Wednesday, December 22, 2004


A De Facto Consumption Tax?

This AP story on Bush's proposed tax reforms contains an intriguing poker tell:

The proposal also would significantly expand opportunities for people to set up savings accounts where their investment earnings would be tax-free, something the administration has been pushing for two years.
Is Bush taking the path of least resistance to a consumption tax? Consider:

Income - Expenses - Savings = Consumption.

The Income and Expenses part has always been there. Adding the Savings to the mix changes the nature of the tax system itself, and left uncapped would effectively create a consumption tax.

Note that the proposal as described only applies to investment earnings, not to the initial investment itself, so there's still a ways to go. But add the initial investment itself to the mix, and you get a de facto consumption tax. I am no fan of the taxman, but as an advocate of limited govt, I recognize that limited taxation is then required to fund the thing. A simple consumption tax would be my first choice. This approach (not unlike a Canadian RSP, actually, based on its description) would make a good start.

Bush's proposal - presuming the report to be true - is a step in the right direction. It is perhaps also one more step in a deliberate series. I had previously thought that series might end in a "traditional" consumption or sales tax, but now I wonder if it might instead find its expression through the existing system, based on the formula above.

If that's the intent, expect to hear subsequent noise about lowering the rate on Savings per se. Cuz if we hear that, then we'll know it's a consumption tax mindset for sure.