Citizen Journal

Let's say the tax rate is 20% and the rebate is $4,000. An average family that spends $60,000 will pay $12,000 consumption tax, and get $2,000 back, for net taxes of $8,000, or 13.3%. A family that spends $100,000 in a year will pay $20,000 in taxes, minus $4,000 for the rebate, equals $16,000, or 16% taxes. But a family that's having a hard time and only has $20,000 to spend will pay $4,000 in consumption tax, and get the same amount back: no taxes. For those under the $20,000 threshold, the net taxes would be negative, making the tax system a form of social safety net.

If we needed more revenue than that, we could raise the rate. If we want to make the system more progressive, we could increase the rebate. So this proposal shouldn't necessarily polarize people based on their preferences about the size of the government, although it will perhaps be especially appealing to lovers of the free market.

The system would save America all the paperwork devoted to income taxes. People wouldn't have to answer to the government for making money. On the other hand, people would become more answerable to the government for spending money. A high consumption tax would create black markets, and the government would have to be more invasive in controlling and taxing processes of exchange.

Ideally, this would encourage people to work and invest more, and spend less. A step in the right direction.

Whenever I hear a Democrat demanding more taxes on the rich (as Jon Chait does here), I think about this proposal. To the extent that inequality is a social problem, the problem is with some people consuming a lot more than others, not with them earning or owning a lot more than others-- isn't it?