Currently, we face a situation where the fate of the poorest Americans would be better off had they been paying more in taxes.
The biggest problem facing low income Americans today is the paucity of job openings. There is strong reason to think that additional government stimulus could help that. Yet, the effort to increase stimulus has been stymied by concerns over the US debt-to-GDP ratio.
Yet, if we look back on the past decade a low flat 5% consumption tax would have eliminated most of the debt. No doubt low income households would have been worse off paying such a tax. However, they are much worse off without the possibility of stimulus, today.
When we think of helping lower income households we typically think of transferring wealth from the rich to the poor. However, perhaps more useful is transferring wealth between the poor under different circumstances. Taking more from the poor when times are good and giving more when times are bad. Providing low income households with this type of consumption smoothing is at the margin likely eliminate much more hardship then small increases in wealth.
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Friday ~ December 11th, 2009 at 2:36 pm
Christopher Hansard
Didn’t I just explain to you how bad a national consumption tax would be? Also, didn’t you explain to me how the debt-to-GDP ratio isn’t a big deal? I don’t get it.
Friday ~ December 11th, 2009 at 3:44 pm
Karl Smith
The debt to GDP ratio is
A) Political
B) A bigger long term than short term issue maybe. I will cover that more in a SOG blog post.
On consumption taxes. First, your presentation was on Fair Tax, ie replacing the entire federal tax structure with a retail sales tax. I have in mind an add on of 5% VAT. This is a lot different. Not least because the entire weight of the tax structure is not falling on the retailer.
Friday ~ December 11th, 2009 at 5:17 pm
dWj
I don’t think the kind of stimulus we would be likely to get if we had a lower debt ratio would be likely to help that much.
It may be worth noting — this emphasizes your point — that the poor are precisely those (to a significant extent at least) who are bad at smoothing their own consumption, whether due to tighter solvency constraints or, not unrelated, to more bounded rationality than typically exhibited by those further up the income scale. Which isn’t at all to say that upper middle class households don’t sometimes do a jaw-droppingly bad job of saving for times of famine, but there is a correlation that way.
Saturday ~ December 12th, 2009 at 4:00 pm
Chris Atkinson
So if i make 60k a year (by some metrics, in some locations a 60k household income is ‘poor’) and i lose my job i can assume that if i find another job at 50k i can count on those currently making 60k to transfer wealth to me. How long do i have to stay at 50k for people making 50k to be responsible for keeping me at 50k? What about if i go the other way and start making 85k, how long until they are responsible for me?
Sunday ~ December 13th, 2009 at 4:54 pm
teageegeepea
How about forced savings, like in Singapore?
Monday ~ December 14th, 2009 at 6:41 pm
Pop
“Taking more from the poor when times are good and giving more when times are bad.” Hmm…if only there existed some way of saving money for a rainy day? Something that paid interest would be good, like a Certificate of Deposit…or better yet, something the government encouraged through a tax-advantaged basis like a Traditional IRA, Roth IRA, 401(k), 403(b), 529 College Savings Plan, or HSA’s and FSA’s, cash-value life insurance, or even a social program that took a little bit out of my paycheck each week and then paid it back if I became disabled and couldn’t work…we could dub this community program ‘Social Security’…nah, these are crazy.
But say for a minute that a 5% consumption tax had succeeded in eliminating most– if not all– of the national debt. Terrific as it would be not to have to deploy most of our federal revenue on interest payments, can we make the leap that– finding ourselves in a similar situation as today but not strapped-for-cash– the government would throw stimulus money around left and right…jobs would be created hither-and-yon…and the poorest among us would rise up to fill them? Somewhere along the line I think we’ve failed to close the loop on that topic.
At any rate, I’ve just found your blog and am very much enjoying the read(s). Thanks!