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This is a question for all of the folks out there that ridicule the supply-siders.

What would happen to US government spending and the size of US government agencies if we moved from a situation where those doing the spending faced zero marginal tax rates (as they do now) to one where every additional dollar they spent beyond some amount was “taxed” at 30%? Who is the taxing authority? I don’t know, perhaps the United Nations or some other “One World, One Planet” kind of state that so many people fantasize about.

I can’t even imagine what my next question would be, could you?

4 Responses to “Another Innocent Question”

  1. Harry says:

    Wintercow,

    Jude Wanniski and other supply-siders have argued for a consumption tax, in part because it would encourage saving and investment.

    I’m not ruling this out as a bad idea, but I’ve got reservations about it:

    First, it would not be simple, since rent-seeking groups would work to get whatever they sell exempt. In Pennsylvania, for example, swim suits are subject to sales taxes, but boxer shorts are not.

    Second, such an arrangement would screw everybody who has managed to save money after paying income and other previous taxes already, and now want to buy a car that gets 28 miles or less per gallon on the highway, and has to pay additional federal sales taxes on top of our existing state sales taxes.

    Third, I’d hate to be part of the group that has their goods or services taxed — these would include investment advisers, jewelers, doctors (gross receipts tax for doctors), and appliance purveyors. (Excluded from taxation would be legal fees, community service organizers, all of public education, and political consultants.

    Fourth, I can’t think of a single example of any new tax that has replaced an old tax, but when you consult your vast database at the U of R, maybe you can find me one.

    Oh, and I’m sure Speedmaster’s services would be taxed.

  2. Rod says:

    Here I was thinking you were referring to “taxing” spending — government spending — to punish the government’s own consumption.

    Say, for example, that Ed Rendell wants to spend 40 percent more than he did when he first took office. If his budget exceeded a certain level (perhaps beyond the rate of inflation), thirty percent of that new spending is automatically “taxed” and returned to the people. This would all make a great calculus problem.

    Other ideas for penalizing public officials for the sin of theft:

    1. Make their salaries vary inversely with constant-dollar spending — this one is pretty popular already.

    2. An electric grid, like the kind they use on lab animals in Psych 301 (Experimental Psychology). Then food pellets for good behavior. This stuff really works.

  3. jb says:

    A progressive tax on goverment, levied by taxpayers. It’s a reverse tax… very interesting idea, and one that could be “sold” to voters … what would the equilibrium level of spending look like?

  4. azmyth says:

    This is a fascinating thought experiment. Since government agents don’t personally pay the tax, they would not have an incentive to change their behavior. The government would try to tax people at even higher rate to pay for the outside tax, which would lower demand for government services.

    If spending is fairly independent from voter pressure or if demand for government services is inelastic, the government will simply raise taxes to maintain spending. If voters have strong control of government and are sensitive to tax rates, perhaps politicians would lower government expenditure significantly and substitute private solutions.

    I lean towards the former, but I think a high enough tax rate would convince moderate politicians to go for more free-market solutions to societal problems.

    Good question!

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