Weisbach: Consumption Taxation is Still Superior to Income Taxation

Chicago's David Weisbach (with Joseph Bankman of Stanford) recently posted  a paper entitled "Consumption Taxation is Still Superior to Income Taxation" on SSRN.  The paper responds to a forthcoming Stanford Law Review article NYU's Daniel Shaviro criticizing consumption tax proposals. The abstract is below (an early version of Shaviro's paper is also available).   

Consumption Taxation is Still Superior to Income Taxation
DAVID A. WEISBACH  
University of Chicago Law School
JOSEPH BANKMAN
Stanford Law School

This essay responds to an article by Daniel Shaviro which argues in part that the failure of empirical assumptions behind the permanent income hypothesis undermines the case for preferring consumption taxation over income taxation. We consider each of Shaviro's arguments and conclude that none change the basic considerations in favor of consumption taxation in any significant way. Shaviro concludes that administrability and implementation concerns should be central to the choice of the tax base and that these concerns are likely to point to taxing consumption. We agree with this conclusion.

Comments

[Joan A. Conway]

Consumption tax - taxes those that spend, and income tax taxes those that earn.

If one earns money, but hoards it, or finds tax-free-opportunities for investment favorble to the capitalistic system, or otherwise, such as foreign investment a la California Governor, Arnold Schwarzenegger's portfolio, which usually is available to the wealthy, then the government benefits, if at all, indirectly with the earner's diversion of his investment(s).

I don't believe it really acts 'progressively' in most cases.

But those that spend include all of us; it is therefore 'regressive taxation' and falls heavily upon the middle-class and the poor disproportionately.

When one spends, one churns the economy. When one earns, one engages in the production of services or goods.

They are not exclusive concepts and though they intercept each other, spending does not elipse earning for the high income earners as a rule.

They seek investment opportunities with their surplus.

Where the middle-class usually has a smaller degree of surplus to investment and the poor has no surplus.