Confessions of a Supply-Side Liberal

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Scrooge and the Ethical Case for Consumption Taxation

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Most of the popular discussion about tax fairness focuses on how much money people make. But it has always seemed to me that it is when people spend money on themselves that they incur whatever debt to society the principles of taxation ought to imply.

  • Suppose first that I made  $10 billion, and gave all but $100,000 of it away to take care of the poor. Should I really be taxed on the $10 billion that I no longer have, but already gave away, or only on the $100,000 that I then actually spend on myself? And with that much of the task of taking care of the poor removed taken off of the shoulders of the government, won’t it have enough money from taxing everyone’s spending to take care of the other necessary tasks of government?
  • Next, suppose I save the money. Then it is still indeterminate whether I will eventually spend the money on myself or give it away. Shouldn’t the government wait until it is clear whether I will spend the money or give it away to take care of the poor before the government taxes it?  Here, notice also that in saving the money for later use, I am making resources available for building factories or other places of business, which employ people.  
  • Now, suppose I give the money to my children. Then shouldn’t the government wait to see whether the children spend the money on themselves or give it away to take care of the poor before the government taxes it?

The essence of this argument is that it is only at the moment of consumption spending that I appropriate money for myself. Until then, I am only acting as a steward for those resources whose ultimate use has not yet been determined. And if I give money to my children, it is only at the moment of consumption spending that my children actually appropriate money for themselves. 

For the rest of the argument, click through to Steven Landsburg’s essay  "What I Like About Scrooge: In Praise of Misers." Here is a short excerpt:

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar’s worth of goods and didn’t consume them.

Postscript. Most of the tricky issues that remain after saying this much fall under the heading of defining “consumption spending.” But I maintain that income is much harder to define than “consumption spending” is.    

There is one more point to be made about aggregate demand. If I am going to spend money on something sooner or later, I am being more helpful to society if I spend the money during a recession than if I spend it during a boom. But it would be even more helpful if during the recession I gave it away to take care of the poor (which would also add to aggregate demand, and alleviate suffering). When the economy is at the natural level of output or above, there is no social value in adding to aggregate demand, since that creates inflationary pressures that need to be counteracted. The benefit to those I employ is balanced out by the harm to those left unemployed because of the measures that will be taken to avoid inflation.  

Filed under longrunfiscal religionhumanitiesscience class

  1. supplysideliberal posted this