Consumption Tax

This Author has long opposed a structural Consumption Tax, accepting certain forms of Consumption taxations to redirect Production sources or materials; he currently favors an Import Sales tax to curb import of Finished Goods. President Bush, on the other hand, does favor a basic Consumption Tax replacement for most Income and Capital Gains taxes in force presently. It is incumbent to study economic effects of Consumption Taxes.

Consumption Taxes are basically regressive in that lower-Income Households inevitably pay a higher percentage of their total Income as tax, than do higher-income Households. The higher expenditures of wealthier Households only marginally affect this regressiveness. The reason lies in the necessity of lower-income Households using a higher percentage of their total income for consumption purchases. The lower the percentage of total income a Household expends on Consumption, the more favored the Household under a Consumption Tax.

Consumption taxation interacts with Inflation. Modern extension of Consumer Credit propels the Economy, but it also propels a normal Inflation rate of about 1.4% under the best of conditions, and generates higher Inflation with increased levels of Consumer Debt: based on a formula where debt service becomes additional creation of M2 supply(think of addtional Interest as more money). Now enters the Consumption tax based on the Retail cost of the Products purchased. Consumption taxation, combined with modern extension of Consumer Credit, has yearly assured increases of tax revenues. Now comes the real Tax sticker: Whoever spends the greatest share of total Household income on Consumption, pays the greatest amount of the Inflation-generated increased Consumption Tax revenues. The Consumption Tax becomes increasingly regressive under the impact of Inflation. This is true whether or not the Consumption tax rate changes.

Economists should also fear the imposition of Consumption taxation. Consumer Demand is generated, or cut, by the total magnitude of the total cost to the Consumer--which includes taxation. The initial Tax rate has an impact, but so does the Inflation rate. Now becomes the horror: the actual regressiveness of the tax is factored in, and the rate of regression is deepest among the lower-income Households. They will reduce their Consumer Demand by the total impact of Tax and Inflation on the basis of the total percentage of their total income used for Consumption. Explained in alternate fashion: higher-income Households, under impact of Consumption tax plus Inflation, can increase their consumption by the amount of regression existent in the combination; as long as they maintain the total percentage consumption to the total of their Income below the consumption percentage levels of lower-income Households, i.e., the later Households effectually pay the inflationary impact placed on the higher-income Households. Economic instability results in the fact lower-income Households must maintain a Consumption pattern about 60% of expenditure levels of higher-income Households to pay for all Household equities, though they often have only a quarter of the Income--guaranteed to be overtaxed by a Consumption tax.

Further Posts will examine exactly why Corporate Executives, fueled by Stock Options and Stock Grants, want the elimination of Capital Grains taxation and the highest rates of Income Tax. lgl