Production (investment) and consumption are two sides of the same coin. No one will produce anything if there are no customers, and you can’t consume something if it hasn’t been produced. Taxing either activity will have a similar Debbie Downer effect on the economy.
There is another option. Tax something that represents the true definition of unearned, unproductive wealth – land values. Replace income and sales taxes with the Land Value Tax.
A personal example (confession!) to illustrate: The house (or, more accurately, the land under the house) that my wife and I purchased decades ago has insanely appreciated. Good for us! But who else has benefited? A similar gain in the stock market would, at least in theory, have been our reward for providing investment capital to grow businesses, create jobs, etc. But land value is a zero-sum game. Our gain comes at the expense of others who can’t afford a place to live.
The advantages of the Land Value Tax:
-Simple to define and enforce. The tax would be “x” percent of assessed land value, no exceptions. You can try to hide income but you can’t hide land.
-Progressive and pro-growth. The wealthy owners of high-priced land and would pay a disproportionate share of the taxes, but the marginal tax on both income (production) and consumption would be ZERO – a win-win for both liberals and conservatives.
This is a very thoughtful article! The one question I have is whether this expenditure tax will apply to expenditures from borrowed funds or is it only taxing expenditures from income?
I think I'm a bit left of you (timidly leaning towards market socialism), but I’ve only published in political theory, not economics, so I might be totally off base here. Would you, as an economist, say my following evaluation of which taxes to implement, is a good one?
*Great Taxes*
Land Value Tax
Pollution Tax
Congestion Tax
Resource Royalties
Monopoly License Fees (if it can’t be turned into a consumer co-op for some reason)
Spectrum & Airwave Fees
Severance Taxes
Luxury Taxes (ultra-high-end goods (e.g., yachts, private jets) that don’t impact necessities or economic growth).
*Decent Taxes, as long as you don’t overdo it*
(Some) Financial Transaction Taxes (small fees on high-volume financial trades to discourage speculative bubbles)
Property Taxes
Progressive Income Taxes
Progressive Wealth Taxes (theoretically higher than income, but harder to check in practice)
Corporate Taxes
Inheritance Taxes (maybe above a certain threshold)
Asset Gains Taxes (if it’s at least as high as regular income tax)
"Raising revenue" is not the best way to think about taxes, imo. The US government can always get enough revenue, because it ultimately produces tax revenue (reserves, specifically). The 3 big economic reasons for a tax are:
1. To drain overall demand
2. To improve distribution
3. To discourage certain activities
With that aside...
I absolutely do not just object to rich people's consumption, but also their wealth itself. Wealth is power. The fact that the wealthy control so much investment is, itself, a problem. As such, having some taxes to dissuade this makes sense.
It's worth pointing out that a bunch of capital gains is just rich people selling stocks to other rich people-this is not real investment in machines or R&D. Also, your example about having money for entrepreneurial activity is flawed. If the capital gains tax collects $1 million more, but the government spends $1 million more, the private sector will have... $0 less for entrepreneurial activity. Sure, the person hit with the capital gains tax will have less, but others will have more. Fine by me! You make a similar mistake when talking about the income tax-remember, money that households save has to come from somewhere (either overseas or from government). If it doesn't change the deficit, and it doesn't change the current account balance, than it doesn't change the funds available for investment. You can also use mark-to-market to avoid the lock-in issue, of course.
This seems interesting, but I'm having a hard time understanding how the investment stuff would work in practice without some potentially ugly edge cases. For example, say I take 100k out of an existing investment at the end of the tax year, I pay 100k's worth of taxes on it, then I want to reinvest it a month later. Unless I'm missing something, I'm now down that entire amount of tax, and I don't 'make it back' in effect until I've actually earned back enough money to pay tax on to equal that. This is assuming that deductions are carried across from previous years too, which I don't think is the case for many deductions currently. Overall this balances out, assuming I reinvest 100k, but if I've just paid taxes on 100k (say 40k of it is gone), then I may not be able to reinvest this. Beyond being able to earmark stuff for reinvestment to defer the tax on it for some time (which seems like it could be open to plenty of fraud and mischief), I'm not sure how you'd address this under a tax like this.
There's also the issue of using existing investments to take out loans against. With the current system of capital gains taxes, this seems like it could be reasonably accounted for by requiring a step up in tax basis. I guess you could do the same here, but I'm not convinced it would work in quite the same way, given that with an expenditure tax you're not paying taxes on profits but on the raw value.
On the first issue, if you sell an investment with the purpose of consuming it and then decide to invest it, I don’t think that’s much of a problem. I believe bank account holdings would be deductible under such a system. Selling an investment wouldn’t mean you’re consuming it. It would only be consumption once you actually use it for consumptions.
With loans against investments, the tax treatment could be similar for borrowing, where we consider what the borrowing was used for (ie consumption or investment) and then tax or allow deductions accordingly.
We all agree that a tax system being progressive is good. The problem is that the wealthiest people aren't accounted for because they don't make their money from wages, so the effective tax rate isn't actually progressive.
Wealth inequality is killing the people. All ideas to fix this problem are welcome.
my goat
Production (investment) and consumption are two sides of the same coin. No one will produce anything if there are no customers, and you can’t consume something if it hasn’t been produced. Taxing either activity will have a similar Debbie Downer effect on the economy.
There is another option. Tax something that represents the true definition of unearned, unproductive wealth – land values. Replace income and sales taxes with the Land Value Tax.
A personal example (confession!) to illustrate: The house (or, more accurately, the land under the house) that my wife and I purchased decades ago has insanely appreciated. Good for us! But who else has benefited? A similar gain in the stock market would, at least in theory, have been our reward for providing investment capital to grow businesses, create jobs, etc. But land value is a zero-sum game. Our gain comes at the expense of others who can’t afford a place to live.
The advantages of the Land Value Tax:
-Simple to define and enforce. The tax would be “x” percent of assessed land value, no exceptions. You can try to hide income but you can’t hide land.
-Progressive and pro-growth. The wealthy owners of high-priced land and would pay a disproportionate share of the taxes, but the marginal tax on both income (production) and consumption would be ZERO – a win-win for both liberals and conservatives.
I overall agree, but the value of land is not so easy to define compared to, say, wages or even most capital gains.
This is a very thoughtful article! The one question I have is whether this expenditure tax will apply to expenditures from borrowed funds or is it only taxing expenditures from income?
Hi Econoboi,
Thanks for the article, good stuff.
I think I'm a bit left of you (timidly leaning towards market socialism), but I’ve only published in political theory, not economics, so I might be totally off base here. Would you, as an economist, say my following evaluation of which taxes to implement, is a good one?
*Great Taxes*
Land Value Tax
Pollution Tax
Congestion Tax
Resource Royalties
Monopoly License Fees (if it can’t be turned into a consumer co-op for some reason)
Spectrum & Airwave Fees
Severance Taxes
Luxury Taxes (ultra-high-end goods (e.g., yachts, private jets) that don’t impact necessities or economic growth).
*Decent Taxes, as long as you don’t overdo it*
(Some) Financial Transaction Taxes (small fees on high-volume financial trades to discourage speculative bubbles)
Property Taxes
Progressive Income Taxes
Progressive Wealth Taxes (theoretically higher than income, but harder to check in practice)
Corporate Taxes
Inheritance Taxes (maybe above a certain threshold)
Asset Gains Taxes (if it’s at least as high as regular income tax)
User Fees (if progressive)
Vacancy Taxes (reduces speculative property hoarding)
Export Taxes (if for defense or food security reasons)
Windfall Profit Taxes (maybe keep this one on the lower side)
Inflation (I see inflation as a secret tax)
*Bad Taxes*
Payroll Taxes
Flat Income Taxes
Sales/VAT Taxes (except on luxury goods)
Tariffs/Excise/Import Taxes (unless tied to ecological or labor condition metrics)
"Sin" Taxes (regressive and doesn’t even seem to work)
Per Capita Taxes/Head Taxes
Lotteries (I hate them, but people keep wanting them so I guess the state should do it and not private companies)
I did a podcast that should answer a lot of these! https://youtu.be/k4u9FeirbDs?si=jKAWKz4cMSk2_x5c
Oh great I'll look at that
"Raising revenue" is not the best way to think about taxes, imo. The US government can always get enough revenue, because it ultimately produces tax revenue (reserves, specifically). The 3 big economic reasons for a tax are:
1. To drain overall demand
2. To improve distribution
3. To discourage certain activities
With that aside...
I absolutely do not just object to rich people's consumption, but also their wealth itself. Wealth is power. The fact that the wealthy control so much investment is, itself, a problem. As such, having some taxes to dissuade this makes sense.
It's worth pointing out that a bunch of capital gains is just rich people selling stocks to other rich people-this is not real investment in machines or R&D. Also, your example about having money for entrepreneurial activity is flawed. If the capital gains tax collects $1 million more, but the government spends $1 million more, the private sector will have... $0 less for entrepreneurial activity. Sure, the person hit with the capital gains tax will have less, but others will have more. Fine by me! You make a similar mistake when talking about the income tax-remember, money that households save has to come from somewhere (either overseas or from government). If it doesn't change the deficit, and it doesn't change the current account balance, than it doesn't change the funds available for investment. You can also use mark-to-market to avoid the lock-in issue, of course.
This seems interesting, but I'm having a hard time understanding how the investment stuff would work in practice without some potentially ugly edge cases. For example, say I take 100k out of an existing investment at the end of the tax year, I pay 100k's worth of taxes on it, then I want to reinvest it a month later. Unless I'm missing something, I'm now down that entire amount of tax, and I don't 'make it back' in effect until I've actually earned back enough money to pay tax on to equal that. This is assuming that deductions are carried across from previous years too, which I don't think is the case for many deductions currently. Overall this balances out, assuming I reinvest 100k, but if I've just paid taxes on 100k (say 40k of it is gone), then I may not be able to reinvest this. Beyond being able to earmark stuff for reinvestment to defer the tax on it for some time (which seems like it could be open to plenty of fraud and mischief), I'm not sure how you'd address this under a tax like this.
There's also the issue of using existing investments to take out loans against. With the current system of capital gains taxes, this seems like it could be reasonably accounted for by requiring a step up in tax basis. I guess you could do the same here, but I'm not convinced it would work in quite the same way, given that with an expenditure tax you're not paying taxes on profits but on the raw value.
On the first issue, if you sell an investment with the purpose of consuming it and then decide to invest it, I don’t think that’s much of a problem. I believe bank account holdings would be deductible under such a system. Selling an investment wouldn’t mean you’re consuming it. It would only be consumption once you actually use it for consumptions.
With loans against investments, the tax treatment could be similar for borrowing, where we consider what the borrowing was used for (ie consumption or investment) and then tax or allow deductions accordingly.
We all agree that a tax system being progressive is good. The problem is that the wealthiest people aren't accounted for because they don't make their money from wages, so the effective tax rate isn't actually progressive.
Wealth inequality is killing the people. All ideas to fix this problem are welcome.
This tax taxes capital income as well. Regarding wealth inequality, I’ll get to that.
I believe his next post in this series will be about a DBCFT