Chapter 4 Tax Choice

4.1 Tax Criteria

4.1.1 Optimality

A system is efficient if it maximizes outputs for given inputs.

But exactly what should be maximized? Efficiency norms vary and can conflict. I present here three popular definitions in increasing order of strength.⁶⁵ Earlier entries are subsets of later entries, as visualized in .

Pareto Efficiency.: \[sec:pareto\] An allocation is pareto-optimal, when no one can be made better off without making someone else worse off. Pareto optimality, is, in fact not a pure efficiency norm but includes an equity component, too.
Kaldor-Hicks Efficiency.: \[sec:kaldor-hicks\] An allocation is Kaldor-Hicks efficient, when no one can be made better off without making someone else worse off by the same or a greater amount of disutility (Kaldor 1939; Hicks 1939). It can also be described as a pareto-optimal outcome where sufficient compensatory sidepayments can be made from the winners to the loosers.
Social Welfare Optimum.: \[sec:swo\] The pure efficiency norm is given by the utilitarian slogan “The greatest good for the greatest many” (Mill 1863). It knows no equity at all, but is concerned only with the sum total. It is also known as a social welfare optimum in game theory (for example, Oye (1985)).

Selected Efficiency Norms, Where Area Equals Utility

I choose as the weakest of these efficiency norms and note whenever a stronger efficiency norm is required for an argument. Pareto efficiency is also widespread efficiency norm that is convenient for its link to (page ).

4.1.1.1 In Dubio Pro Mercatus.

The above posited perfect markets can be shown to work Adam Smith (1776)’s Invisible Hand (1776). More formally, the first theorem of welfare economics states that any competitive equilibrium will be Pareto optimal: no one could be made better off, without making someone else worse off⁶⁶.

For () efficiency, the burden of proof then lies on state interventions in . \[sec:perfect-competition\] It follows that a tax should affect market interactions as little as possible.

4.1.1.2 Minimize Deadweight Losses

The efficiency loss that does occur when taxes alter market interactions is called a deadweight loss (DWL), illustrated in . It arises as follows: consumers and producers both reduce their buying and selling, as consumers face higher and producers lower prices. This reduces the welfare, or surplus of consumers and producers. Some of this loss is transferred to government. The net that is not recouped as tax revenue is the deadweight-loss of taxation.

A desirable tax should have a minimal deadweight loss. \[des:minimal-DWL\]

A desirable tax will maintain and strengthen incentives to maximize private, unobserved effort in work and investment. \[des:Incentives\]

4.1.1.2.1 Reformulations of DWL.

The idea of the DWL of taxation can be reformulated in a number of ways.

Factor Unemployment: refers to DWLs in markets of factors of production, when tax wedges cause incomplete employment of labor or capital. This problem is particularly dire in the indivisible supply of low-productivity labor, where entire strata of workers may be unable to find gainful employment at post-tax wages. This problem of is further discussed in and addressed in desideratum \[des:low-price-floor\].
Taxes are Anti-Growth.: A sophisticated version of this sentiment will also argue that widespread DWLs waste economic resources in the medium and long run.
Neutrality.: The DWL of a tax can also be described as its impact on a hypothetical, before-tax, pareto optimal market. An efficient, desirable tax is neutral in the sense of leaving pre-tax relative prices unchanged (McCaffery 2005, 849).

4.1.1.3 Responsiveness is Elasticity.

This responsiveness is called the price elasticity of demand and supply respectively. It is defined as the percent change in quantity demanded (supplied) over a percent change in price (???). Where $E-{d}$ ($E-{s}$) is the price elasticity of demand (supply), $Q-{d}$ ($Q-{s}$) the quantity demanded (supplied) and $P$ the price, it holds that:

\[\label{eq:PED} E-{d}=\frac{\%\ \mbox{change in quantity demanded}}{\%\ \mbox{change in price}}=\frac{\Delta Q-{d}/{Q-{d}}}{{\Delta P}/{P}}\]

and

\[\label{eq:PES} E-{s}=\frac{\%\ \mbox{change in quantity supplied}}{\%\ \mbox{change in price}}=\frac{\Delta Q-{s}/{Q-{s}}}{{\Delta P}/{P}}\].

4.1.1.4 Elasticities of Supply and Demand

become more intuitive when applied in polar cases of perfect inelasticity () and perfect elasticity ().

4.1.1.4.1 Perfectly elastic

supply (demand) does not respond at all to changes in price. Whatever the price, suppliers (buyers) will always produce (buy) the same quantity. It is displayed by a perpendicular supply (demand) curve in .

4.1.1.4.2 Perfectly inelastic

supply (demand) responds maximally to minimal changes in price. When the price drops (rises) below a certain point, suppliers (buyers) will cease stop producing (buying) any quantity. Below (above) the horizontal supply (demand) curve in , no production (buying) occurs at all.

Perfectly Inelastic Supply and Demand

Perfectly Elastic Supply and Demand

Unit Elastic Supply and Demand

4.1.1.4.3 Unit elastic

supply (demand) responds proportionally to changes in price. Along a supply (demand) curve of slope $1$ ($-1$), producers (buyers) produce (buy) one percent more quantity for each percent increase (decrease) in price⁶⁷.

4.1.1.5 Elasticities and DWLs.

Because DWLs stem from market participants tax-depressed activity, less price responsive activities will be more efficient to tax. Relatively inelastic supply and demand will have relatively smaller DWLs (Ramsey (1927), Piatkowski and Jarmuzek (2008, 16)).

This is illustrated in figures \[fig:DWL\] and \[fig:smaller-DWL\]. displays the same market with the same tax, only with relatively less elastic (= more inelastic) supply and demand. Compared to the original DWL-scenario in , the DWL in is absolutely smaller and smaller relative to the recouped tax revenue. Because both producers and buyers are less responsive to the tax-induced price change, they each loose less of their surplus.

A doable specification of desideratum \[des:minimal-DWL\] on minimal DWLs is:

A doable tax falls on inelastic bases. \[des:tax-inelastic\]

4.1.1.6 Determinants of Elasticity.

Elasticities are hard to quantify: if prices change, they typically change only marginally. Elasticities are typically known only locally, that is, in the vicinity of equilibrium prices.

Elasticities are determined by a host of factors. The price elasticity of supply depends, amongst other things, on the mobility of labor and capital employed in production, the availability of substitute consumers or the ability to substitute current for future sales (a.k.a. liquidity). The price elasticity of demand depends, amongt other things, on the availability of substitute goods, brand loyalty or ability to substitute current for future consumption.

4.1.2 Incidence

4.1.2.1 Flypaper Theory is False.

To illustrate this dynamic, first consider . In this market (actually the same as in ), a tax is placed on the supplier. For any given market price, the producer is now willing to produce less. The supply curve shifts upwards by exactly the amount of the tax. Assuming constant demand, the curtailed supply will raise the price above the prior equilibrium. Both consumers and producers end up paying for the tax. Consumers have to buy at higher prices. Producers have to sell at lower prices. In this case, consumers and producers carry an equal share of the tax burden.⁶⁸

The naive “flypaper theory of tax incidence” is false: the state cannot easily legislate who should pay a tax. Instead it must anticipate market reactions to the tax and gauge the effective incidence, irrespective of where the tax was originally levied.⁶⁹

4.1.2.2 The Relatively Less Elastic Bears Relatively More.

The incidence is not only different from where a tax is levied, it can also fall asymmetrically on demand and supply. More specifically, the incidence of a tax is determined by the relative price elasticities of supply and demand: whoever is less elastic (more inelastic) bears a relatively greater share of the burden.

illustrates the incidence of a tax on suppliers in a market with relatively less elastic (more inelastic) demand. It is the same market as in and \[fig:DWL\], only the elasticity of demand is different: buyers react relatively less to price changes than sellers. As a result, buyers are willing to pay quite a lot to maintain a similar quantity. Sellers, by contrast, will curtail their production substantially when prices drop. The market reaches a post-tax equilibrium at a price much greater than pre-tax equilibrium for consumers, and a little lower for producers. Consumers end up bearing most of the burden.

4.1.2.3 Incidence is Hard.

As argued in the above, relative price elasticities of demand and supply can be hard to ascertain ex-ante, and they are affected by many factors. To reliably gauge the effective incidence of a tax, government would have to know the elasticities in a myriad of markets and constellations with great precision. This will be very costly and likely unsuccessful.

To effectively redistribute between natural persons only, as per desideratum \[des:personal-taxation\], a doable tax will fall on market interactions where relative elasticities of demand and supply can be easily and reliably ascertained. Government can achieve non-random, normatively justifiable redistribution only when:

A doable tax has a well-determined incidence. \[des:determined-incidence\]

4.1.3 Natural Personhood

4.1.3.1 Corporations

Corporate bodies have rightfully been characterized as fictions. The welfare of all these non-natural, private juristic persons ultimately accrues to natural persons as their owners, workers or consumers⁷⁰. Equity considerations do not apply at the corporate level⁷¹.

As per desideratum \[des:redistribution-and-revenue-are-one\], . \[sec:fiscal-redistribution-and-revenue-are-one\] \[des:redistribution-and-revenue-are-one\] It follows that for both these components:

A doable tax falls only on natural persons. \[des:personal-taxation\]

4.1.3.2 Families

\[sec:love-marriage\]

“Love and marriage, love and marriage
Go together like horse and carriage
(…)
Try, try, try to separate them:
It’s an illusion.”
— Frank Sinatra (1915-1998)

Personal taxation becomes impossible when common usage, transfers and mutual obligations become so intensive, informal and intangible as to render individual accounts meaningless. In modern, functionally differentiated societies such mechanical solidarity is — for better or for worse — largely replaced by extensive, formalized and tangible organic solidarity (Durkheim 1893).

Romantic cohabitation, marriage and the nuclear family alone remain as refuges of mechanical solidarity. Personal taxation of (married) couples and families becomes impracticable. They are therefore taxed as one entity, or at least under one rate. A problem arises: you have to add (two) potentially (very) different incomes⁷² together and tax them under a single rate. There are two ways to do this. First, you can apply the same schedule as for single households, which would punish people just for getting married or having children. For example, two people earning $50,000 each would, after marriage, be taxed under the higher rate applicable at $100,000. Secondly, you can divide the family income by the number of people in the household and apply the tax rate for this average income. In this case, the tax liability will depend on the distribution of incomes between the family members. If their incomes are starkly different, they will benefit from applying a progressive rate to their average income. This conundrum cannot be resolved: it is the equivalent to Arrow (1950)’s Impossibility Theorem in taxation. Of three desirable things, you can only have two:

a progressive schedule,
neutrality towards marriage and
tax liability independent of the distribution of income in a household (Moffitt (2003, 124), Dalsgaard (2005, 29))

I have stated here that progression is desirable, and that people should not and cannot be punished for mechanical solidarity in family and marriage. It follows that, while undesirable, the tax liability will be dependent on the distribution of income in a household.

The contradictions arising in the taxation of family and marriage point to more fundamental problems of drawing boundaries (page ) based on administrative and analytical abstractions (here: , page ) that are not unambiguously applicable in real life. As this particular problem affects all progressive taxes, it will not be further addressed here.

The aggregate costs of taxation depend on the responsiveness, or elasticities of what is being taxed. The individual costs — who really pays — also depend on this responsiveness.

4.1.4 Timing

4.1.4.1 Haig-Simons Identity of Income

4.1.4.2 Two Savings Norms

Much of the debate on taxation in recent years has concentrated on the relative taxation of capital and labor. This dichotomy is no longer empirically meaningful, and normatively contradictory.

4.1.4.3 Empirically: Marxism is Dead — Capital is no Longer a Class in Itself.

\[sec:CapitalNoClass\] For personal taxation as per desideratum \[des:personal-taxation\], capital and labor incomes are an irrelevant, false dichotomy. Today, capital is no longer a class in itself: even middle class earners have substantial capital incomes, for example from capital-based pensions or life insurances (Grabka et al. 2007 XV). In a (happily) past world of bifurcation between workers and capitalists, balancing the taxation of labor and capital incomes made redistributive sense. When almost everyone is, to some extent, a capitalist, taxation of either of the two incomes does not neatly map on (page ). Any tax mix of labor and capital incomes will have indeterminate redistributive effects.

4.1.4.4 Normatively: Two Savings Norms Conflict.

\[sec:savings-norms\] Capital, in the last instance, is saved labor income. There are two conflicting, equally plausible norms on how to treat saving.

4.1.4.4.1 Ordinary Savings Norm.

\[sec:OSN\] According to the ordinary savings norm, people save to shift labor incomes within their lifetime, or between generations (McCaffery 2005, 819). They receive a return to capital to make up for the the risk borne and the pure discount of the future. Because the saver and the non-saver are same ex ante, they should not be taxed differently ex post. In short, people should not be punished to smooth out their consumption over time.

4.1.4.4.2 Yield-to-Capital Norm.

\[sec:Y2C\] According to the yield-to-capital norm, the return to capital that people receive is additionally accumulated welfare that should be taxed.

Under income taxation, these two norms are in fatal tension. Any mix of capital and labor income taxation will violate either of the two norms. There is no meaningful way to tell the one kind of (ordinary) saving from the other (yield) kind: they are the two sides of the same coin.

4.1.4.5 Structural Agnosticism.

A tax regime can avoid this empirical futility and normative contradictions when it is agnostic in its treatment of labor and capital incomes:

\[des:structural-agnosticism\] A doable tax will be agnostic towards labor and capital incomes.

Second, Rawls suggests two distributive norms, the difference principle and the fair equality of opportunity.⁷³ Under the difference principle, differences in endowments as well as subsequent social and economic inequalities are acceptable only if their granting also benefits the least fortunate.⁷⁴ If inequities cannot be thereby justified, such undeserved differences (by birth or other random allocations) in endowment should be corrected by intervention for fair equality of opportunity.

This latter norm of fair equality of opportunity is a pure equity norm on the equality of inputs.

The difference principle is more complicated. It combines equity and efficiency norms. It is that weak pareto optimum (WPO),⁷⁵ which maximizes the minimum payoff (maximin) in outcomes. illustrates the two Rawlsian norms of distributive justice in context.

Selected Distributive Norms and Rawlsian Distributive Justice (in green)

4.1.5 Fairness

4.1.5.1 Why Rawls?

Any comprehensive discussion of distributional justice is beyond the scope of this thesis. Rawls (1971) Theory of Justice is presented here for four reasons.

First, justice as fairness serves as a convenient cut-off point on a (crudely) imagined continuum of theories of distributive justice from left to right, from egalitarianism to utilitarianism and liberitarianism.⁷⁶ It is assumed that all allocative norms “left of” Rawls (such as Cohen 2000), stressing equity over efficiency will strictly prefer the PCT over the status quo. Conversely, theorists on the right end of the imagined continuum (for instance, Nozick (1974)) may not share all of the normative foundations of the PCT, or even prefer it over the status quo.

Second, the difference principle is (page ) when I argue the normative superiority of the progressive taxation of consumption.

Thirdly, in arguing that the PCT is the perfect tax, I attempt to establish it as an reflective equilibrium (Rawls 1971, 49) emerging from a pragmatic-spirited back-and-forth between what is , and what is McCaffery (2005, 856).

Fourth, Rawls (1971)’ Theory of Justice ((1971)) is an end-state theory of distributive justice (Fried 1999, 1007), not a procedural prescription (for example Dahl (1989)). A political process, aside from (???) liberty, is not prescribed in its own right. It merely serves as an independent variable in ,explaining and criticizing why it may have failed to deliver the superior allocative outcome.

4.1.5.2 Implications for Tax Design.

Two desiderata for tax design emerge from Rawls (1971)’s Theory of Justice.

First, the principle of fair equality of opportunity introduces equity as a goal for taxation. It is a general and unspecific norm. Translating it into a desideratum for tax design hinges on an empirical assessment of opportunity in the real world. A specification of this norm must therefore await an inspection of the (page ) in modern society. \[sec:inequality-dynamics\]

Second, the difference principle provides a more straightforward guideline for redistributive taxation. It implies that taxation should exempt from redistribution economic inequality if, and to the extent that, it makes the least fortunate better off. This may occur when able people require economic to exert maximum efforts (desideratum \[des:Incentives\]). Because axiomatically assumed perfectly competitive markets can be shown to be pareto optimal, it follows that:

\[des:difference-principle\] A desirable tax exempts from redistribution economic inequality if, and to the extent that, it makes the least fortunate better off.

Generally, for axiomatically assumed homo economicus to , she needs incentives. Desideratum \[des:Incentives\] is closely related to desideratum \[des:minimal-DWL\] ().

4.2 Base, Schedule and Timing

Taxation offers highly structured choices along the three dimensions of base, schedule and timing, the first two of which are cross-tabulated in table. There can be no meaningful democratic rule on taxation that does not ultimately opt for a definitive mix of distinct combinations along those dimensions. The choice among these (already high-level) alternatives cannot be abstracted away, or relegated to experts: it hinges on irreducible moral and causal judgments (for example, McCaffery 2005).

4.3 Taxes on Income

4.3.1 Taxes on Capital Income

4.3.1.1 Corporate Income Tax (CIT)

\[sec:CIT\] The cit taxes the earnings⁷⁷ of an incorporated firm. It is usually proportional. Unincorporated firms do not pay cit, instead their owners owe pit on their business earnings.⁷⁸

cits are proportional, with rates around 20% in the EU. Countries have recently created issued sectoral (trade, finance) or regional (Hong Kong, London) exemptions from the cit to attract investment (Genschel, Kemmerling, and Seils 2009; Ganghof and Genschel 2007; Genschel 2005).

4.3.1.1.1 Local Business Tax (LBT)

\[sec:LBT\] Taxes on local businesses exist only in some OECD countries, including Germany. In Germany, local authorities can tax local business a progressive tax on their earnings. Local authorities set the rate of the tax (within federally mandated margins). Firms are taxable based on the location of their establishments. Earnings of firms with multiple establishments are weighed by the sum of wages and salaries paid.

4.3.2 Taxes on Capital and Labor Income

4.3.2.1 Personal Income Tax (PIT)

\[sec:PIT\] Under the pit, all sources of personal income (labor, capital) are added and taxed under a single schedule. pit schedules are typically progressive. Marginal (not average!) tax rates in Germany range from 14% to 42% (Bundesministerium für Finanzen 2009).

4.3.2.1.1 Dual Income Tax (Dual PIT).

\[sec:Dual-PIT\] The 2-pit is a variation on the pit, where schedules differ between capital and labor sources of income. 2-pits burden capital relatively less than labor incomes. The 2-pits was introduced to avoid the negative growth effects of high capital taxation (particularly through its , p. ) and to counteract capital flight.

In Sweden, a pioneer of the 2-pit, the top marginal (not average!) rate for labor incomes is 55%. Capital incomes are taxed proportionally at 30% (marginal rate equals average rate).

4.3.3 Taxes on Labor Income

4.3.3.1 Payroll Taxes (Payroll)

\[sec:Payroll\] In Germany, and many other countries, social contributions for old age, health, unemployment and long term care insurance are implemented as payroll taxes. Payroll taxes are paid on labor income. Whether they are implemented as withholding taxes (the employer withholds and transfers the tax) or paid out of the employees funds is of no significance here: it does not matter for (page ).

4.4 Taxes on Consumption

4.4.1 Prepaid Consumption Taxes

4.4.1.1 Value Added Tax (VAT)

\[sec:VAT\] The vat is best understood as an elegant advancement of a retail sales tax. A retail sales tax charges sellers a fixed percentage of the sales price on goods for which the (corporate or private) buyer is the end user. Because under a sales tax, the tax on any single taxable transaction is very high, incentives to evade the tax and to smuggle goods are great. What is more, the state looses all tax revenue on a given good when evasion occurs.

The VAT was developed to address this problem. Instead of charging sellers only at the end of a production chain (before the good is consumed), sellers are charged a percentage of their sales prices on all goods, including investment and intermediary goods. Sellers invoice the tax to buyers. Buyers are then eligible for refunds on their VAT receipts: they can deduct all of their sales. Instead of kicking in only at the last transaction before consumption, the VAT charges every transaction according to the value added at the respective stage of production. It is handed down the economic cycle to whoever ultimately consumes a good.

The tax burden on any single transaction is much smaller: value added instead of entire sales price are taxed. Incentives to evade the tax on any single transaction are thereby greatly reduced.⁸⁰

VATs are very common in the EU, standard rates differ from 15% (Luxembourg, Cyprus) to 25% (Denmark), with the majority of countries above 20%. Reduced rates are frequently implemented for foodstuffs and other basic needs.

4.4.1.1.1 Graduated VAT

4.4.2 Postpaid Consumption Taxes

4.4.2.1 Progressive Consumption Tax (PCT)

\[sec:PCT\] The pct is applied to the total consumption of natural persons. Crucially, it is postpaid and cash-flow based.

Postpaid.

It is crucial to understand that the PCT is not a VAT or sales tax of any kind with progressive rates (say, a higher rate for luxury goods). The PCT is not prepaid on the price of individual consumer goods, but postpaid on the sum of individual consumer accounts. It matters not what you consume, but how much and of what value. The PCT suggested here is called postpaid because the progressive rate is known and deducted only once all consumption in a given period is completed.

Cash-Flow-Based.

It would be impractical to collect and add up all consumption receipts. People usually consume very many, different things of relatively small value. Instead, the PCT relies on the Haig (1921)(1938) definition of income in ((1921), (1938) respectively). \[\label{eq:HaigSimons} \text{Income}=\text{Consumption}+\Delta\text{Wealth}\]

A trivial transformation yields a practical definition of consumption:

\[\label{eq:HaigSimonsPCT} \text{Consumption}=\text{Income}-(\text{Savings}-\text{Dissavings})\]

Consumption is simply defined as that part of income which is not saved. You can, after all, only either save or spend. People create much fewer savings receipts than consumption receipts: while you may have hundreds of grocery receipts, you will have only one savings account and maybe a few other financial instruments. In addition, transactions to save money are more thoroughly formalized: the bank, by necessity, keeps good track of your accounts.

Consumption out of wealth is included as a dissaving. Consumption out of loans is also treated as a dissaving. Payments on interest and principal are treated as accretions to wealth (saving). They are fully deductible.

To measure the wealth of individuals, the taxman would have to list the assets and liabilities of each person. Such balance sheet accounting would be very costly administratively and require undesirable evaluation of (page ).

The PCT achieves its objective through a simple cash flow accounting of individuals. Instead of evaluating all assets and liabilities, the taxman merely records all cash transactions. A dissaving is recorded when, for instance, a mutual fund is sold and its cash value wired to the checking account. Savings are recorded when payments are made from that checking account to a qualified investment (say, a life insurance). Incomes from labor or capital are recorded as the salary or interest are deposited on the checking account. Consumption is recorded as cash is withdrawn or wired to a seller.

The cash flow variant of the PCT rests on the assumption that all assets are transformed into cash before they are consumed.⁸¹

Cash flow accounting is much simpler than balance sheet accounting. In a modern economy, most cash flows are already recorded by individuals and their financial service institutions. The taxman just needs to look into these records. Moreover, cash flows are by definition liquid: they constitute the equilibrium prices. The taxman does not need to evaluate anything.

4.4.2.1.1 Illustration

I enlist Aesop (564AD)’s fabled Ant and Grasshopper (c.a. 564 b.c.) to explain an example.⁸² summarizes incomes, savings and consumption for three archetypical taxpayers.

4.4.2.1.2 Grasshopper

earns 30,000 each year, of which he spends everything. He had no savings at the beginning of the year, and none at the end, when winter, or rather, the taxman comes. With no savings, all of his income is taxable at a progressive rate, of say, 10%. Grasshopper owes 3,000 to the state.

4.4.2.1.3 Thrifty Ant,

who also earns 30,000 per year, saves 10,000. Her taxable consumption is 20,000 at, for example, 5%, owing 1,000 to the taxman. Ant will at some point in the future consume what she has saved, but possibly spread more evenly (thereby avoiding sharply progressive rates) and while earning an interest on her savings. This interest is not income taxed, as mandated by the (page ).

4.4.2.1.4 Big Spender Lion.

Let’s introduce a third beast, the Lion, who powerful as he is, earns a great income of 600,000. He also consumes a lot (he is a predator, after all), say 300,000. Come winter the (brave) taxman will collect a 33% due on consumption, that is 100,000. Note, that although Lion consumes relatively less (50%) than Grashopper (100%), he has to pay relatively more taxes (33% as compared to 10%), because, in absolute terms, he is encouraged to spend less and save more, given his superior income-generating abilities. Also note that the tax liability does not depend on the source of income. It does not matter whether the Lion earns much because he is such a diligent hunter (labor income), or (as it happens to be), whether it is because he sits comfortably on the top of the food chain and actually sleeps most of the day (capital income).

Progressive Consumption Taxation of Thrifty Ant, Big Spender Grasshopper and Big Earner/Spender Lion.
	Ant	Grasshopper	Lion
Income	30.000	30.000	600.000
Saving	10.000	0	300.000
Consumption	20.000	30.000	300.000
Tax Rate	5%	10%	33%
Tax	1.000	3.000	100.000

4.5 Taxes on Wealth

4.5.1 Taxes on Unimproved Nature

4.5.1.1 Land Value Tax (LVT)

4.5.1.1.1 Pigouvian Element.

4.5.1.1.2 Other Natural Resources

4.5.2 Taxes on Property

4.5.2.1 Property Tax

\[sec:PT\]

4.5.2.2 Stamp Duty

\[sec:SD\]

4.5.3 Taxes on Net Worth

4.5.3.1 Wealth Tax (WT)

\[sec:WT\] The Wealth Tax is a tax on the net wealth ($assets$ $-$ $liabilities$) of natural persons. It requires a balance sheet account for all tax liable individuals, including some method of valuation for . Wealth Taxes are typically progressive in schedule. They are levied only in a few OECD countries, including France (up to 1.8% p.a.) and Switzerland (up to 1.5% p.a.).

4.6 Non-Taxes

4.6.0.1 Financial Transaction Tax (FTT)

\[sec:FTT\]

4.6.0.2 ecotax

\[sec:Ecotax\]

4.6.0.3 Negative Income Tax (NIT)

\[sec:NIT\] The Negative Income Tax (NIT) is a subsidy for low wage earners, not a tax. It does not raise, but spends revenue. It is included here because of its broad redistributive impact and its technical implementation as a “tax”.

The NIT was suggested by Milton (Friedman 1962) as an elegant replacement for minimum wage legislation and (page ) social security transfers. Under the NIT, workers would receive progressive transfer payments for hourly market wages below the socially acceptable minimum. However, in contrast to current income supplements, real market wage increases are not entirely eaten up by transfer cuts: at any given level of income, earning more on the market will leave you with more net in the bank. For example, under a minimum acceptable hourly income of €7.50 (current minimum wage proposal in Germany), moving from a €2.00 market price to a €4.00 market price job could increase your post-tax income from €7.50 (transfer €5.50) to €8.50 (transfer €4.50), always maintaining your incentives to earn more on the market. This may also help to counteract rent-seeking exploitation by low-paying firms.

4.7 The Scores

scores different taxes on the desiderata suggested herein. Some desiderata are summarized in one entry, when they are very similar or mere specifications.

4.7.0.1 A Methodological Disclaimer.

This table is not a methodologically sound index of desirability,⁸³ let alone a comprehensive cost-benefit analysis (CBA) of tax choice.⁸⁴

p4cmccccccccc

&vat &sic &pit &Dual PIT &cit &Business Tax &pct &Wealth Tax &nit

p4cmccccccccc

&vat &sic &pit &Dual PIT &cit &Business Tax &pct &Wealth Tax &nit

The Forerunner: Indirect, Proportional Taxes: VAT & Payroll {#sec:ScoreVAT}

Indirect, proportional taxes are the forerunners in tax choice today. For the last two to three decades, they have assumed an ever greater share of GDP, compared to other taxes (for Germany and the UK, see (Kemmerling 2009, 11).

VAT and Payroll, for all their differences, share key characteristics: they are indirect, they are proportional and they fall on relatively immobile bases.

4.7.0.2 Neutrality.

The key merit of indirect, proportional taxation is its neutrality to relative prices in the economy: deadweight losses are indeed , as per desideratum \[des:minimal-DWL\].

4.7.0.2.1 Everyone Has to Consume.

For the VAT, the neutrality case is clear-cut. Ultimately, people can only spend the savings and (capital, labor) income they have on goods on the market. If buying of all goods is proportionally taxed, people have no way to avoid the tax. They cannot react to a price signal that is universally increased: their (page ) is minimal. The same holds for sellers: they have to sell to someone. When every potential buyer has to bear the same tax, sellers have no way to react. Their (p. ) is minimal, too. The VAT falls on a as per desideratum \[des:tax-inelastic\].

4.7.0.2.2 Everyone Has to Work …

A proportional payroll tax is neutral when one accepts an exclusive, (page ). When capital rents are only compensation for risky, deferred consumption all savings and capital rents are ultimately labor incomes. Under the , someone living off her savings is someone living off her past work. In short, to consume and to live at all, everybody has to work, for someone, sometime. If you have to work for someone, and every potential employment is subject to the same, proportional tax, you cannot react to the tax. Again, the of labor supply (page ) is minimal. The same holds for employers: they have to employ someone. If every potential employer is subjected to the same, proportional tax, their of labor demand (page ) is minimal, too.⁸⁵

4.7.0.2.3 …Except the Rich.

Under a (page ), a proportional tax is not neutral. When capital rents are a genuine increment to wealth, there is an alternative to work: you can either work, or live off your interest. In formal terms, rich people can substitute their labor income with capital income. As the availability of substitutes increases price elasticity, the labor supply by rich people is no longer price inelastic. Absent the payroll tax, they might have elected to work more than they will if their labor income is taxed.

4.7.0.2.4 Ideally, A Ordoliberally Hygienic Tax.

A neutral tax, by definition, has no fee or pigouvian component. A VAT or payroll tax with a proportional, uniform rate is as per desideratum \[des:ordoliberal-hygiene\].

4.7.0.3 Redistribution $=$ General Revenue?

To the extent that proportional taxation is accepted as an equity norm (!), a VAT or payroll that goes into general government revenue is a proper instrument both to , as a desirable tax should as per desideratum \[des:redistribution-and-revenue-are-one\].

In Germany and many other countries, capped payroll taxes are used to raise social insurance contributions. Here, redistribution and revenue generation undesirably interact.

First, social insurance contributions are proper taxes: they serve to pool risks and they redistribute between old and young, healthy and sick. Second, these services are actually provided universally and unconditionally: as a last resort, the (German) welfare state pays even for those who have not contributed. The welfare state polity, has in other words, already adopted an allocative norm.

Raising revenue for these very services on a regressive schedule (capped) on only some incomes (employed labor) embodies another, very specific allocation, for which no normative justification is readily available. In Germany, only employed people pay for the health insurance of all other employed people. Exactly why, at minimum, self-employed people do not also contribute to this risk pool is unexplained, but allocatively consequential.

4.7.0.4 Fairness.

At best, a VAT or payroll tax can be regarded as a proportional taxation on as per desideratum \[des:personal-taxation\].⁸⁶ It cannot accommodate progression, let alone an arbitrarily steep schedule.

4.7.0.4.1 Payroll: Regressive.

An (ideal) payroll tax is proportional only under an (page ). When capital rents are regarded as proper income (, page ), a payroll tax falls only on one of two types of incomes. A payroll tax is clearly not , as mandated by desideratum \[des:structural-agnosticism\].

4.7.0.4.2 VAT: Proportional.

No matter the savings norm, a VAT is straightforwardly proportional, because all income is ultimately consumed and tax liable to generate utility.

4.7.0.4.3 Different Rates Are Not An Option.

One common alteration to make the VAT fairer is to adopt different rates for different types of products. Goods that cover basic needs (food) often enjoy a lower VAT rate. In a complex economy and modern society, it is impossible to easily determine which goods satisfy basic needs and which do not. Is a meat a basic need? Is a filet mignon? Is a filet mignon every day?

When the state does establish different VAT rates, it risks becoming a micro-manager of fairness and will create arbitrary incentives for cross-substitution.

4.7.0.5 The Problems of Proportional Taxation.

Aside from not being progressive, a proportional tax raises a number of problems (page ).

4.7.0.5.1 Diminishing Utility and Positional Consumption.

As proportional taxes, VAT and payroll cannot consider of wealth, income or consumption. Whether you are struggling to pay for the first class trip of your child or whether you are thinking about signing up your child for the third summer school, the taxman will treat these two transactions equally, irrespective of the clearly differential impact on the subjective well-being — not to mention opportunity — of parents and child in these two families.

Similarly, a proportional VAT on consumption can also not curb (). Whether you are buying a high-priced Mercedes sedan because you enjoy a luxury car during your frequent trips on the German autobahn, or whether you are buying it merely because you do not want the smaller car than your neighbor, the taxman will treat these two transactions equally, with no regard to a potentially wasteful, positional component of consumption.

4.7.0.5.2 Proportional Taxation Raises the Effective Price Floor of Labor.

\[sec:PropTaxDWL\] Most problematically, any proportional taxation will make it relatively more expensive for low-income earners to make ends meet. In welfare states with legislated or effective minimal standards of living, such an increase in the real costs of living will push more people into structural unemployment. When every trip to the grocery store gets more expensive, more low-skilled people will be unable to afford a socially acceptable minimal standard of living from their equilibrium incomes. Conversely, the (very price-elastic) demand for such low-qualification service jobs drops dramatically, as struggling workers try to extract higher wages (Scharpf in foreword to Ganghof (2004, 12ff)). An equivalent dynamic holds for proportional payroll taxes.

Proportional taxation raises the in violation of desideratum \[des:low-price-floor\]. Present some income-replacing transfer scheme, as is nearly universally the case in developed welfare states, supply for low-productivity work becomes very elastic: you can either work for less net purchasing power, or receive same or a little more from the state for not working at all. Proportional VAT or payroll taxation then creates a substantial of structural unemployment, disallowed in desideratum \[des:minimal-DWL\].⁸⁷

4.7.0.5.3 Limited Stabilization.

Proportional taxation, by definition cannot serve as an automatic stabilizer. When the schedule is linear, it does not matter how lumpy your consumption is. A VAT or ideal payroll will do nothing to prevent you from buying nothing during a bust, and too much during a boom.

A proportional VAT could, theoretically serve as an discretionary stabilizer if government were to lower the VAT rate during the downturn. People would have an incentive to buy at lower taxes during the downturn, rather than later at higher rates.

Unemployment insurance works as an automatic stabilizer because of how the revenue is used, and not how it is raised. Consumption is smoothed out as the incomes of laid-off workers are insured in the medium term. Two problems remain: First, laid-off workers can still consume less than they optimally should, maybe because they are anticipating a prolonged, uninsured downturn. Second, unemployment insurance would be a much better automatic stabilizer if it were raised in a manner that also smoothes consumption.

4.7.0.6 A Mixed Bag For Capitalism.

On the pro side, a VAT and proportional payroll tax let entrepreneurs make their own production decisions, and on their own dime and incentive.

A VAT and proportional payroll tax also do not require , as disallowed by desideratum \[des:liquid-assets\].

On the other hand, a VAT and proportional payroll tax does little to avoid (page ff.). If capital is concentrated in the hands of only a few people, the rest will not be able to close intelligently incentivized deals on their unobservable effort and uncertain innovations.

4.7.0.7 A Tiny Little Bit Difference Principle.

For all its equity and efficiency shortcomings, a proportional VAT shares the fundamental merit of all consumption taxes: it taxes a normatively justifiable basis. Taxing consumption, not incomes, may be desirable under the the , as per desideratum \[des:difference-principle\]. This is presented in greater detail and strength in \[sec:foundational-beauty\] on the Progressive Consumption Tax. Absent progression, the difference principle merits of the VAT are negligible.

The merit of consumption taxation under VAT also manifests itself in the (somewhat⁸⁸ positive savings rate it allows for.. If government would raise its revenue exclusively through a VAT, people’s incentive to save would be unaltered: as argued in the above, a VAT is agnostic towards capital or labor incomes.

4.8 The Old Hand — Direct, Progressive Taxes: PIT, CIT & Dual PIT

The pit is the archetypical modern tax designed to redistribute. It was conceived in the early to mid 19th century to address the inequities of early capitalism.

4.8.0.1 Income Taxation Punishes Saving.

A pit can cause two different kinds of in desideratum \[des:minimal-DWL\].

First, if insufficiently progressive (= near proportional), it causes the discussed for VAT and payroll taxes (page ).

Second, if it is sufficiently progressive on both labor and capital incomes, it taxes savings twice: once when they are earned, and a second time when they yield an interest (and yet again when they yield a compound interest). This has a number of negative implications.

When people can avoid double taxation by consuming income right away, they may very well do so. Capital incomes are taxed, even though saving is elastic. This conflicts with desideratum \[des:tax-inelastic\] (). Things become even more awry when we consider investments (savings) of different risk. When the (uncertain, but higher) rewards of risky investment are taxed progressively, people will have a smaller incentive to run the risk in the first place. The PIT still allows for local, decentralized production decisions but incentives are substantially dampened.

A PIT discourages saving, and it falls twice on capital income, and only once on labor income.

4.8.0.2 The Merits of Progression.

It also serves to of labor as per desideratum \[des:low-price-floor\]. The problematic double taxation of capital incomes also serves to substantially dampen and ensures some degree of broad ownership.

4.8.0.3 The Limits of Progression Under the PIT.

A tax on income, by definition, does little to curb .

More fundamentally, a PIT does not allow for truly arbitrarily steep schedules. For a high average tax rate on incomes say, 50%, marginal tax rates would be prohibitively high. Such high marginal tax rates would all but destroy at that margin at all. It seems likely that a PIT will be no match to the (page ), given its limited steepness in progression.

4.8.0.4 No Stabilization.

As any tax on income, the PIT cannot serve as an effective automatic or discretionary stabilizer.

4.8.0.5 The Systemic Flaws of the PIT.

Aside from its limited and problematic merits, the PIT carries with it some unavoidable, inherent flaws.

4.8.0.5.1 The PIT’s Ugly or Unfair trade-off: Accrual vs. Realization.

Because the PIT is based on flows of economic welfare, it requires a method to measure these flows. Whenever assets are illiquid the taxman can either wait indefinitely for realization, or tax on some assumed accrual. Either way, substantial welfare losses ensue and desideratum \[des:liquid-assets\] on the is violated.

Income taxation on accrual or realization also has substantial equity implications. In contrast to the VAT, it is not merely a matter of timing when we pay the income tax.

“Such a statement reveals a basic failure to understand — or a desire that others not understand — the nature of income taxation and tax avoidance: \[...\] if income tax can be postponed \[...\], interest (or other capital income) can be earned on a tax deferred basis in the meantime.”
— McLure (1988 Seidman (1997, 125))

In short: taxation on realization ignores compound interest.

4.8.0.5.2 Tax Evasion 101: Buy, Borrow, Die.

\[sec:TaxEvasion101\] A sinister exploitation of the evaluation problem of the PIT goes by the name of buy, borrow, die.⁸⁹

It emerges from the following three doctrines, all of which make sense in isolation.

First, a PIT never taxes debt as income. It makes little sense to tax debt: according to Haig (1921)(1938) (equation eq:HaigSimons) and common intuition, the income-generating ability of a person does not change just because she takes out a loan. Consequently, people pay their taxes on the income they use to repay principal and interest.

Second, for the practical reason of avoiding evaluations by a central planner, the PIT is levied on realization, not accrual.

Third, for Haig (1921)(1938) and common intuition, heirs are (estate) taxed only net of assets and liabilities handed down to them.

So far so good? These three trivially intuitive doctrines, in combination constitute the fatal achilles heel of effective capital income taxation. Tax evaders can follow a simple, and entirely legal strategy. First, they buy appreciating, but illiquid assets. In a second step, they borrow money on the appreciating asset as collateral. Recall that this cash inflow is not taxed. Also recall that lenders may very well consider the yet-illiquid appreciation of the asset in extending their loan terms. Tax evaders can now spend out of the appreciation of the asset without paying any capital income tax on this de-facto accrual of welfare. Third, tax evaders die and bequest their assets to someone else. That someone else is liable only for estate tax on the net value of the assets and liabilities. The consumption of the deceased tax evader is deducted from the net value. Again, ultimately, and irrevocably, consumed capital incomes escape taxation.

This loophole, like the underlying problem of , is not a practical aberration that could conceivably be closed. Any income tax on realization will offer this evasive strategy.

This is not a hypothetical or esoteric problem. The pre-2007 housing bubble in the U.S., Spain and elsewhere was — amongst other factors — also fueled by this strategy. Houses were good illiquid assets (buy). Banks willingly offered mortgages on the houses (borrow). They also happily refinanced the loan, if the suggested (but unrealized!) fair market value of the house had increased. Consumers took out a bigger mortgage on the (supposedly) appreciated house and spent the difference on a new SUV and a flat screen TV. All tax free.

Appreciation in illiquid assets is no small component of our economic growth. A colossal share of the real welfare that accrues to capital income earners escapes income taxation without further notice, and any readily available fix.

4.8.0.5.3 The PIT’s Ugly Backstops: The Estate and Gift Tax.

It follows from the strategy of tax evasion 101 that an estate and gift tax are necessary backstops to the PIT. Without a tax on the substance bequested, unrealized appreciations on illiquid assets would go entirely untaxed. With an estate and gift tax, “only” the consumed part of unrealized appreciations escapes taxation.

The estate and gift taxes are, in themselves ugly beasts. Just like the PIT, they require an evaluation of a flow of economic welfare in the potential absence of a market equilibrium price of that very flow. If an entrepreneur bequests her family-owned firm to her daughter, no one can know how much it is worth. Again, problems in the taxation of illiquid assets ensue.

4.8.0.5.4 The PIT’s Ugly Backstops: The CIT.

\[sec:ScoreCIT\] A PIT has another, even uglier backstop: the Corporate Income Tax. Recall that a PIT is meant to tax all incomes, including interest and compound interest. With only a PIT, tax evaders would have at their disposal a strategy even simpler than tax evasion 101: they could place (or retain) their savings in an incorporated firm. First, tax evaders could spread out their (spiky) income over a longer period of time to play the progressive schedule. A small, but steady trickle of income is better than a large, lumpy flow under a progressive tax. Second, and more fundamentally problematic, tax evaders can also retain their initial capital income in the corporation and have it earn a compound interest. Note that the compound interest is earned on a capital income which, ideally, should have been taxed already.

To avoid this loophole, a PIT needs a CIT to get at the corporate shelter from the income tax (Genschel 2005, 7). Also empirically, PIT and CIT rates go hand in hand, between countries and over time, further supporting the intricate, if dysfunctional link between the two (Piatkowski and Jarmuzek 2008, 14).

The CIT is as bad as the PIT, minus the merits of progressive, personal taxation of the PIT.

First, the CIT has no as demanded in desideratum \[des:determined-incidence\] (McCaffery 2005, 918). Corporations are fictions. If you tax them anyway, you violate desideratum \[des:personal-taxation\] ().

Second and related, the CIT knows no progression. To the extent the the CIT ever reliably fell on capital, it made some sense historically when corporate ownership was a reasonable proxy for the propertied classes. This is no longer the case. Many people receive capital incomes (Grabka et al. 2007 XV). The CIT has no way of distinguishing between different owners (McCaffery 2005, 918). Whether a particular Volkswagen share belongs to the life insurance of a single working mother or a stock market tycoon, both are taxed at some uniform corporate income rate .

Third, much like the PIT, the CIT itself is plagued by unavoidable loopholes. The CIT is very sensitive to international tax rate competition: if CIT rates differ from country to country, multinational companies can easily shift profits to the country with the lowest rate. A number of strategies are available to do this, the simplest of which is to charge inflated (deflated) prices in intra-company trade (Ganghof 2004, 43ff). This loophole cannot be closed as inflation (deflation) of intra-company trade prices cannot be reliably detected. More fundamentally, “any national claim to a particular share of \[a multinational's\] profits is hard to justify on the basis of principle” (Genschel 2005, 61).

4.8.0.6 The Downgraded Upgrade: The Dual PIT.

\[sec:ScoreDualPIT\] To the extent that a Dual PIT has substantially lower, and proportional rates on capital incomes, it alleviates the PIT’s disincentives to save and invest. The Dual PIT is simply another non- relative burdening of capital and labor incomes in violation of desideratum \[des:structural-agnosticism\].

4.8.0.6.1 A Hollowed-Out PIT.

The relatively smaller burden on capital is hard to justify on principle. The largest incomes are, by definition, capital incomes.⁹⁰ Charging capital incomes a lower, proportional rate will greatly depress the overall progressivity of the PIT Progression is limited under the PIT already, but will be even more compressed under a dual rate structure.

To the extent that more of the tax burden falls on labor, a Dual PIT will also raise the , as disallowed in desideratum \[des:low-price-floor\].

The Dual PIT is a PIT only in name. It hollows out the ideal of universal progression. The lower the rate on capital gets, the more a Dual PIT approximates a (progressive) payroll tax.

4.9 The Streaker — Local Business Tax (LBT)

A tax on the earnings of local businesses shares all of the disadvantages of the CIT.

More fundamentally, the LBT is not a proper tax. It should not need to be discussed here at all.

Local authorities provide different kinds of (see ). The , and it provides should be financed out of general revenue. A general revenue tax should fall only on as per desideratum \[des:personal-taxation\].

Local authorities also provide such as parks and such as sewers.⁹¹ Common good and natural monopolies should be financed out of Pigouvian levies (at marginal cost) and fees (at average cost), respectively.

The LBT sits in the nomansland somewhere between general revenue taxation and Pigouvian levy or fee. It violates the norm of as per desideratum \[des:ordoliberal-hygiene\].

To the extent that the LBT is used to finances risk pools, public goods and redistributes, it should not be allowed to differ between municipalities. If universal education is an allocative goal of the broader, national polity, everyone should pay for it. If fire protection is a public good, everyone should pay for it. LBT revenue used to finance these things should be replaced by transfers from higher levels of government.

To the extent that the LBT is used to finance common goods or natural monopolies, it must specifically fall (at marginal or average cost, respectively) on the very consumption of these goods, and not on the earnings of a firm in general. If industry pollutes a local river, every unit of discharged pollution should be (Pigouvian) taxed at marginal cost, not every firm in the city based on their earnings. If some firms or citizens in a rural municipality require high-speed internet access (a natural monopoly), each user of the network should pay at average costs, not every firm in the vicinity. Also note that LVT can replace this purpose to some extent.

In short, the LBT is an anti-ordoliberal streaker that should never have entered this game of perfect taxation. It should be marshaled off the playing field as soon as possible.

4.10 Impotent Redistribution

“Advocates of redistributive taxes must wake up and realize that their end is in jeopardy on account of their poor choice of means: they are fighting, and losing, the wrong war.”
— Edward J. McCaffery (2005, 848)

4.10.1 Dangerous Backstops

4.10.2 One Tax, and You’Re Done: As Close to a Beer Coaster Tax as it Gets

The PCT emerges as the by far superior tax of all of the redistributive taxes scored in the above, both real and hypothetical. It can replace all other redistributive taxes, including the (ugly) backstops to income taxation, the corporate, estate and gift taxes. Administering the PCT together with any of the existing taxes in the above will at best create unnecessary complications, and at worst, unintended double taxation.

Organizing redistribution through only one tax has tremendous advantages. It will reduce costs in the administration and cut red tape for economic activity. It will also greatly enhance the transparency of taxation. Once the PCT is thoroughly explained, well-designed and implemented, it can enlighten the politics of tax. Only if we all understand and know how we are taxed and on what, can we begin to have a deliberative debate on how much we ought to redistribute.

4.10.2.1 One Tax Only, Plus Two.

The PCT may need a supplemental wealth tax and NIT. Both of these taxes are very imperfect taxes. Metaphorically, they are like powerful antibiotics: very effective as a last resort, but at the cost of severe side effects. They should be prescribed with care, and only if absolutely needed.

4.10.3 PCT

4.10.3.1 It’s Win-Win-Win-Win: No DWL Or No DWL & Less Waste Or Diminishing Marginal Utility.

\[sec:WinWin\] The DWL case for the PCT is not clear, but either way, it’s good.

Just in which way the PCT is good depends on the in excessive and positional consumption.

Without further empirical research, they cannot be known. The PCT will have very high marginal rates, possibly well above 100 %. Because universal, stark price hikes in the markets for excessive consumption have never occurred, we have no systematic observations regarding the responsiveness of excessive buyers to such price changes.

So what are the alternative outcomes?

4.10.3.1.1 What If: People Still Consume Excessively.

If people do not respond to the post-tax price hike in excessive consumption, the PCT will tax an . The DWL will be , as per desiderata \[des:tax-inelastic\] and \[des:minimal-DWL\]. Most of what consumers no longer enjoy in excessive consumption will be recouped as government revenue, as illustrated in .

Producers will be perfectly elastic in their supply. At least in the long run,⁹² all producers can shift their production to less expensive consumer goods, or, as described later, to investment goods. The burden of the PCT will fall exclusively the who ultimately consume goods, as mandated in desideratum \[des:personal-taxation\].

4.10.3.1.2 What If: People Consume Less (Expensive) Things.

If people do respond to the post-tax price hike in excessive consumption, the PCT gains a Pigouvian component, but one that works. When people consume excessively, they pay for the negative externality of defection in the (page ). Recall that when the Joneses buy a BMW (defect) instead of a VW (cooperation), the utility enjoyed by the VW-owning Does decreases: they cannot stand having the cheaper car. Under the PCT, the Joneses pay (dearly) for showing off their BMW. If their demand for BMWs is price elastic, they may buy the same VW as the Does.

Also recall that the level of cooperation in a multiplayer Prisoner’s Dilemma is a (page ). Contributing to cooperative behavior creates a benefit to other players from which they cannot be excluded. Establishing cooperation is, however, rival: if no one, or too few people cooperate, the benefits of cooperation will not materialize. Buy buying a VW, the Does contribute to a common-good-like lower level of automobile consumption, from which everyone else can invariably (relatively) benefit. The Joneses can exploit the thriftiness of the Does by buying a BMW (greater relative utility), or they can partake in the Does thriftiness by buying a cheaper VW (same relative utility, but lower absolute utility), without being looked-down upon by a BMW-owning neighbor. Either way, the Does cannot prevent the Joneses from benefiting (non-exclusion). The Joneses buying of a VW is, however rival. If they end up being the only family on the street that buys the cheaper VW, their triftinness will be inconsequential for everyone else.

Common Goods are best financed out of Pigouvian taxes. The PCT is that Pigouvian tax of excessive, positional consumption. It falls on exactly that behavior (excessive consumption) at exactly that price (marginal rate!) which it is meant to discourage. If rates are sufficiently high and progressive, the PCT can effectively curb . At minimum, it can lower the level of material waste at which positional consumption occurs.

4.10.3.1.3 What If: People Don’t Mind Buying Less (Expensive) Things.

A Pigouvian tax, by definition, has a DWL. The DWL of a Pigouvian tax is the very consumer and producer surplus that should never have been realized, because of the social costs hidden to them.

The definition of a DWL assumes that the utility of consumers is accurately measured in their willingness to pay. Utility and nominal demand curve are the same. (page ) suggest that people derive utility not from absolute, but relative consumption or status. People want to have more, or at least not less things and status than other people.

If excessive consumption occurs for positional gain, there can be no DWL when that consumption is curtailed for everyone. No one will be relatively worse off, only less relatively different. If anything, a more compressed stratification in the material signs of affluence and status will make most of us happier.

4.10.3.1.4 What If: People Really Care About Luxury.

People enjoy having many, and many expensive things not only because they want more than their neighbor. Driving that BMW on the autobahn may be aesthetically pleasing and functionally faster in absolute terms.⁹³

Let’s assume for a minute that there really is an absolute, sheer driving pleasure⁹⁴ in driving an expensive car. Even if there is absolute utility, it is likely to be of marginally decreasing return. Upgrading from a VW to a BMW will probably bestow more utility on someone than upgrading from a BMW to a Bentley. By taxing big spenders more, the PCT accounts for in excessive consumption. Even in a world of sheer driving pleasure, when more people get to upgrade from VW to BMW and fewer from BMW to Bentley, aggregate autophile utility will be maximized.

4.10.3.2 Sky-High Progression.

The PCT can be arbitrarily progressive. For very excessive consumers, rates can be as high as several hundred percent: literally, the sky is the limit. Because the PCT falls on consumption, and not on incomes, incentives or entrepreneurship will not be dramatically curtailed.

The ultimate reason for homo economicus to work hard and invest wisely is superior consumption. At first sight, depressed consumption (at higher prices) may appear to reduce incentives. Consider the trade-offs for homo economicus under the PCT: She can either work an extra hour, or not. Because she is already very diligent, and likes to work hard / party (consume) hard, any additionally enabled unit of consumption will be taxed at a fairly high rate. At any rate of consumption taxation, she will still be better off if she works the extra hour.

At the other end of the progressive schedule, rates can be very low or at zero for people who consume very little. Aside from equity, this also serves to labor as per desideratum \[des:low-price-floor\]. If the working poor or structurally unemployed pay a zero tax rate on their necessarily minimal consumption, their living standards increase and their reservation wage vis-a-vis the socially acceptable minimum living standard drops.

4.10.3.3 The PCT Smoothes Consumption.

Under progressive tax rates on consumption, people are punished for spikes in their consumption. To have the lowest possible PCT rate for a given level of lifetime consumption, you have to spread out the shopping sprees as evenly as possible.

In a bust or boom, the PCT serves as an automatic stabilizer. Without legislative intervention, people are always incentivized to smooth out their consumption.

The PCT can also serve as a powerful discretionary stabilizer. In a bust, legislatures can opt to lower the entire PCT schedule⁹⁵ . For the duration of the bust, people have a greater incentive to consume, knowing that higher rates will return once the economy reverts to its long-term growth path.

The PCT as discretionary stabilizer will be general in impact. Whatever you choose to buy will be cheaper to buy. Government can inject discretionary stimulus without opening up to clientelist pressures.

The PCT also minimizes windfall effects. Because you have to consume first to take advantage of the lower rate, you cannot channel the government stimulus into further savings. In fact, you have to divert from your average consumption path, and consume more during the bust. Just as a cash-for-clunkers scheme, the PCT incentivizes people to dissave, except for all kinds of consumption and without the waste of clunkers.

4.10.3.4 Deciding How Much to Consume, and Who Consumes.

The PCT allows government to set an arbitrary savings rate. Because it is progressive, the PCT can incentivize saving without (see page ). The PCT allows for greater saving than the VAT because it (greatly) incentivizes exactly those people to save more, who can: the excessive consumers.

4.10.3.4.1 How the PCT Makes You Save More.

The PCT offers two mechanisms to increase the savings rate.

First, the PCT is simply an elegant revenue stream for government from which it can finance public good projects (public works) or buy investments (sovereign wealth fund). Both a new (non-congested) motorway and public ownership of some corporation constitute saving.

Second, the PCT is an instrument to alter the save-vs.-consume trade-off for natural persons. It encourages saving in three distinct ways (the following is from (Seidman 1997, 28ff).

The incentive effect

of higher post-tax interest rates is more complicated than might appear at first sight. Intuitively, tax exempted saving and capital incomes will increase the post-tax interest rates and cause people to save more. A substitution effect may ensue: for every unit of resource saved now, you will receive a greater post-tax payoff in the future. You save more.

On the other hand, a higher post-tax interest rate is an accrual to wealth: you just got richer. According to the income effect of higher interest rates, you may save less. For fewer units of resources saved now, you will receive a same payoff in the future. The PCT is less ambiguous in its effects than a change in the market interest rate. It has only a substitution effect. Because people are (income) taxed before the PCT, too, introducing the PCT does not make them any richer. Taxation does not disappear, it merely shifts the base. Think this through again

The horizontal redistribution (heterogeneity) effect

occurs between equally affluent persons who differ in how much they consume. Consider two millionaires, one of whom spends all his income (affluent consumer), one of whom saves all her income (affluent saver). Under income taxation, both pay a (same!) tax on their millionaire income. Under the PCT, the affluent saver pays no tax at all, and the (price inelastic) affluent consumer pays twice the income tax for revenues to stay constant. The affluent saver gets to save all of her income. Under income taxation, she can save only the post-tax income. In sum, at same public revenues, more money is saved under the PCT than under income taxation. Seidman (1997) estimates US savings rates to increase by roughly 11% due to the heterogeneity effect of a PCT transition.

The postponement effect

occurs as a one-off effect as the tax burden shifts within cohorts from saving at working ages to dissaving during retirement. An income tax burdens savings immediately, and early in life once they are earned. A PCT burdens savings late in life, when they are consumed. At same levels of retirement consumption, people will be able to accumulate more capital earlier.

To the extent that the postponement effect occurs within cohorts, it is a zero-sum intertemporal redistribution between private saving and public revenue. It does not, as Seidman (1997) seems to imply, generate genuine new saving in the long term. It just postpones government revenue.

To the extent that the postponement effect occurs between cohorts, it can genuinely improve the savings rate and public revenue by taxing old savings twice (or even three times). The intergenerational equity considerations of this effect are later discussed in .

4.10.3.5 It’s not All Pleasure-Delaying.

So far, the PCT appears to encourage thriftiness over all else. As Ant — and even the most die-hard supply-side economist — will attest, that alone would make for a fairly sad state of affairs, with all saving, and ever-delayed consumption. As Ant learns, the heart wants some music, too.

4.10.3.5.1 The Party’s Over.

As argued in , there are good reasons to believe that we are growing much slower than we could at greater savings, and that, already, we have taken out loans on the future. No matter what the heart wants, we may have to turn down the music quite a bit.

4.10.3.5.2 Deciding How Much To Consume.

Correctly understood, the PCT is actually agnostic towards how much we, as a society, consume or save.

What is missing in the description so far — as it is in much of the politics of tax — is what happens with the revenue. Taxation does not reduce resources, but (with a small DWL), merely redirects them. It is then up to the democratic state, or the individuals to which it redistributes, to decide how much should be saved or invested and how much should be devoted to consumption.

4.10.3.5.3 Deciding Who Consumes.

Let us (optimistically) assume that the current savings rate is optimal, that aggregate consumption must remain on current levels, and that the public expenditure quota is optimal. Even in this (unlikely) scenario, the government can use the PCT as a pure redistributive tax to redirect resources from big spenders to small spenders, with no effect on the savings rate or public budgets. All government would have to do is to either zero-rate the small spenders (a de-facto redistribution to them), or hand out additional transfers to them. To go back to the car example, the PCT would redirect resources from buyers of BMWs to buyers of budget Dacia Logans.

Alternatively, government itself can also spend the revenue on public goods or risk pools. For instance, government could organize a big parade or a fireworks display on the national holiday. The savings rate would be unaffected. The same amount of resources would be spent, just by a different body and for a different purpose.

4.10.3.5.4 S-Classes to Subways.

Let us now consider what happens when the PCT is used to increase the savings rate, as described in the above. When implemented with an appropriately , the PCT does not lead to a drop in aggregate demand (page ). It merely redirects economic resources from the production of consumer goods to the production of capital goods. Under axiomatically assumed , factor markets always clear. That means that surplus incomes (savings) will always find profitable investment.

This capital deepening of the economy can take many forms. In the public budget, it can mean building a new school, upgrading our infrastructure, funding basic research or abating and adapting to climate change. On the marketplace, it can mean building a new factory for solar panels, developing a new biotech patent or building more equity to guard against the next financial crisis.

Whatever the use, in a perfect market, capital deepening is an unambiguously good thing. It means to enrich our world, with powerful factories, liberating technologies and empowering education. When people and institutions are given enough time to adapt to the new incentives, no welfare will be lost and no factors will sit idle. Mercedes Benz just needs some time to convert its production line from S-Class sedans to economic minivans, or even public transportation.

4.10.3.6 The Foundational Beauty of the PCT.

\[sec:foundational-beauty\] Gleaming behind its ability to make us all enrich our world, there is a greater normative appeal to the PCT: its beautiful alignment with a foundational theory of private property.

By taxing consumption, the PCT leaves incentives to work and save unaffected. The PCT is as per desideratum \[des:structural-agnosticism\]. Like the VAT, it taxes neither of them, but only the component of all income that is consumed. In contrast to the VAT, it does so without sacrificing progression.

“Under the progressive consumption tax”, as industrialist C. William Hazelett put it to the US Senate in 1939, “we define income at what it really is. There is no economic income but the living standard of the taxpayer” (Hazelett as cited in (Bank 2004, 15).

Consumption is the very transaction at which we take a part of the riches of our economy, exclude other people from its partaking and use it up. The PCT taxes you for what you take out of the cake, not for what you contributed to the cake (Seidman 1997, 58).

This foundational ideal of taxation goes back a long time.

Thomas Hobbes (1651), in his “Leviathan”, wrote:

“\[T\]he equality of imposition, consisteth rather in the equality of that which is consumed than of the riches of the persons that consume the same. For what reason is there that he which laboureth much, and sparing the fruits of his labour, consumeth little, should be more charged than he that living idlely, getteth little, and spendeth all he gets, seeing the one hath no more protection from the commonwealth than the other? But when the impositions are laid upon those things which men consume, every man payeth equally for what he useth, nor is the commonwealth defrauded by the luxurious waste of private men.”
— Thomas Hobbes (1651, 386)

Adam Smith (1776), in his “Wealth of a Nation”, wrote:

“Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. \[...\] Taxes upon such consumable goods as are articles of luxury, are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them little by little, as he has occasion to buy the goods. As he is at liberty too, either to buy, or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconveniency from such taxes.”
— Adam Smith (1776, 778)

Both Thomas Hobbes (1651), the founding father of the modern state, and Adam Smith (1776), the founding father of the modern economy, hinted at, if not endorsed a (progressive) taxation of consumption.⁹⁶

4.10.3.6.1 The Difference Principle of Consumption Taxation.

They probably did not know it then, but what already Hobbes (1651) and Smith (1776) saw in the progressive taxation of consumption was the ingenious conciliation of equity and efficiency in the modern world which we now call the (???) and which here is listed in desideratum \[des:difference-principle\]. The PCT leaves untouched that economic inequality in incomes, in incentives, and in entrepreneurship which, in a perfect market, pareto-grows the cake for everyone, including the least well-off, as the difference principle mandates. The PCT taxes, discourages, disallows that economic inequality, in excessive consumption and positional gain, which slices up the cake in exclusive, inequitable pieces, devours it, leaving only the shameful crumbs for the rest.

4.10.3.6.2 Private Property Isn’t Theft. But Neither Is It God-Given.

\[sec:AntiEntitlement\] A foundational understanding of private property and taxation is not without its discontents. If you believe, as Robert Nozick (1974) does, “that a person is entitled to those goods acquired in uncoerced exchanges with others” (1974, 149), there is no good reason (if at all) to tax this entitled private property again when it is consumed. A comprehensive (de)appreciation of such hyperliberal entitlement theory is beyond the scope of this thesis, but a preliminary critique I must offer.

Naturalizing whatever the allocative results the free market produces as inalienable private property is as ahistorical as it is uncritical. Just a cursory look in the history reveals that private property has not been around for a very long time. For a constructed entitlement, written and signed on a piece of paper to be powerful enough to guarantee inalienable access to whichever economic resource it concerned, one thing was needed above all: security. If you have to use a stick everytime you want to exercise your property rights, they are not much worth to begin with. In an insecure world, sticks and physical power mean everything, pieces of paper mean nothing. This (???) nightmare of violent anarchy, incidentally, was resolved by the state. How did the state and its prototypical racketeers do it? They extracted protection money from the people they protected from (or, equivalently, threatened with) violence and theft (Tilly 1985). As these racketeers enjoyed technological innovation (gunfire) and economies of scale in their protection of violence, they became larger until they morphed into the modern state. From that day on, their protection money was called a tax.

That hyperliberalism insists on essentially entitled, private property, but now begrudges the polity and the modern state its revenue is, to say the least, ungrateful.

Private property is not the antithesis to a potent polity. They are part and parcel. You cannot have the growth that empowers a polity without private property (for now). You cannot have private property without a polity either violent enough, or equitable enough to maintain these very entitlements.

Taxation should treat private property accordingly. Not as theft, but as taxable.

4.10.3.7 The Perfect Tax.

“A progressive postpaid consumption tax emerges as the fairest and least arbitrary of all comprehensive tax systems, precisely because it chooses to make its decisions about the appropriate level of progressivity at the right time. In doing so, it burdens some but not all uses of capital and its yield, and for normatively attractive reasons.”
Edward J. McCaffery (2005, 812)

Let me introduce you: the perfect tax.

The duty that is both elegant, and fair. The regime that lets our economies grow, and have everyone partake in its fruits. The excise that reconciles efficiency with equity. The only tax that does not either discourage savings, or is regressive (Seidman 1997, 2). The set of rules that raises the revenue for a potent polity, and, at the same time, curbs wasteful decadence.

4.10.4 The Nuclear Option — Wealth Tax

A wealth tax, or more accurately, an expropriation tax shares many of the advantages of the PCT.

A wealth tax is superior to a PCT in its ability to disperse the ownership of means of production. When inequality is (page ), taxing consumption at whichever progressive rate may not suffice to dampen capital accumulation in the hands of very few.

Three other, more hypothetical considerations speak for a wealth tax.

First, if there were a macroeconomic crisis of Marxian underconsumption, a wealth tax would provide a powerful lever to redistribute resources (to other people or the state) and consume them. This is an unlikely scenario: Marx’s gloomy predictions on the crisis of capitalism have not become reality, and, if anything, OECD economies save too little. This is also about a liquidity crunch, and in that respect, it might help, if through a highly discretionary lever, which is not so great. In fact, there is both a Marxist (capital accumulation) AND a Keynesian (liquidity crunch) argument for it.

Second, if there were an inefficient misallocation of resources in an overproduction of private goods (cars) and an underproduction of public goods (levees against rising sea levels), concerted expropriation under a wealth tax could provide for public works revenue much faster than a PCT can.

Third, if there were a sustained excess indebtedness in public budgets, well-organized and progressive expropriation may be the least inefficient and arbitrary of all evils. Sovereign defaults are prone to cause panics and ripple effects in the world economy, as recently evidenced by the Greek debt crisis (not default) in 2009. Inflating your way out of sovereign debt also has severe adverse effects. Rational actors will freeze up their capital in non-monetary assets (such as real estate, or even gold) and be excessively conservative about the future.

Most importantly, both sovereign defaults and inflation burden natural persons arbitrarily: like a corporate tax, defaults and inflation have no well-determined, let alone progressive incidence. A wealth tax, for all its shortcomings, has both.

4.10.4.1 Better Than Income Taxation.

In contrast to sharply progressive taxation of capital incomes, a wealth tax still maintains (if not strengthens) as per desideratum \[des:Incentives\]. Even if the taxman will expropriate a certain percentage of your net worth at the end of the year, you will still try to make as much profit with what you have. A wealth tax is neutral with regards to the risk aversion of investors.

4.10.4.2 Property is Power.

There is an equity argument for a wealth tax, too. It requires that we relax condition itm:MaximizeProfits and allow homo economicus to make irrational investment decisions.

If owners of capital exercise discretion in their decisions, rather than fully rational (if sophisticated and privately informed) cost-benefit analyses, great wealth bestows great power. Such investors, in the classic definition of power, can make other people do something they would not otherwise (pareto-optimally) have done (Geoff, Segal-Horn, and Lovitt 2002, 8ff). A wealth tax gets at that accumulation of power.

4.10.4.3 Redistributive Instrument of Last Resort.

A wealth tax has immense normative and practical drawbacks. It is antithetical to capitalist entrepreneurship. It disallows market production decisions on those means of productions with are confiscated.

Most fundamentally, a wealth tax is plagued by the dilemma of having to evaluate in violation of desideratum \[des:liquid-assets\]. As a tax on capital, it has to either evaluate illiquid assets as a central planner, or let owners escape taxation and freeze up liquidity. Since expropriation is already a state intervention in the economy, it probably makes a certain amount of sense to rely on accrual-based taxation through a central planner.

4.10.4.4 A Nuclear Option.

The flaws of a wealth tax are by no means trivial. Taxation on realization will allow evasion and wreak havoc on liquidity. Taxation on accrual, as expropriation in general, will put the political process under inordinate pressure by private interest. The (partial) central planner may be contaminated by widespread clientelism, or incompetent to begin with.

4.10.5 The Backup — NIT

A negative income tax (NIT) can serve to for low-productivity labor by subsidizing the purchasing-power parity minimum living standard of these small earners, as per desideratum \[des:low-price-floor\]. It does so more elegantly and with a smaller (desideratum \[des:minimal-DWL\]) than minimum wages or combined wages. At any level of productivity or gross income, workers will still have (desideratum \[des:Incentives\]) to earn more. Workers experience less moral hazard not to work, or to work less than they otherwise would. Free-riding firms will have a harder time cannibalizing non-subsidized employment.

4.10.5.1 A Methadone Program for Structural Unemployment.

A NIT may be a very effective treatment of structural unemployment in the short term. In the long term, only greater education and productivity alleviate the root cause of structural unemployment. Transferring resources, however elegantly and at whichever level only treats the symptoms, not the disease. As a discretionary stabilizer, a NIT can be a structural painkiller, disguising necessary pressures to adapt and reform.

4.10.5.1.1 Bringing in the Nuclear Option: Tax Wealth Only If Absolutely Needed.

The PCT alone may be insufficient to broaden the distribution of capital, given the self-reinforcing and excessive dynamics of inequality today. Taxing only the consumed component may be inadequate to get at some riches (Shaviro 2004, 106). For some people, no matter how progressively their newest sports car is taxed, they will spend only out of their interest, if not out of petty cash.

If, and only to the extent that the overall distribution of private property is deemed unacceptable only for the reasons mentioned in the above, a wealth tax may be advisable. It should target exclusively that inequality of the very, very rich which cannot be adequately taxed on their consumption only.

4.10.5.1.2 Bringing in the Backup: NIT Only If Absolutely Needed.

The PCT goes some way to lower the price floor of low-productivity labor. Very small spenders would be zero-rated in their consumption. In effect, these people would receive for free all public goods and risk pools they ever benefit from. The productivity of some people may be so low, that even no taxation at all does not make ends meet.

If, and only to the extent that people cannot live off their equilibrium labor incomes with zero-rated consumption, government should subsidize such labor through a NIT.

4.10.5.2 Implementing The Perfect Tax

A comprehensive suggestion for the implementation of the PCT is beyond the scope of this thesis and my competence. Much legal, administrative and design specification will be required to make the PCT real.

I provide here some preliminary thoughts on implementing the PCT and its problems.

4.11 Durables

4.11.0.1 Depreciation, not Expensing.

A simple addition to a PCT is that durable consumer goods should not be expensed, but depreciated over time. A desirable tax as per desideratum \[des:minimal-DWL\] will leave , including those between more durable (and expensive) and less durable (less expensive) goods. A simple cash flow treatment (expensing) of durable goods would punish people for buying high-quality, presumably expensive durables. If you buy a set of new, high quality household appliances in one year, your consumption spikes, irrespective of how long you will use the devices. Under a progressive schedule, you would be better of buying cheaper appliances more often (smoother consumption), rather than more expensive appliances less often. To avoid such distortion, a PCT should depreciate durables over time. The “consumption” of a durable good would incur to your as they are depreciated every year. Depreciation schedules for durable goods are tested and readily available in most tax legislations.

4.11.0.2 Really Durable Goods: Real Estate.

Depreciation of durable goods becomes more thorny for goods that never substantially depreciate, or even appreciate in value, as for example owner-occupied real estate. There are three possibilities to tax owner-occupied housing, all of which have severe drawbacks.

First, house owners could be taxed on the imputed rents of the real estate. House owners would be treated to tenants, as mandated by desideratum \[des:minimal-DWL\]. Any appreciation or depreciation of the house would go untaxed just like any other financial investment. This would require that the state, in the absence of an equilibrium rent, approximates market rental rates.

Second, house owners could be taxed on a depreciation schedule set by the government (taxation on accrual). This would substantially alter incentives to invest in owner-occupied housing. In a house that appreciates in market value, occupying owners would be at a relative disadvantage to non-occupying owners and their tenants. Much like taxation on accrual, depreciation requires the government to act as a central planner, albeit in a much smaller sector of the economy. Under a PCT, only owner-occupied housing, or owner-used durables may require government valuation, not all illiquid assets as under income or wealth taxation.

Third, house owners could be taxed on the resale price of the house (taxation on realization). When a house looses market value, occupying-owners will be taxed on the difference in price. Owner-occupied housing that gains in market value would escape taxation. Much like taxation on realization, taxation on resale price will substantially alter the incentives in the economy, in violation of \[des:minimal-DWL\]. Markets of depreciating owner-occupied housing may freeze up entirely, in fear of the impending tax burden. Markets of appreciating owner-occupied housing may overheat, with demand inflated by the tax-free consumption of such housing. Occupying owners would be treated starkly differently than non-occupying owners and their tenants. Occupying owners would be subjected to a bifurcated risk distribution. If their house gains in value, they go free entirely: they gain an income and receive tax-free consumption. If their house looses value, they get punished twice: they loose wealth and get taxed on the loss.

On cursory inspection, the least arbitrary and disruptive method to tax owner-occupied housing or owner-used durables in general appear to be imputed rents.

4.12 Introducing the PCT

The transition to an exclusive, progressive taxation of consumption will require careful planning and specification.

4.12.0.1 Go Slow.

\[sec:GoSlow\] Most importantly, a transition to the PCT must be credible, but very slow. Moving to the PCT is probably more a process of (one to three) decades, than of years. The principal reason to transition very slowly is that the economy needs time to exit from the production of (positional) consumer goods to the production of investment goods and/or cheaper consumer goods. If incentives change faster than firms can cheaply exit and enter, welfare is lost (Seidman 1997, 20). When Mercedes is forced to abandon the S-Class production line before it is depreciated or before it can be cheaply converted, we are just burning capital.

It will probably be wise to phase in the PCT over several years. The PCT should be introduced on a binding timeline grandfathered-in at year one of the transition, to reliably incentivize firms to change their production.

Additional problems not discussed here may stem from short- and medium term monetary dynamics. A careful investigation of monetary correlates of taxation and the introduction of a PCT in particular must (page ).

4.12.0.2 Intergenerational Incidence.

\[sec:IntergenerationalIncidence\] A tax reform as paradigmatic as from income to consumption will affect people differently depending on when in their lifetime income and consumption streams the reform sets in (Graetz 1979, 1649). People with savings, absent other specification, will be taxed three times on these savings: once when they were initially earned, a second time when they earned an interest (), and a third time when they spend it under the newly introduced PCT. People with no savings, absent other specification, will be taxed only once.

Savings and income follow a probabilistic lifecycle: people save out of their income in their middle years to spend when they are old and have no income.⁹⁷ When the PCT is introduced, people who are old at the time of introduction will contribute more to the polity over their lifetime than people who are young at the time of introduction.

To a certain extent, intergenerational redistribution of this scope may well be the unavoidable side product of a changing society. Equity considerations may come to an end just here: you are not entitled to recompensation for when in the history of a society you are born. Still, the magnitude of triple taxation of old people may be so immense that a PCT should address the intergenerational incidence caused at the time of introduction.

4.13 Investment vs. Consumption

4.13.0.1 Deductions.

The PCT requires a white list for cash uses that qualify as saving. For many financial products, the distinction will be straightforward: whenever means of production are acquired (equity) or financed (debt), whether as mutual funds, bonds, stocks or life insurance, the respective payments will be deducted from income and dissavings (, page ).

4.13.0.1.1 Education.

For some cash uses, the distinction may be more complicated. Education is a good example. On the one hand, some component of some education constitutes saving into one’s own human capital, one’s own means of production. On the other hand, education can (and should!) also serve other purposes of self-realization, fulfillment and leisure. A summer school in the fine arts is something that we may want many people to enjoy, but it is not in any strict sense an investment. Ideally, it should be taxed as consumption.

These and other lines will be hard to draw in practice. Given the broadly beneficial and various spillover effects of education (maybe the fine arts do inspire you, after all), it will probably be wiser to err on the side of too much deductable education, rather than too little (Seidman 1997, 8).

4.13.0.2 Self-Employment.

The line between consumption and investment gets even more blurry, when people own their own means of production other than their human capital.

First, the distinction between self-employed people and employees should be resurrected. When people do not bear the full financial risk of their economic activity, their expenses other than education should not be deductible. Both the commute to work (Pendlerpauschale, commuter tax allowance) and the costs of securing a job (Werbungskosten, income-related expenses), in a perfect market, should be reimbursed in equilibrium incomes, not through tax breaks.

Second, when people are their own risk-takers, all their expenses should be deductible. Unincorporated, self-employed people must have a tax burden fully equivalent to that of incorporated firms. Under a PCT regime, both should not pay any redistributive or general revenue taxes.

The private consumption unrelated to the business activity of self-employed people should be tax liable. In real life, this line will be very blurry: which percentage of a large sedan or business attire is required for the job, and which percentage for private use?

Specifying these rules and regulations for the tax liability of self-employed people (and unincorporated firms) will be very tedious. Still, a necessarily unelegant, but rough approximation of what is private and what is business expense should be possible.

4.13.0.3 Fringe Benefits.

An equivalent problem occurs when incorporated firms hand out non-cash benefits to employees (or owners). These non-cash benefits, while never formally detected as a cash flow under , may constitute additional non-cash income. Without further specification of the PCT, such fringe benefits would escape taxation entirely: private consumption of the (luxurious, gas-guzzling) company car would go untaxed.

To avoid untaxed fringe benefits, the taxman has to audit the books of corporations to detect and quantify non-cash Benefits⁹⁸ . Employees who receive non-cash benefits would be tax liable on the cash equivalent of these benefits as incomes. All other things equal, if they do not offset their company car use by additional saving, they will be taxed on its consumption.

4.14 Gifts and Bequests

Gifting and bequesting will not be taxed. It is an accrual to (or loss of) wealth (income), but does not constitute consumption. Instead, gifted resources will be taxed when recipients consume them out of their respective (page ).

When non-cash resources are gifted, donor and donee have to agree on an evaluation of the gift. Donors and donees will have opposing incentives to evaluate the gift.

Donors will have an incentive to overstate the value of their gift: the more inflated the value, the smaller their income, the smaller their taxable consumption. If real income drops less than the gift-inflated reported income, people can dissave and spend the difference tax free.

Donees will have an incentive to understate the value of their gift: the more deflated the value, the smaller their income, the smaller their taxable consumption. If real income increases more than the gift-inflated reported income, people can dissave and spend the difference tax free.

Ideally, donor and donee will agree on and report an evaluation close to the equilibrium price of the gift as a result of their opposing incentives.⁹⁹

4.15 Imputed Income

People can consume their own income without either the income or the consumption ever showing up in a cash flow. This occurs when people iron their own clothes, or when they sit idle and enjoy their free time. Both self-supply and leisure would go untaxed under a pure PCT. People would be incentivized to iron their own clothes, rather than have someone else do it for a cash flow detected price. Likewise, people would be incentivized to enjoy their leisure, rather than enjoy some additional good or service they could have earned in the same time.

This is undesirable for two reasons. First, it pre-tax market prices in an arbitrary way, in violation of desideratum \[des:minimal-DWL\]. Ironing your clothes yourself or giving them to a dry cleaning should not be taxed differently. Second, it favors autarky over welfare-improving trade. When cash-based division of labor is disincentivized, many absolute and comparative advantages may be foregone. The dry cleaner may be much more efficient, or at least relatively more efficient in ironing your clothes.

This problem can be solved by including an imputed income in the cash flow for everyone. If you earn no income at all and spend nothing at all, the assumption would be that you consume your own work entirely. If you are living the autarky lifestyle, you cannot offset your imputed income with any savings. All of your imputed income is, by definition, consumed, and taxable. If you are living the separation-of-labor lifestyle, you receive an actual income on top of your imputed income. You can spend your actual income and save out of your imputed income. At (presumably) equal living standards, only one of the two incomes is consumed, and taxed. The PCT with an imputed income is neutral towards the relative configurations of leisure, self-supplying consumption and cash-compensated separation of labor.

An imputed income also serves as an elegant backstop to barter transactions undertaken to evade the PCT.

4.15.0.1 Strengthening Comparative Advantage.

The theory of comparative advantage dictates that one should specialize in whichever production one is relatively more efficient (Ricardo 1817). Even if a doctor can iron her shirts faster than the worker at the dry cleaning, she should outsource ironing because she is relatively even more productive at providing medical care, compared to the worker with no medical training. Efficient incentives should reflect the comparative advantage of the doctor in providing medical care. Under the PCT, even with a flat imputed income, this is not the case.

All other things equal, a highly productive doctor has an equal tax incentive to send her laundry to the dry cleaning as, say, a social science PhD student with questionable productivity. When they do their own ironing, both are taxed on the same, flat imputed income that they are consuming in supplying themselves. In reality, the two have very different opportunity costs in ironing: doing another brain surgery, or spending another afternoon on the internet. Ideally, the doctor should be incentivized to outsource much more at same levels of consumption than the PhD student.

A variable, imputed income based on past earnings accomplishes just that. If you have shown to be very productive, you will be incentivized to devote your time to that highly productive and well-paid activity. If the doctor irons her own shirt, she consumes out of a much higher imputed income on which she will be taxed. If she instead gives the shirts to the dry cleaning and does another brain surgery in the meantime, given same levels of consumption, she will be taxed only on the presumably lower price paid in cash at the dry cleaning.

It is important to note that including even a variable, imputed income based on past earnings does not force more productive people to work more. At same levels of consumption, it merely incentivizes them to work whichever time they choose to work at whatever they are best at.

An imputed income based on past earnings also does not force highly productive people to adopt any specific combination of work and leisure. It merely incentivizes them to adopt the same combination as other people. Absent a dynamic, imputed income, very productive people could maintain the same standards of living (consumption) with much less work than less productive people.

Still, to incentivize productive work, an imputed income based on past earnings must not entirely reflect higher productivities. If higher productivity does not allow you to either work less or consume more, you may never strive too hard in the first place.

4.16 Cross-Border Transactions

As with any tax, additional complications arise when cross-border transactions are concerned.

The problems arising from different tax rates or tax regimes between countries are not addressed here. The real existing international political economy of taxation is what is malleable, or what demands explanation given the doable and desirable hypothetical established here.

4.16.0.1 The End Game.

First assume that all developed countries have transitioned to the PCT. All income, value-added, corporate and withholding taxes are abolished. People would be taxed based on residence (Graetz 1979, 1645).¹⁰⁰

Consumption abroad would be liable to taxation at home. Investment abroad, when properly documented, would qualify for tax deductions. If in doubt, the taxman can simply assume that cash flows to another country constitute consumption until otherwise proven. Conversely, aliens consuming in another country would be taxed in their home country of residence.

4.16.0.2 The Real World.

In the real world, international transition to and harmonization of the PCT is likely to occur slowly, if ever. In the meantime, introducing the PCT will create some problems and complexities.

Citizens investing or consuming abroad can be taxed on their global consumption at home. Receipts for VATs, income or withholding taxes paid abroad can be deducted from their PCT liability.

Taxing consumption abroad may violate WTO regulations on the free movement of goods, services and capital.

People can evade the PCT if they cash in foreign capital and labor incomes abroad and consume it there. Considerable international tax cooperation will be necessary to avoid such evasion. Non-PCT countries may have few incentives to cooperate.

Foreign residents earning labor or capital incomes at home, absent any PCT account for them, would still have to be income taxed. Similarly, to maintain stable revenues, government would have to retain withholding taxes on foreign-owned corporations.¹⁰¹ This will create considerable administrative duplications and contradictions.

4.17 Family

Notwithstanding in accordance with desideratum \[des:personal-taxation\], people who share living quarters and pool resources should be taxed as one household, as argued in . Under a progressive schedule and with no, or only a small penalty to mechanical solidarity in marriage or other forms of intimate cohabitation, the tax liability of such units will depend on the distribution of consumption (not income) in a household. A big spender marrying a small spender will enjoy a much greater benefit than two small spenders.

Aside from spouses, children are often dependents relying on mechanical solidarity. Under the pure PCT, they are treated equivalently. Their income and saving is added up to a household-wide , consumption is then divided by the number of persons in that household and taxed at the respective rate of average consumption in the family. While this will already give parents a tax break, it is not clear that the relief would be sufficient or appropriately distributed.

4.17.0.1 Why Averaging May Not Suffice: Children Are Investments.

Averaging taxable consumption alone will treat a child exactly like a spouse. Considering the low fertility rates in many developed countries and the severe dissaving of an aging (not shrinking!) population, this equal treatment may be insufficient. Rearing a child is fulfilling, but it is also a costly investment into the future of your society.

Averaging taxable consumption alone will give limited financial incentive to procreate. I cannot address here whether such pro-natalist policy would be normatively desirable, or even effective. Either way, the polity should be able to incentivize child rearing, if it so sees fit.

4.17.0.2 Why Averaging Only May be Undesirable: Tax Breaks Favor the Big Spenders.

Again, as in marriage, the value of the tax break depends on the distribution of consumption within the family. The starker the differences, the greater the benefit. Assume that children require relatively less consumption than adults, and are less prone to excessive consumption on their behalf: compared to the very big spenders on cars, yachts and houses, even a designer-clad toddler is relatively cheap. It follows that those very big spenders, taxed at higher rates will benefit the most from averaging their consumption with that of their (truly) smaller spender children. It is hard to defend normatively why of all potential parents the big spender should reap the greatest fiscal benefit for rearing a child.

4.17.0.3 Add to the PCT: An Allowable Deduction for Children.

Both of these shortcomings can be addressed by supplementing the PCT with an allowable deduction for children. Such a flat deduction would treat consumption on behalf of a child up to a certain amount as an investment into the future. It would be fully tax deductible. This could be accomplished by simply adding a fixed amount of annual saving for every dependent child to that household’s Haig-Simons equation. An allowable deduction for children would create an extra incentive independent of the level of spending of the parents, so as long as they consume anything¹⁰² .

4.18 The Formula for the PCT

Specifying the schedule and formulae for the PCT will require extensive econometric and fiscal research, as well as frequent adjustments during its introduction. I can only list the terms of the formulae here, and suggest some tentative criteria for each of the terms.

4.18.0.1 Taxable Consumption in Real, not Nominal Terms.

Taxable consumption is given by the (page ), with the addition of gifts and bequests made and received, imputed income and an allowable deduction for children. Taxable consumption is then averaged over the entire household. Taxable consumption should not be in nominal values for two reasons.

First, nominal consumption would be subjected to inflation. If the schedule is constant, people pay ever more taxes by a dynamic called cold progression¹⁰³ .

Second, economies grow. As our economies get richer and richer, consumption should grow, too. Notwithstanding the need for a higher savings quota, there is no reason to tax consumption in absolute terms for all time. Rather, consumption should be taxed progressively in relation to overall production, or the size of the cake.

For these reasons, taxable consumption should be denominated relative to a multi-year running average of GDP.¹⁰⁴

4.18.0.2 Progressive Schedule.

The progressive schedule, while open to a great deal of political discretion must satisfy the following conditions.

4.18.0.2.1 Sufficient Revenue.

To be revenue neutral, or to raise more revenue for underprovided public goods and risk pools, the rates must be sufficiently high and sufficiently steep. Because discrete price elasticities of demand in positional or excessive consumption are unknown, revenues for any given schedule are hard to project without further econometric research. The schedule will likely require careful adjustment as it is introduced and actual price elasticities are observed.

4.18.0.2.2 Savings Rate.

The schedule must be sufficiently steep to incentivize the democratically elected savings rate, taking into account real dissavings. Again, it is hard to project savings behavior for any given schedule without further econometric research or implementation in the real world.

4.18.0.2.3 Generational Incidence.

To alleviate the triple taxation of old savers upon the introduction of the PCT, the schedule could be allowed to vary for people of different age. A term expressing the percentage of life expectancy lived under income taxation could be included in the formula to discount the tax burden for older savers.

4.18.0.2.4 Entry Bracket.

The lowest bracket will be particularly hard to determine in width and rate.¹⁰⁵ On the one hand, it must be sufficiently wide and sufficiently low rated to minimize the as per desideratum \[des:low-price-floor\]. On the other hand, an entry bracket too wide in scope and too low in rate may allow too many small-spending people to free ride on the public goods and risk pools financed by everyone else.

4.18.0.3 Design.

For the PCT to garner popular support and to work its magic, intelligent design is key.

4.18.0.3.1 Fully Automatic.

Both to enable instant marginal rates and to reduce administrative cost, the PCT liabilities should be calculated with minimal human discretion, and invoiced fully electronically. Since cash flows are already recorded at financial institutions it probably makes sense to interface them directly with tax administration and have them withdraw tax liabilities on a regular basis. Given modern information technology and enough time for careful development, an ideal PCT should work without people ever handing in a tax return or many other (paper) forms of any kind. The tax administration will establish which cash flow recipients qualify as investment. Citizens will indicate cash flows that are donations or gifts. All other cash outflows will be treated as consumption. Whenever consumers buy an officially recognized durable good, the respective price will accrue to their consumption over time according to a fixed depreciation schedule. Lists of durable goods and respective depreciation schedules already exist in developed tax administration. Whenever consumers buy owner-occupied housing (or some other extremely durable, owner-used good), they are charged with the imputed rental rate. Tax administrations would have to establish electronic lists with fair market rental rates for such goods.

4.18.0.3.2 Instant Marginal Rates.

PCT liabilities must be invoiced much more often than income taxes. People cannot wait until the end of the year until they know how much consumption tax they paid on the last present they bought for Christmas. For the PCT to be transparent, and to reliably signal people against positional consumption, people need to know in real time their marginal rate of progressive consumption taxation at every possible consumption decision. Because the PCT is personally progressive the listed gross prices of goods in the store will have little resemblence to the net prices incurred to individual taxpayers. One apple does not have the same VAT rate for everyone, but it may have a tax rate of zero for one small-spending person, and a tax rate of 800% for the big spender next in line at the grocery store.¹⁰⁶ Modern ICT (think mobile devices) should enable intelligent designs to inform people about their current marginal tax rate.

4.18.0.3.3 Running Averages.

Annual invoicing of the PCT also makes little sense because that would cause lower PCT rates for everyone in January than in December of each year. At the other extreme, it also makes little sense to tax people for their consumption every day, or even every month. Not only would consumption be cheaper in the morning than in the evening, people would also be punished excessively for unavoidable, short-term spikes in their consumption. Under daily taxation, buying a suit on one day would be taxed at a higher rate, than buying the jacket and pants on different days. Under monthly taxation, a long summer vacation would be taxed at a higher rate than monthly weekend trips. This makes little sense because it violates the (page ). People must be able to shift consumption freely to some extent. In the real world, people probably also receive utility from a long summer vacation for a longer time than just the duration (let alone the infinitesimally short expensing) of the trip. Summer vacations, suits and other consumables cannot be practically depreciated.

Instead, people should be taxed on running averages of their consumption over extended periods of time. At minimum, an annual, moving average of consumption will be required for meaningful and practical taxation of consumption. A lifetime average consumption, with significant discounting of long past consumption may also be worth consideration.

4.18.1 Not All Progressive Consumption Taxes are Created Equal.

“The real and pressingly practical question for tax is not whether to have an income or a consumption tax, but what form of consumption tax to have. The stakes in this battle are clear and dramatic: the fate of progressivity in tax lies in the balance.”
— Edward J. McCaffery (2005, 817)

The PCT has been considered and suggested many times in recent history. It was considered after World War I as a graduated spendings tax (Bank 2004, 2), again in 1942 by Treasury Secretary Henry Morgenthau under the label of graduated surtax on spending and, most recently, in 1995 by Senators Sam Nunn (D-GA), Pete Domenici (R-NM) and Bob Kerrey (D-NE) as the Unlimited Savings Allowance (USA Tax).¹⁰⁷

It is important to note that not all these, nor current proposals are created equal. They differ in important details from the PCT proposal suggested here.

First, many PCT proposals, including the 1995 USA tax do not include dissavings in their definitions (Bank 2004, 18). A PCT that exempts consumption out of debt or savings, leaves a colossal share of excessive consumption untouched. Such a PCT is very limited in its progression.

Second, many PCT proposals are not radical enough in their departure from an income tax regime. They keep some of the old clutter and cause debilitating interactions and complications. The USA tax, for example, did not terminate the estate and gift taxes, even though these are transfers of wealth, not new consumption (Bank 2004, 19). The resulting administrative complication (evaluation of illiquid goods) and necessary deductions to avoid double taxation of spent gifts and bequests made it an incoherent nightmare.¹⁰⁸

4.18.1.1 The PCT’s Evil Neocon Twin.

A particularly brazen disfigurement of the ideal of progressive consumption taxation comes from the American Enterprise Institute (AEI), which sponsors and markets the (???) X-tax as a progressive consumption tax (???). The Bradford (1986) X-Tax is a two-tiered tax originally suggested in (1986). It comprises of a flat, European-style VAT with deductions for all wages, and a progressive wage tax. Why anyone would use the term “progressive consumption tax” to describe the Bradford X-Tax is hard to explain, except for sinister intent to create confusion.¹⁰⁹

4.18.2 The Least Imperfect Tax

Borrowing Churchill’s classic adage, the PCT may not be the perfect tax, but for all the alternative taxes we know. It has two fundamental shortcomings.

4.19 Work/Play, A Constructed and Diffuse Border On Which Taxation Depends

The fundamental problem in bringing the PCT to the real world is that it depends on a very clear distinction between investment and consumption. The problem is: this “notion of a sharp division between pleasure-seeking and profit-seeking is alien to human psychology and essentially unrealistic” (Bittker 1973, 203). Just like (page ) in (page ) the PCT depends on a distinction that does not unambiguously exist in the lives of people.

%this is the big-ass homo-economicus question. %Include a somewhat extensive discussion, include extensive references, argue why tax (materialism) still matters.

Where PCT administration defines and enforces this boundary anyway, severe distortions, evasion and administrative complications necessarily ensue. The problem of identifying fringe benefits already exists under the income tax (Graetz 1979, 1591), and they will become more severe as incentives for tax-free, excessive consumption increase.

There is no easy or elegant fix to this. Tax administrations cannot fairly and simply establish whether an AC at the office, an extravagant business lunch or an executive MBA in an exotic location is an investment, or consumption. It is probably both, to some extent.

These gazillions of loopholes for tax evasion cannot be elegantly closed, by one strike of tax administration genius. Instead, the PCT will require tax administrations to plug each and every one of them at a time, all the while not stifling economic activity and maintaining some degree of fairness.

It appears that whenever government wants to tax progressively, it is, to varying degree forced into the role of central planner and micromanager of inequality. The PCT may just offer the least severe of these administrative nightmares, or at least, no worse than the nightmare of progressive income taxation (Graetz 1979, 1595).

4.20 Stratification, Elsewhere.

Notwithstanding its grandiose ambition to curtail positional consumption, the PCT will not do away with all harmful stratification in the modern world. People may simply find other avenues for the very same, very dysfunctional positional games. Straightforwardly, people can show off their wealth by displaying slowly depreciating durables, or even jewelry. Even when these are taxed on imputed rents, people can still play status games in all our immaterial dimensions of difference. With no notice to the taxman or your democratic polity, you can break The Spirit Level (Wilkinson and Pickett 2009) through cultural distinction (Bourdieu 1984), romantic and sexual relationships (Mazur 1993) or anything else that makes us not only different, but also unequal.

This is not so much a shortcoming of the PCT as it is the end of democratic, liberal policy. Whenever policy moves beyond material leveling, by prescribing habitus, or even whom people meet and mate, it risks poisoning the polity with totalitarian zeal.

4.21 An Angel in Tax

“I will not add fuel to think tank fires. Complexity can wait. The devil may indeed dwell in the details, but we first need to find an angel or two in the abstractions that govern tax.”
— Edward J. McCaffery (2002, 6f.)

The limitations and problems of the PCT notwithstanding, it is the least imperfect tax. In the abstractions even more than in its implementation, these angels point to the PCT.

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Piatkowski, Marcin, and Mariusz Jarmuzek. 2008. “Zero Corporate Income Tax in Moldova: Tax Competition and Its Implications for Eastern Europe.” Geneva, Switzerland.

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Moffitt, Robert A. 2003. “The Negative Income Tax and the Evolution of US Welfare Policy.” The Journal of Economic Perspectives 17 (3): 119–40. https://doi.org/10.1126/science.151.3712.867-a.

Dalsgaard, Thomas. 2005. “U.S. Tax Reform: An Overview of the Current Debate and Policy Options.” Geneva, Switzerland.

Grabka, Markus M., Peter Westerheide, Richard Hauser, and Irene Becker. 2007. “Integrierte Analyse Der Einkommens- Und Vermögensverteilung.” Bonn, Germany: Bundesministerium für Arbeit und Soziales.

Rawls, John. 1971. A Theory of Justice. Boston, MA: Harvard University Press.

Cohen, Gerald Allan. 2000. If You’re an Egalitarian, How Come You’re so Rich? Boston, MA: Harvard University Press.

Nozick, Robert. 1974. Anarchy, State and Utopia. Ann Arbor, MI: University of Michigan Press.

Fried, Barbara H. 1999. “Who Gets Utility from Bequests? - the Distributive and Welfare Implications for a Consumption Tax.” Stanford Law Review 51 (4): 641–81.

Dahl, Robert Alan. 1989. Democracy and Its Critics. New Haven, CT: Yale University Press.

Genschel, Philipp, Achim Kemmerling, and Eric Seils. 2009. “Speeding up, down the Hill - How the EU Shapes Corporate Tax Competition.” Bremen, Germany.

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Genschel, Philipp. 2005. “Globalisation and the Transformation of the Tax State.” European Review, TransState working papers, 13 (1): 53–71.

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Friedman, Milton. 1962. Capitalism and Freedom. Chicago, IL: University of Chicago Press.

Kemmerling, Achim. 2009. “How Labour Ended up Taxing Itself - the Political Consequences of a Century of Self-Transformation of the German Welfare State.” Bremen, Germany.

Ganghof, Steffen. 2004. Wer Regiert in Der Steuerpolitik? - Einkommenssteuerreform Zwischen Internationalem Wettbewerb Und Nationalen Verteilungskonflikten. Frankfurt am Main, Germany: Campus.

Seidman, Lawrence S. 1997. The USA Tax - A Progressive Consumption Tax. Boston, MA: MIT Press.

Bank, Steven A. 2004. “The Progressive Consumption Tax Revisited.” Los Angeles, CA.

Hobbes, Thomas. 1651. Leviathan.

Tilly, Charles. 1985. “War Making and State Making as Organized Crime.” In Bringing the State Back in, edited by Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol. Cambridge, UK: Cambridge University Press.

Geoff, Mallory, Susan Segal-Horn, and Michael Lovitt. 2002. Organisational Capabilities - Culture and Power. The Open University: Milton-Keynes.

Shaviro, Daniel N. 2004. “Replacing the Income Tax with a Progressive Consumption Tax.” Tax Notes, no. 2004: 91–113. https://doi.org/10.2139/ssrn.444221.

Graetz, Michael J. 1979. “Implementing a Progressive Consumption Tax.” Harvard Law Review 92 (8): 1575–1661.

Ricardo, David. 1817. On the Principles of Political Economy and Taxation. London, UK: John Murray.

Bradford, David F. 1986. Untangling the Income Tax. Cambridge, MA: Harvard University Press.

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Wilkinson, Richard G., and Kate E. Pickett. 2009. The Spirit Level - Why More Equal Societies Almost Always Do Better. London, UK: Penguin.

Bourdieu, Pierre. 1984. Distinction: A Social Critique of the Judgement of Taste. Cambridge, MA: Harvard University Press.

Mazur, Allan. 1993. “Signs of Status in Bridal Portraits.” Sociological Forum 8: 273–83.

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For this insight, I am indebted to Franziska Deutsch who first noted in 2011 that tax was an interesting case because it affected everyone, but most people knew little about it.↩
Ideational perspectives surely are important, and rationalist epistemologies not the only way to knowledge, but, as I explain in more detail in (p. ), first-order alternatives must be clarified first.↩
To mention just a few red flags, it is unclear what costs Postwar prosperity extracted from others (dependence or world systems theory), we do know whether or how Western affluence can be repeated without the same gigantuan carbon footprint and we worry whether broad-based growth in value-add is but a historical episode (cost disease).↩
For some social science that seems to physically placing “markets” in quotation marks, see, for example Beckert and Streeck (2012). In lieu of an economic, or social scientific explanation of failing or corrupted markets for sovereign debt, this rhetorical device works to distance the social scientist from these market messengers, as if their price signals were merely social constructs. There is, however, such a thing as objectively given, materially tangible, unsustainable debt that higher interest rates might merely communicate (Wihlborg, Willett, and Zhang 2010, 55). “Punctuation”, in any event, does not replace an explanation.↩
The eu commission is quite explicit about this:

“The Single Market Review put (sic!) citizens, consumers and smes at the centre of policy-making.”
— European Commission (2008, 3)

One wonders, at least, why, in addition to citizens, consumers and some (though not other) firms are also mentioned, when, in a functioning market, the latter two should be served only as proxies of the ultimate beneficiary, the citizen.↩
For this insight, I am indebted to Franziska Deutsch who first noted in 2011 that tax was an interesting case because it affected everyone, but most people knew little about it.↩
Ideational perspectives surely are important, and rationalist epistemologies not the only way to knowledge, but, as I explain in more detail in (p. ), first-order alternatives must be clarified first.↩
For this comparison, I am indebted to Maike Schulz, who — citing Eco — reminded me in 2013 that an ever elongating reading list need not be a bad thing.↩
For this comparison, I am indebted to Maike Schulz, who — citing Eco — reminded me in 2013 that an ever elongating reading list need not be a bad thing.↩
For some social science that seems to physically placing “markets” in quotation marks, see, for example Beckert and Streeck (2012). In lieu of an economic, or social scientific explanation of failing or corrupted markets for sovereign debt, this rhetorical device works to distance the social scientist from these market messengers, as if their price signals were merely social constructs. There is, however, such a thing as objectively given, materially tangible, unsustainable debt that higher interest rates might merely communicate (Wihlborg, Willett, and Zhang 2010, 55). “Punctuation”, in any event, does not replace an explanation.↩
The eu commission is quite explicit about this:

“The Single Market Review put (sic!) citizens, consumers and smes at the centre of policy-making.”
— European Commission (2008, 3)

One wonders, at least, why, in addition to citizens, consumers and some (though not other) firms are also mentioned, when, in a functioning market, the latter two should be served only as proxies of the ultimate beneficiary, the citizen.↩
To mention just a few red flags, it is unclear what costs Postwar prosperity extracted from others (dependence or world systems theory), we do know whether or how Western affluence can be repeated without the same gigantuan carbon footprint and we worry whether broad-based growth in value-add is but a historical episode (cost disease).↩
For this insight, I am indebted to Franziska Deutsch who first noted in 2011 that tax was an interesting case because it affected everyone, but most people knew little about it.↩
Ideational perspectives surely are important, and rationalist epistemologies not the only way to knowledge, but, as I explain in more detail in (p. ), first-order alternatives must be clarified first.↩
For this comparison, I am indebted to Maike Schulz, who — citing Eco — reminded me in 2013 that an ever elongating reading list need not be a bad thing.↩
For some social science that seems to physically placing “markets” in quotation marks, see, for example Beckert and Streeck (2012). In lieu of an economic, or social scientific explanation of failing or corrupted markets for sovereign debt, this rhetorical device works to distance the social scientist from these market messengers, as if their price signals were merely social constructs. There is, however, such a thing as objectively given, materially tangible, unsustainable debt that higher interest rates might merely communicate (Wihlborg, Willett, and Zhang 2010, 55). “Punctuation”, in any event, does not replace an explanation.↩
The eu commission is quite explicit about this:

“The Single Market Review put (sic!) citizens, consumers and smes at the centre of policy-making.”
— European Commission (2008, 3)

One wonders, at least, why, in addition to citizens, consumers and some (though not other) firms are also mentioned, when, in a functioning market, the latter two should be served only as proxies of the ultimate beneficiary, the citizen.↩
To mention just a few red flags, it is unclear what costs Postwar prosperity extracted from others (dependence or world systems theory), we do know whether or how Western affluence can be repeated without the same gigantuan carbon footprint and we worry whether broad-based growth in value-add is but a historical episode (cost disease).↩
For starters, desiderata are not (yet) comprehensively exhaustive and mutually exclusive (MECE). They are also not weighted.↩
A fully-fledged CBA would require ordinal, if not cardinal quantification of equity and efficiency. Quantifying the gains of the suggested superior tax choice, if possible at all, will be key to the further development of this project. For this, and other see further .↩
For example, László Kovács (2004), then Commissioner for Taxation and Customs asked that tax rates must be allowed to differ 6-8% simply to make up for the remote location of some markets.↩
Capital inflows will be particularly effective in relatively poor economies. As these economies, supposedly, still lie far below the golden rule of saving (Solow 1956), returns on capital will be much higher than in richer economies where further (near-Solowian) capital deepening faces diminishing returns (for example, Barro and Sala-i-Martin (1995) or ibid. 1992 as cited in (Beckfield 2009, 3).↩
To remind readers that this is not, in fact, what the acquis currently stipulates: The overall structural and cohesion funds for 2007–2013 amount to no more than € 347 billion, less than 3 times the budget of the city of Berlin (€ 21 billion in 2009), or about 0.005 % of the budget of Germany (€ 1,164,000 billion in 2011). In addition, eu budget negotiations are still marred by juste retoure attitudes, with ms wanting to get paid out what they have received — the very opposite of a redistributive regime (for example, Begg et al. 2008).↩
It too, is neither new nor revolutionary: internally heterogenous mixed economies have always, with varying results, dealt with this question. In the US, much of the controversy about the role of the federal government boils down to the question of how much rich Texans should dole out to poor Louisianans. In Italy, the rift is between North and South (for example, Putnam, Leonardi, and Nanetti 1993)) and in Germany, initially between industrial and rural states, since 1990 between old and new Laender.↩
…the reach of which was only recently discussed in the 2012 US Supreme Court ruling on the Affordable Care Act.↩
…the reach of which was only recently discussed in the 2012 US Supreme Court ruling on the Affordable Care Act.↩
In fact, the run on Greece is already underway, with the country having lost almost a third of its domestic bank deposits by May 2012, according to (The Economist 2012).↩
For the german original, see footnote \[fn:Offe-regress\]. –>↩
Who knows? — Had they known about , and had they foreseen the coming wonders of electronic retail banking, they might have saved us all a lot of trouble.↩
Whether this saving is implemented as a PAYGO, capital-based or entirely private scheme is of no relevance to the question of intergenerational incidence.↩
Note that this is the only reason under the PCT for the taxman to check the bookkeeping of incorporated firms.↩
When the progressive rates of donor and donee are very different, incentives will not be strictly symmetrically opposed. A big-spender donor has a greater incentive to inflate, than a small-spender donee has an incentive to deflate. Slightly false reporting of prices of gifts and some tax evasion may ensue. Where gifts and bequests are substantial and differences in progressive rates great, government may have to intervene and correct evaluations.↩
The residence principle in taxation is problematic when people frequently and for longer periods of time change their primary residence. If you live, spend and work “abroad”, you depend on public goods (fire service), risk pools (disaster relief) and redistribution (social peace) in that country. In effect, you become part of that polity, no matter the citizenship regime or your legal status as resident alien. The residence principle in taxation is fundamentally at odds with a cosmopolitan lifestyle.

Input and output congruency demand that whoever partakes in a polity pays, and votes in it, too (Zürn 2000). Progressive, of consumption demands that people pay for what they spend, irrespective of where they spend it. Even without international tax competition and evasion, these two norms can be reconciled only when all developed countries adopt the same progressive schedule, and the same base for taxation.

The cosmopolitan contradictions to the residence principle are not germane to taxation. They are the principle condition a denationalized world, with no greater functional polity filling the void of the modern nation state.

Taxation, like other policy areas, cannot respond to this change in itself. Without a greater polity, there will be no resolution to the contradictions of residence taxation.↩
For a different suggestion to transition to the PCT without corporate income taxation of foreign-owned firms, see .↩
With the addition of imputed income, all people consume something. The allowable deduction for children could, for example (partly) offset the costs of child care, whether done by a parent at home, or in daycare.↩
Again, the monetary dynamics of taxation cannot be addressed here. In income taxation, cold progression serves to dampen second-round effects of inflation.↩
Denominating taxable consumption relative to annual GDP would make the PCT procyclical. Short-term deviations from the long-term growth path should not matter.↩
The lowest, entry bracket of the PCT is the functional equivalent to the VAT.↩
This example makes obvious a seeming possibility for tax evasion: the big spender could give some cash to the small spender and have the small spender buy the apple on behalf of the big spender, at a much lower rate.

The PCT should be relatively immune to this kind of tax evasion. Once the big spender has given her cash to the small spender, the small spender has no incentive, let alone legal obligation to buy the apple. The small spender can just keep the cash.

The only way for the big spender to avoid consumption taxation on the price of the apple was to misreport her transaction to the small spender as a gift. It is then officially documented that the transaction was a gift, which, by legal definition carries no strings attached. The only option for the big spender to force the small spender to actually buy the apple is to report herself to the authorities for tax fraud and to declare the transaction as a taxable service (“buy me that apple”), not a gift.

Given these incentives, the tax evasion deal is unlikely to ever occur.↩
For an extensive review of the history of progressive taxation of consumption, and the USA Tax in particular see Seidman (1997, 11ff)↩
The gift and estate tax were necessary under the disfigured USA tax because it had ignored dissavings. When consumption out of dissaving goes untaxed, tax evasion 101 (“buy, borrow, die”) is operative. To get at least at some of the inherited and gifted wealth, the ugly backstops of income taxation (estate and gift tax) were kept.↩
(Shaviro 2004) delivers a particularly revealing example of conspicuous misrepresentation of the abstractions of tax and equity. At various points in his advocacy (desecration, really) of the “progressive consumption tax” (the Bradford X-Tax), he describes power, social standing or security through money as an instance of money illusion (2004, 106), argues that capital income is a meaningless category on the merits of a thought experiment in which a talented cook buys a restaurant and makes a fortune (2004, 100) and insists that infra-marginal returns are much like labor incomes because “one has only so much time and so many good ideas” (2004, 103).↩