Robert Frank's solution: Tax what we spend
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Like evenly matched sumo wrestlers, the Republican Congress and the Obama White House have argued endlessly over taxing the wealthy, without ever moving off dead center.
In one recent speech, President Barack Obama complained about Congressional rejection of a plan that would have paid for new public-sector workers with a half-percent surcharge on incomes of more than $1 million.
"Most people I know who make more than $1 million a year would make that contribution willingly," the president said. "They're patriots. They want to see America strong. But all the Republicans in the Senate, 100 percent, voted no."
House Speaker John Boehner often leads the countercharge. "The president says that the bulk of these tax increases would only impact the rich," Mr. Boehner said in one recent speech. "But the fact remains that these tax increases will kill American jobs."
In the midst of this standoff, Cornell University's Robert Frank thinks he has a way around the impasse.
It's called a progressive consumption tax, and he says it would be the smart way to strengthen the middle class, restrain excessive spending by the rich and replace the loophole-riddled income tax.
"The way it would work," the economist said in an interview in Ithaca, N.Y., earlier this year, "is that you report your income to the IRS the same as you do now, and then you report how much you saved that year, and the difference between those two numbers is how much you spent.
"You can then take off a big standard deduction, say $30,000 for a family of four, and so income, minus savings, minus $30,000, that's what you pay tax on." Under his plan, the tax rates would start out low for those in lower spending brackets and then climb gradually until spending above $1 million a year might be taxed at 100 percent.
He has heard many critics say that no one would support a 100 percent tax rate on any level of income -- but he's not so sure.
First, he noted, that rate would apply only to the dollars spent above a very high threshold. And second, he contended, as long as everyone in that income bracket is treated the same, it means wealthy Americans would all be in the same boat.
"Once consumption gets above $1 million to $3 million a year, it's not about absolute spending anymore, it's about relative spending -- how big a mansion do you need, how long a yacht do you need, how big a coming-of-age party do you need for your kid? So you have a very steep marginal tax rate on dollars devoted to such things."
Is it possible for such a major overhaul of the tax code to take place in today's partisan climate?
Mr. Frank doesn't know, but he noted that after he wrote an article promoting the consumption tax in 1997, "a week later I got a nice letter from Milton Friedman," a champion of conservative "supply side" economics. In the letter, Mr. Friedman wrote that "he didn't believe the government needed to be spending more money, but if we needed someday to raise more money, he felt the progressive consumption tax would be the way to do it."
In fact, the consumption tax idea was sponsored in Congress in 1995 by two leading senators, Democrat Sam Nunn of Georgia and Republican Pete Domenici of New Mexico, who called it the Unlimited Savings Allowance Tax System, or USA Tax.
In a recent Washington Post essay, John Endean, president of the American Business Conference, said it is time to consider that plan again.
Individuals would be rewarded for saving, Mr. Endean wrote, and businesses would be rewarded for investments, and as an additional benefit, it "would render obsolete the tax-shelter industry while giving all taxpayers, including those of modest means, a financial advantage now enjoyed only by those able to hire accountants to search out loopholes."
As to how wealthy Americans might view the tax, Mr. Frank used New York City as an example.
Because Manhattan is so expensive, he said, billionaires who want to reside there "don't live in 40,000-square-foot mansions, because in Manhattan, 10,000 square feet seems huge."
"The rich will build smaller when it gets more expensive, and if they all build smaller, nobody loses anything, and the tax revenue is 'free money.' "
First Published December 11, 2011 12:00 am