The means by which a government adjusts its level of spending in order to monitor and influence a nation’s economy it’s known as Fiscal policy. The federal government’s chief source of funds to cover its expenses is the income tax on individuals, which in 1999 brought 48% of total federal revenues. An argument can be made about the use of taxes as a means to influence the economy. Hence the reason most debates about income tax today as a macroeconomic policy revolve around three issues: (1) the appropriate overall level of taxation; (2) how graduate, or “progressive” the tax should be; and (3) the extent to which the tax should be used to promote social objectives. In fact, some economists-democrats and Republicans- have suggested that the economy would fare better if the government would eliminate the income tax altogether and replace it with a consumption tax, taxing people on what they spend rather than what they earn. As a result, we will take a look at consumption tax as a macroeconomic policy to stimulate the current U.S. economy.
In an interview conducted by a news journalist quoting Alan Greenspan, the Federal Reserve Chairman, pointing out the merits of a “consumption tax,” as well as the challenges of setting up such a tax. Greenspan added that “the consumption taxes could take the form of national retail sales taxes or a value-added tax, imposed on the increased value of a good or service at each stage of manufacture and distribution and ultimately passed on to the customer” (fox news online). A consumption tax—also known as an expenditures tax, consumed-income tax, or cash-flow tax—is a tax on what people spend instead of what they earn. Moreover, most of the political debate over a consumption tax has centered on whether the United States should adopt a value-added tax (VAT) similar to the ones that European countries have. While a VAT definitely is a tax on consumption, it is not the kind that most consumption-tax advocates prefer. What’s more, the debate over whether to add a VAT to the U.S. tax code has obscured the more basic issue of whether to tax income or consumption.
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Our contention here is to tax consumption as a means to simplify taxes and stimulate the U.S. economy. First, proponents of a consumption tax argue that it is superior to an income tax because it achieves what tax economists call “temporal neutrality.” A tax is “neutral” if it does not alter spending habits or behavior patterns and thus does not distort the allocation of resources. No tax is completely neutral, since taxing any activity will cause people to do less of it and more of other things. According to Al Ehrbar, “a properly constructed consumption tax can be neutral between consumption and savings.” He goes on to argue that, “it is because taxes fall only on income that is consumed, not on income that is saved” (www.econlib.org). Consequently, the results are that the tax wedge on saving is zero and the total saving in the economy is much closer to the optimal amount.
Furthermore, a broad range of studies conducted by Americans Volunteer for Fair Taxation Organization reported that “a consumption tax would have a significant positive effect on economic growth” (fairfaxvolunteer.org). They contended that since the FairTax (consumption tax) has a better impact on marginal tax rates and an arguably equivalent tax on capital investment, the FairTax has a more positive impact on economic growth. Moreover, because U.S. and foreign producers for overseas markets can produce goods and services tax-free under a consumption tax, the consumption tax has a relatively more positive impact on economic activity in the United States.
Finally, the most important thing about this taxation is that it taxes everyone who consumes even those who would otherwise not get tax because of certain life decisions such as loan-sharks and drug-dealers. As we all know, regardless of what is legal and not, organized crime produces the most revenue from all big businesses in the United States.
The amount of money that organized crime brings to the U.S. on an annual basis is unbelievably large. The government needs to be run in an organized and efficient manner. Presently, there are many different areas where our tax money is distributed. Our tax money goes to social security, state tax, federal tax, and much more. One thing that everybody is aware of is that different areas of our government have different demands. In conclusion, one of the biggest obstacles facing policymakers is deciding how much involvement the government should have in the economy. Indeed, there have been various degrees of interference by the government over the years. But for the most part, it is accepted that a degree of government involvement is necessary to sustain a vibrant economy, on which the economic well-being of the population depends. And consequently, while this concept of consumption taxation is a good one, it is not absolutely flawless. There are many wrinkles that indeed need to be ironed out. However, is a good starting block and something that could potentially change the country’s direction in terms of economic growth.
- Ehrbar, Al. An Online Library of Economics.