By Ezra Klein
January 24, 2008 | Prospect.org
[...]
Consumption taxes, however, do not need to be sales taxes, and they do not need to be flat. Cornell economist Robert Frank has a particularly elegant proposal for a progressive sales tax that's tabulated at year's end, rather than at the point of sale. Under his system, come tax time, families would report their income, just as they do now, but also their savings (how much they've invested, kept in the bank, etc). The difference between the two would be their taxable consumption. Everyone would then get a standard deduction of $30,000, effectively exempting low-income families from taxation altogether. As the total taxable consumption rose, so too would the rates, just as is true now. A taxable consumption of $15,000 might pay 10 percent in taxes. At $8 million the top rate could be as high as we chose to make it.
This could have substantial benefits. "Consider a family that spends $10 million a year and is deciding whether to add a $2 million wing to its mansion," Frank writes. "If the top marginal tax rate on consumption were 100 percent, the project would cost $4 million. The additional tax payment would reduce the federal deficit by $2 million. Alternatively, the family could scale back, building only a $1 million addition. Then it would pay $1 million in additional tax and could deposit $2 million in savings. The federal deficit would fall by $1 million, and the additional savings would stimulate investment, promoting growth. Either way, the nation would come out ahead with no real sacrifice required of the wealthy family, because when all build larger houses, the result is merely to redefine what constitutes acceptable housing."
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