Consumption Tax: Coming to the USA

One of the key problems facing the United States economy is a massive fiscal budget deficit. The federal deficit is now estimated to be more than 11% of GDP, the highest since the second world war. Spending on the wars in Iraq and Afghanistan, and a propensity to cut income taxes by the previous administration are key causes of the blowout in the deficit. A wide range of government expenditure programs, including government stimulus programs, and bailouts to combat the financial crisis, have resulted in significant additional expenditure, and proposed new programs such as health care will require further expenditure. This will only add to the federal deficit, unless new forms of revenue are found.

The only solution is to increase taxes. Unfortunately many Americans, particularly those on the right of the political spectrum, resist tax increases. However, a tax levied on consumption rather than income would likely be more palatable to those opposing tax increases. A tax on expenditure rather than income encourages savings, and leaves the tax payer with the option of reducing tax by reducing expenditure.

A tax on all consumption  without exemptions, such as the goods and services (GST) tax in Australia is the best option. All expenditure is taxed, and existing taxes  on consumption (such as sales tax on fuel), which distort consumer behavior can be eliminated, and rolled into the expenditure tax system. The downside of this tax is that it is regressive, and tends to tax lower income earners at a higher proportion of their income. However, targeted expenditure programs and income tax exemptions at the lower end, combined with increased marginal income taxes at the upper end, can offset the regressive nature of the tax.

Consumption taxes are used very effectively to raise revenue in Australia, Canada, Europe, and Japan and would likely be a very appropriate tax given the size of the current federal deficit in the United States. There is no reason that some of the states such as California with significant budget deficits could not also institute a consumption tax to reduce the deficit.

Watch this one, a consumption tax is coming to the USA.