Consumption Tax Fantasies

Among the "all things all at once" fantasies about Trump's tariffs is the notion that they could replace income taxes as the primary funder of the government. I already dismantled that notion here, but it re-opened broader ideating about how to fund government functions. While I haven't seen the FairTax mentioned much lately, a more generalized consumption tax is on the lips of at least some political hobbyists.

Replacing income taxes with consumption taxes - taxing money spent rather than money earned - would produce many benefits:

• Simplicity. The Federal Tax Code is nearly 7000 pages long, and the compliance burden for individuals alone tallies $144B a year.

• Encourages savings and investment, making the economy stronger and more efficient. Money saved would be pre-tax, meaning there'd be more of it to grow over time via interest or investment gains.

• Greater awareness of how much money the government takes from earners. Today, people see the portion of their income taken by the tax man in the abstract, since it never lands in their pockets due to withholding. By contrast, every dime of consumption tax would be a dime paid during the transaction.

• Greater participation in funding the government. As it is now, more than half of Americans receive more from the government than they contribute, meaning that more than half of Americans don't actually contribute to keeping the country operating. A tax on purchases means everyone pays, everyone has skin in the game, and thus we might hope that there'd be greater demand for accountability and prudence.

• Reduced ability to tinker with the tax code.

These, especially the last, are why it'll never happen.

The tax code is thousands of pages of social engineering, favoritism, targeted punishment, and payoffs. While a consumption tax can also be a playground for rent-seekers and mischief-makers, the shenanigans aren't as easily executed. A consumption tax would sap lawmakers' ability to muck with our lives and pay off their donors via the tax code.

The tax prep industry would be obliterated, and it's an industry large enough to have its own lobbyists. Similarly, the IRS would be reduced to a fraction of its current size, and would fight tooth and nail to preserve itself.

Redistributionists and other big-government types claim the tax is regressive, impacting the lower earning brackets more. "Regressive" is, I rebut, in the eye of the beholder, and any effort at a more level playing field will look regressive in comparison to our extremely progressive and 'burden the few' income tax code. Some would make the consumption tax progressive, but we have seen that luxury taxes simply prompt the wealthy not to buy, so good luck with that.

Awareness is also undesirable. As we've seen with the DOGE revelations, government hates sunlight being shone onto its spending habits, and if people had to pay the government its vig every time they bought something, some who currently coast in ignorance might think to sharpen pitchforks. Trump got publicly angry when Amazon hinted at listing the tariff component of its prices on its website, probably because he knew that would undermine support for them. Imagine if everything you bought included a blatant "this is the government's share of what you're paying" line item? We already see the bite that sales tax takes. Imagine tripling that bite? FairTax advocates claim that 17% would cover all income tax revenue.

Replacing income tax with a consumption tax is an attractive idea, but it's a political non-starter. Worse, I can easily see how an effort to implement it would result in both income and consumption tax being levied on Americans. That's what European nations do via their VATs, that's probably the only way to break the truth of Hauser's Law, which reveals the limits of income taxation, and that'd be the beginning of a major downturn in American living standards.

So, attractive or not, pursuing it would be Quixotic at best and harmfully counterproductive at worst. Better to focus on simplifying and flattening the income tax code. But, even in that, I'm not gonna hold my breath.