Get Nothing Card

According to Greenspan, a national sales tax would increase economic growth. At the same time, such a tax would increase savings, hence investment - again, according to Greenspan. Now that is a wonderful magic wand.

Let's suppose the sales tax increases national savings. If so, it might indeed stimulate investment. But, there are two questions: investment in what? savings of what? As usual, there are lots of ideas that sound good, but the devil is in the details. The usual explanation - by Libertarians such as Dr Greenspan - is that a national sales tax (NST) or value-added tax (VAT)¹ will reduce consumption because purchase prices will be higher. If fewer purchases are made, people would save the money not spent - presumably leaving it in the bank. Most investments are made by financial institutions, which aggregate the money individuals park there. Those who control the financial institutions and a few wealthy individuals are the usually ones who control direct investment. If those investments are made a certain way, they might promote economic growth (but, there's no guarantee). The libertarian argument is that all those things will go right, so the economy grows. People get less of what they want immediately, but, so say the Libertarians, they do get it sooner or later. Apparently, the model Libertarians have in mind is the notoriously thrifty Scotch household. (Or, it's like being a citizen living under Stalin's industrialization policies or Mao's Great Leap Forward.)

Therein is the rub, because Scotch households are famously thrifty on account of their less well known poverty. That is something the perennially poor learn: thrift. The fact is the VAT would raise prices higher than the NST, and the NST would have to be at least 25% to make up most of a repealed income tax. A 25% price increase would probably kill most ordinary household purchases. For example, teenagers would have to go back to hand-me-down clothes, not a new outfit every year. Those most affected by such an increase would be, of course, those making the least. Generally, the lowest 50% of incomes would find their purchasing power severely limited by such a tax. Consumption taxes would amount to a huge tax increase and burden on the lowest 50-60% of the population. That's because at least half of lower income household expenses involve things that would be taxed, amounting to a tax increase of 12-15% relative to income. Assuming income is from wages, that would raise Federal taxes paid to about 30% of income plus another 7-8% for Social Security and Medicare. With State and local taxes, lower income households would pay taxes amounting to 50-60% of income.

Meanwhile, household consumption is not a large fraction of annual expenses for most wealthy families - in this case, those in the top 1/3 of incomes. So, there would be little incentive for rich to save and invest on account of the tax. Further, the NST or VAT would replace income taxes these families now pay. Generally, the higher the income, the less tax would be paid, which is why consumption taxes are regressive. For those making over $200,000 (the top 1%), the effect of eliminating income (and other taxes) in favor of consumption taxes would be a huge tax windfall - a 90% or more tax reduction. With the near abolition of Estate, dividend and capital gains taxes, wealthy families will pay far less than 5% of their income in all taxes.

While my explanation may not be as slick as some economist could make it, the point should be clear: imposing a consumption tax - VAT or NST - in place of the income tax amounts to a massive shift of taxation from the rich to the poor. This replicates the status quo ante. That's the way things used to be in France before the Revolution.

There are several questions one must ask about the consumption tax proposal. Proponents assume that spending is an alternative to saving, which is probably true of the wealthy. (Of course, most proponents are wealthy.) But, where are the poor and lower classes that have any money to save? Less than 1% of all equities (stocks and bonds) are owned by people with incomes under $50,000. The evidence is that people are running up credit card bills they cannot pay, because they must do so to live. The United States is becoming a giant company town, where everyone is ensnared by the company store.

If the consumption tax reduces spending, as argued, then it would seem a lot of businesses are going to suffer for want of sales. That leads to lower employment, and even less spending. Where that leads, of course, is to a recession; maybe even a Depression. The proposal is reminiscent of Hoover's attempt to reduce Federal spending in the face of economic collapse. Hoover's theory didn't work, but it was part of the same castor oil prescription conservatives would have us swallow today.

Frankly, we really have to question the intentions and motives behind a consumption tax. Since Greenspan is making the proposal, we need to go back to the 1983 Social Security Commission. At the time, there was engendered another "crisis" in Social Security funding which had to be resolved. Pres. Ronald Reagan appointed the Commissioners, with Alan Greenspan as chair. What the Commission did was recommend an increase in the retirement age, and the Social Security tax, which Congress adopted. The net effect was to create a huge Social Security tax surplus at a time when the Reagan administration was cutting taxes on the wealthy. This, following the most severe recession since 1930-33, in 1982.

Retrospectively, the 1983 Social Security Commission was the front man for a huge transfer of taxes from the wealthy to the poor. That is what the 1983 reform really accomplished. Some of the tax reduction for the wealthy few was undone in 1993 by the famous Clinton tax increase, but the increased Social Security tax stuck. The result has been that Social Security has received far more than it pays out since the "reform." Currently, the difference is $150 billion a year, which is immediately "loaned" to the Federal government's general fund (to be spent on whatever). Thus, the 1983 Social Security reform was effectively a tax increase on working people - those receiving the lowest 60% of wages - for which they will not receive any benefit until about 2018.

If we assume the average age of death to be about 75, or even 80, those, like myself, now over 60 have paid the extra tax for two full decades, but are likely to receive little or no benefit from it. We've just been ripped off (again). The presumed beneficiaries will be Baby Boomers born from 1946 - 1964. [Of course, the whole point of the Bandit's private accounts is avoid having to pay those lucky people out of the IOU's the general fund gave to Social Security.]

Conservatives are going crazy making proposals to change taxation and benefits. Flat Tax. Sales Tax. VAT Tax. No Tax. If you analyze their proposals you will see they all come down to these essentials:

What you should see and hear in all this, is the earnest wish of the upper classes to have their high Estate and nobility recognized and preserved in law (and concrete). This is class warfare, the warfare of the few against the many.

Don't be deceived. You are the Schmoo assigned to target practice, special duty target.