Jackson Doughart
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The moral case for a consumption tax
Taxes are a necessary evil. But when it comes to collecting state revenues, not all methods are created equal.

Prince Arthur Herald, 23 June 2013

On the subject of taxation, there are two normative political theories which constitute the proverbial book-ends of the economic spectrum: Propertarians believe that taxation amounts to theft on behalf of the state, and that the protection of property is one of the sole responsibilities of civil authorities. Egalitarians believe that irrespective of taxation’s practical utility, the redistribution of wealth is a moral imperative for the government. Fortunately, there is much more room for argument here, especially among those who rightly see taxation as an unfortunate but necessary evil in light of the numerous legitimate responsibilities of the state.

But this seemingly-pragmatic justification is not without its moral implications, which are the basis for many proposals by several conservatives to reform the tax code. One suggestion is to replace the progressive bracket model with a broad-based flat tax, in which all taxpayers would pay the same rate on all income without the minutia of loopholes and exemptions that bog down the current system, and which allow many high earners to insulate parts of their income from taxation. A concrete Canadian example of this is the Hall-Rabushka flat tax model of 1981, which was redeveloped by the economists Alvin Rabushka and Niels Veldhuis for a Fraser Institute publication in 2007 entitled “A Flat Tax for Canada”. That paper recommended that Canada adopt a flat income tax with a rate of 15 percent for all individuals and business.

But whatever its pragmatic economic effect, support for a flat tax is also motivated by the ethical belief that the state cannot, by threat of coercion, take beyond a certain amount of anyone’s wealth (an oft-suggested figure is one-fifth), including wealthy persons with significant disposable income. Predictably, egalitarians have an objection to this proposal that is distinct from their desire to redistribute wealth: such a tax, they suggest, would be inequitable because the middle and lower classes would be significantly more penalized than the highest earners.

Taking the practical necessity of some taxation and the consideration of fairness as starting points, there is reason to take the egalitarian objection seriously. But there is a far more equitable tax model than the progressive system under which both the Canadian and United States governments collect state revenue, and which egalitarians maintain to be the only just means to do so. That model is a consumption tax, whereby a significantly-elevated tax at the point of sale would replace income tax altogether. Apart from the economic implications of a consumption tax, which may be favourable or unfavourable, the freestanding moral arguments in its defence are many and convincing:

1. Practical fairness: Under a consumption tax, a person would have much greater control over his or her own contribution to the state’s revenue pool. Someone who is wealthy but wants to pay fewer taxes could choose to buy a $10,000 car instead of a $100,000 car, and subsequently owe much less money to the government. And those who can only afford the less-expensive model will only be responsible for paying the lower tax value that accompanies such a purchase. Meanwhile, those who choose to buy or invest in large amounts would be responsible for a much higher bill. Everyone’s contribution, in other words, would be congruent with his or her use of the economy. Want to pay fewer taxes? Buy less. And since everyone has to consume, everyone would also be inevitably contributing to the pool of public monies at some level. The only complaint that an individual under such a regime could make is that the actual consumption tax rate is too high, but the rate would be proportionate to what the government spends, so the only argument in such a case would be to reduce state spending. Consequently, the argument that “someone else” should pay more would be impossible to make.

2. Addressing class tensions: A consumption tax would be one step toward lessening inter-class resentment, based on the twin admonitions that the rich do not pay their fair share and that those of modest means leech off the rich through state-funded programs such as welfare. This is a major cause of division in society that could be improved by adopting a tax model that makes no discrimination on one’s wealth or lack thereof. And since one’s spending, and not income, would be taxed, the wealthy would be less motivated to shelter money in offshore tax havens, which would keep more money in domestic banks.

3. Civil liberty: For all of the complaints about the encroachment by government upon individual rights, by far the most substantive intrusion upon an individual’s liberty and privacy is the tax system. At present, the government has the right and obligation to know what one earns — in itself a dubious privilege — and can take from citizens essentially what it wishes to. And if someone is subject to an audit, this represents an enormous inconvenience in which one has no choice, and in which one is obligated to participate at the coercive pain of substantial penalties. In such a case, the state has a right to force the auditee to justify any claimed expenses or deductions. Under a consumption model, the government’s target for taxation would be limited to the sellers of goods and services, which are already subject to state scrutiny for current sales. What would be removed is the ability of the state to exert the substantial inconvenience and coercion over individual citizens that it currently does through its income-taxation powers.

4. Better incentives: Taxation is often deliberatively used for paternalistic reasons, such as when the state offers tax credits to citizens for performing a particular action, such as donating to recognized charities. But taxes are incentives even when not expressly used for such a purpose, as the subsidizing of something (through tax exemption) is bound to result in more of that thing, and the taxing of something in less of that thing. In the case of income tax, the incentives work in precisely the wrong, and even a perverse, way. For income tax discourages two good things — employment and self-reliance, on the one hand, and saving money on the other. A switch to a consumption tax would do the reverse: the employed, the self-reliant, and the frugal would be rewarded, while those who can claim none of those titles would be encouraged to adopt them.

5. Broader base and legal residency: Finally, persons who inhabit the country illegally would not be able to avoid paying taxes, as the goods and services they need to sustain themselves would be subject to the same tariff as they would be if purchased by an accredited resident or citizen. This would have the dual effect of broadening the tax base, by ensuring that all consumers contribute to the tax pool, and of making illegal residency less attractive.

There would of course be many practical challenges in implementing such a model. One aspect not explored here, but deserving of thought, would be this model’s implications for cross-border trade, which would have to be addressed through a regime of rebates. Another would be the consequence for people who do not currently pay taxes, such as seniors and the poor, whose cost of living would increase without the simultaneous augmentation in income that wage-earning people would experience. Nevertheless, as an ideal, yet fact-sensitive conception of taxation, the consumption model is a serious one, and a view that deserves public consideration.

Jackson Doughart jdoughart (at) gmail (dot) com