Bush Moves Towards Consumption Taxation

Worth A Look, Taxation, Frontier Centre

As the Bush Administration moves towards tax reform that would tax consumption instead of income, many liberals are opposing it because they claim it would benefit the rich too much.

Liberals make the mistake of assuming that those who are poor today will always be poor, and those who are rich will always be rich. This is really their principal justification for income and wealth redistribution policies. However, new data reported in the latest Economic Report of the President show that there is substantial mobility up and down the income ladder.

The Council of Economic Advisers looked at what rate taxpayers faced in 1987 and again in 1996.

  • Two-thirds of those in the lowest tax bracket the first year were in a higher bracket 10 years later, and more than half of those in the top tax bracket were in a lower bracket
  • .

  • In other words, the bulk of those who would be considered poor in the first instance were much better off a decade later—a few even became rich, going all the way from the bottom tax bracket to the top bracket.
  • Simultaneously, most of those who would be considered rich weren’t after a few years—5 percent fell all the way from the top tax bracket to the bottom bracket.
  • The high degree of income mobility in American society is a key reason why many of the poor and middle class oppose high taxes on the rich—70 percent of Americans favor abolishing the estate tax, for example, even though it affects just 2 percent of the population. Implicitly, they know that they or their children might one day be rich and have to pay this tax. They also know that poor people don’t create jobs; rich people do.

    Adopting a consumption-based tax system will help more Americans become rich. That is another reason why liberals oppose it.