to pay owe something to the system that allowed them to generate such wealth in the first place. What do I think of as "reasonably progressive"? As I mentioned earlier, I think the '86 Act got it right. If only they'd have left the bloody thing alone!

 

The Fair Tax?
The German Democratic Republic anyone?

Without attending to the details, the name alone sends shivers down the spine.

 

/\ This

 

Okay, this has run its course and has wandered off to general economic debate.