States, Sales Taxes, and Consumption: When Saving Isn’t an Option

There are days I really am glad I live in Massachusetts. We read in the NY Times that, in many Republican-governed states, there is a movement to shift the tax burden from corporations, estates, and income to sales taxes. Yes, this is the same old Republican same-old, but, unfortunately, I’ve noticed a lot of economists like this idea:

Along the way these governors are taking small first steps into a debate over what kind of tax system most encourages growth in a 21st-century economy. In particular they are focusing attention on the idea, long championed by conservatives but accepted up to a point by economists of all stripes, that the economy would be better served by focusing taxation on consumption rather than on income.

The argument is that a sales tax encourages savings (which can then be used to drive investment–an argument debunked by James Livingstone in Against Thrift, by the way. But I digress). This assumes, however, that most people are choosing between non-essential goods and savings. I’m not sure that’s the case at all. For many people–and not just the poor–once you factor in higher housing prices, more rent extraction (all those damn fees), increasing insurance rates, as well as the 21st century accoutrements that keep you competitive in the job market (internet access, cell phone), most people are not saving anyway. This makes an increase in the sales tax yet another burden diminishing the quality of life for too many.

So, in the real world, this is simply knocking down the lower middle class and the poor even more, while giving the rich a tax cut.


Meanwhile, Governor Patrick, to his credit, is proposing the opposite to pay for much needed transportation and education programs: cutting the sales tax from 6.25% to 4.5% and raising the income tax by a percentage point (5.25% to 6.25%). Haven’t always been a huge Patrick fan, but he’s absolutely right about taxes.

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1 Response to States, Sales Taxes, and Consumption: When Saving Isn’t an Option

  1. Hamer says:

    These supply-siders are all over the place. The general argument I hear from supply siders is lower marginal taxes reduce production costs allowing the business to have more capital to reinvest, rinse and repeat. The argument for non-deficit govt spending is because govt borrowing competes with business for the available capital, thus driving up the cost of capital. This suggests the economy is fundamentally driven by access to capital and the current economy is somehow capital limited.
    Anyone who has a savings account or CD knows there are no shortages of capital and the cost of capital is at all time low. Savings rates are essentially 0%, if not net negative. We don’t need people to save more we need people to spend these piles of money sitting around. Now they want to pursue policies for greater savings, that only benefit the wealthiest? The biggest problem with the economy is all the capital is concentrated in a relatively small group of hands and they have no needs or wants left to spend it on. If this capital was in the hands of the masses it would all be cycling through the economy buying goods and services, rather than sitting in some billionaires account.
    To be fair, some of these ideas had merit when Reagan came to office and interest rates were 15%. At that point, the economy was truly limited by the cost of capital. But now the financial landscape is much different and closer to that of the great depression.
    The capitalist economy is supposed to be evolutionary exercises were businesses compete and thus drive efficiency. But, like most assays, you get what you select for, in this case profits. It didn’t take long for big businesses to realize competing with each other was a sucker’s game. The smart money saw it was much cheaper and easier to buy off government officials to protect their monopolies and stack the deck in their favor to generate profit. This can be seen in our efficient transportation system, where we drive around in monster 4 x 4 SUVs in urban jungles getting 6 miles to the gallon. An energy system that only depends on off-balance costs in the trillions in middle east wars and other costs to keep the oil flowing. A healthcare system that….you get the point.

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