The pundits’ pessimistic projection: Protracted misery lies ahead. 1. Private consumption won’t recover to 2007 levels any time soon. 2. Tax resistance will keep Obama’s long- term agenda on permanent hold.
Things aren’t as bad as they seem: Because satisfaction depends more on relative consumption than absolute consumption, most people will adapt quickly to an across- the-board reduction in consumption.
By simply changing what we tax, we can eliminate several trillion dollars of waste from our current system, more than enough to pay for long-term national renewal.
A tax on any activity has two effects: 1. It generates revenue. 2. It discourages the activity. The current tax system taxes mostly useful activities, such as savings and job creation. If we instead taxed only harmful activities, we could raise all the revenue we need without requiring any painful sacrifices.
Whether deficits make future generations poorer depends on what we buy with borrowed money.
If we spend borrowed money on productive investments, we make future generations richer, not poorer.
World B: You and your family live in a neighborhoods with 3000-square foot houses, others in neighborhoods with 2000-square- foot houses. Which world would you choose? World A: You and your family live in a neighborhood with 4000-square foot houses, others in neighborhoods with 6000-square-foot houses.
Which world would you choose? C: You have 2 weeks of vacation each year, others have 1 week, or D: You have four weeks of vacation each year, others have 6 weeks?
Housing = positional good Leisure = nonpositional good
1.People care about relative consumption, more in some domains than in others. 2. Such concerns lead to expenditure arms races focused on positional goods--those goods for which relative position matters most. 3. These arms races divert resources from nonpositional goods, causing large welfare losses.
The Conflict Between Individual and Group Robert H. Frank. “The Demand for Unobservable and Other Nonpositional Goods.” American Economic Review, 75, March, 1985, pp. 101-116.
The Progressive Consumption Tax (a.k.a., the Unlimited Savings Allowance Tax) Consumption + Savings = Income Consumption = Income – Savings Taxable consumption = Income – Savings – standard deduction
The Jones Family Annual income: $50,000 Annual savings: $5,000 Standard deduction: $30,000 Taxable consumption: $50,000 - $30,000 - $5,000 = $15,000 Tax rate = 20 percent Annual tax bill = $3,000 (About the same as under the current income tax.)
A family that currently spends $5 million a year is debating whether to build a $2 million addition to its mansion. If top marginal tax rate on consumption were 100 percent, the after-tax cost would be $4 million. If it scaled back its addition by half, the after- tax cost would fall to $2 million, and it could save $2 million more than before. Because others would also scale back their additions, the bar that defines an acceptable mansion would be reset.
Other harmful activities that might be taxed: Emitting non-carbon pollutants Mobile phone use while driving Driving heavy passenger vehicles Excessive honking Financial transactions?
Boost government spending by as much as possible, paid for with debt and by raising taxes on top earners. To minimize the long-run impact of deficits, direct stimulus spending toward productive investments. “Tax More Tomorrow:” Once the downturn ends, replace the current tax system, which taxes useful activities, with one that taxes only activities that cause harm. A progressive consumption tax Carbon, pollution, and congestion taxes
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