Thursday, January 3, 2013

More Reasons to Tax Consumption Rather that Income.

Income is complicated.  Imagine 2 people earn $100,000 both are taxed the same amount and one guy spends the full net amount, the other invests half of the net.  Over 20 years the invested money doubles but inflation eroded the final value of the money.  Why is the second guy taxed so much more even on the part that is inflation.  It is better to spend your money earlier. there is dis-utility to waiting. It gets very complicated to tax income because of things like inflation capital gains, dividends and interest.  Consumption is easier to define.

Imagine 2 people one who earns $40,000/year right out of college with modest income growth and one (like me BTW) who earns close to minimum wage but then has one big year where he earns 250,000 in one year why should the latter pay more in taxes.  A progressive consumption tax would make this less likely. 

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