Cochrane’s Remarks on the National Sales Tax

In an op-ed in the Wall Street Journal economist John H. Cochrane writes in support of the national sales tax about which I wrote the other day:

Something remarkable happened last month. On Jan. 9, Georgia Rep. Buddy Carter introduced the “Fair Tax” bill to the House of Representatives, and secured a promise of a floor vote. The bill eliminates the personal and corporate income tax, estate and gift tax, payroll (Social Security and Medicare) tax and the Internal Revenue Service. It replaces them with a single national sales tax. Business investment is exempt, so it is effectively a consumption tax. Each household would get a check each month, so that purchases up to the poverty line are effectively not taxed.

Mainstream media and Democrats instantly deplored the measure. Mother Jones said it would “turbocharge inequality.” Rep. Pramila Jayapal called it a “tax cut for the rich, period.” The New Republic asserted that consumption taxes are “always a dumb idea”—but presumably not in Europe, where 20% value-added taxes finance welfare states—and called it a “Republican dream to build a wealth aristocracy.”

Even the Journal’s editorial board disapproved, though mostly on politics rather than substance, admitting a consumption tax “might make sense” if Congress were “writing the tax code from scratch.” The board worried that we might end up with income and sales taxes, like Europe. And the tax change won’t pass, making it is a “masochistic vote” that it will “give Democrats a potent campaign issue.”

But our income and estate tax system is broken. It has high statutory rates with a Swiss cheese of exemptions, immense cost, unfairness and distortion. Former President Trump’s taxes are Exhibit A, no longer making headlines because we learned that he simply aggressively exploits the complex rules and deductions that Congress offers to wealthy politically connected real-estate investors.

A consumption tax, with none of the absurd complexity of our current taxes, is the answer. It funds the government with the least economic distortion. A consumption tax need not be regressive. It’s easy enough to exempt the first few thousand dollars of consumption, or add to the rebate.

More important, the progressivity of a whole tax and transfer system matters, not of a particular tax in isolation. If a flat consumption tax finances greater benefits to people of lesser means, the overall system could be more progressive than what we have now. A consumption tax would still finance food stamps, housing, Medicaid, and so forth. And it would be particularly efficient at raising revenue, meaning there would potentially be more to distribute—a point that has led some conservatives to object to a consumption tax.

If the legislation is as he describes it and as H. R. 25 seems to be, it goes a long way to satisfying the issues I raised in my post. Still to be added are the block grants to the states I mentioned and a clear statement of what consumption should be taxed. Does the federal government presently have a definition of “taxable property”? The definitions in the states of which I am aware satisfy my reservations about what consumption is to be taxed. I’m not sure the federal government has such a definition.

It should be clearly understood just how disruptive such a tax would be. Personal consumption expenditures are 70% of U. S. GDP, more than in any other developed country. Indeed, as I have noted in the past in that respect we are more like a developing country. As Dr. Cochrane intimates it is a step much needed but we should recognize how disruptive it will be.