A Consumption Tax Is the Shock Our Broken System Needs

Rep. Carter’s ‘Fair Tax’ would fund the government with fewer economic distortions than estate and income taxes

By John H. Cochrane. Excerpts:

"The New Republic asserted that consumption taxes are “always a dumb idea”—but presumably not in Europe, where 20% value-added taxes finance welfare states—and called it a “Republican dream to build a wealth aristocracy.”"

"our income and estate tax system is broken. It has high statutory rates with a Swiss cheese of exemptions, immense cost, unfairness and distortion."

"A consumption tax, with none of the absurd complexity of our current taxes, is the answer. It funds the government with the least economic distortion. A consumption tax need not be regressive. It’s easy enough to exempt the first few thousand dollars of consumption, or add to the rebate."

"If a flat consumption tax finances greater benefits to people of lesser means, the overall system could be more progressive than what we have now. A consumption tax would still finance food stamps, housing, Medicaid, and so forth. And it would be particularly efficient at raising revenue, meaning there would potentially be more to distribute—a point that has led some conservatives to object to a consumption tax."

"Others complain that the rate will be high. An effective 30% consumption tax, added to state sales taxes as high as 10%, could add up to a 40% or greater rate. But taxes overall must finance what the government spends. Collecting it in one tax rather than lots of smaller taxes doesn’t change the overall rate. It’s better for voters to see how much the government takes."