Murray Rothbard first published “The Consumption Tax: A Critique” in the “Review of Austrian Economics,” but it’s more than a critique of the consumption tax, it covers virtually all forms of taxation. Rather than summarize his piece, I simply want to highlight a few of the points he makes related to tax collection, because the entire article is well worth reading and I simply can’t do it justice in my own form.
He notes that it was Milton Friedman who helped institute the withholding tax during WWII, something which is apparently not too well known in some libertarian circles. The Libertarian party’s nominee, Gary Johnson, was unaware of this fact until recently, when he was interviewed by Robert Wenzel.
An important point to consider in the debate over which kind of tax is better or worse is the subjective valuations that individuals place on their payments and interactions with the Feds. For some people they would much prefer to pay as little as possible, but others may not mind giving up more of their money if it’s done through a more simplified process.
Perhaps the biggest point that I took from this article was the insight that income taxes and consumption taxes are essentially the same in terms of how they impact savings and consumption. In the case of an income tax it must reduce one’s net consumption assuming one maintains their consumption and savings ratios. For example, if Mr. Jones earns $100,000 a year and spends ninety percent of his income he’d save $10,000. But if he were taxed at ten percent he’d only be able to consume some $81,000, while saving $9,000. Clearly consumption has been impacted in this case.
As for a consumption tax, it would also impact saving, whatever consumption tax (Flat Tax, Fair Tax, etc.) advocates might say. Their argument is essentially that an income tax has an adverse impact on saving, but under a flat sales tax people would be incentivized to save more, and without it being impacted by tax policy. However, since saving is merely the act of delaying consumption, at one point or another savings will be impacted. And what we’re left with is that: “An income tax does not penalize saving per se any more than it penalizes consumption.”
But going back to the promotion of saving, Rothbard notes that that too is not without problems for so-called free market types who promote a consumption tax. It’s true that saving is a good thing in general, for it allows the formation of capital, which helps to increase output and therefore the standard of living. But what a good economist must recognize is that individuals make their own decisions about saving versus consumption as a matter of their time preference. Those with a higher time preference tend to value immediate goods over future goods, and will save less. Using the tax code to engineer their preferences subverts their will and imposes that of the central planner, hardly something compatible with the free market. As Rothbard puts it, “To say […] that only consumption should be taxed and not savings is to challenge the voluntary preferences and choices of individuals on the free market….”
Another issue that Rothbard raises in regards to excise taxes, is that such methods of revenue generation cannot be passed onto consumers as is often suggested. The reason this is so is due to the Austrian contribution to price theory. According to the subjective theory of value, the market determines the price of a good based on supply and demand together the preferences of the individuals involved. This means that firms set their prices as high as the market will allow the items to clear, and raising them even slightly to cover the tax will tend to drive consumers to substitute goods.
He notes that it would be possible over time to raise prices as new stock becomes available, but this not something which can be accomplished easily or overnight. So while it’s true that firms can try to pass taxes onto their clients, there is a natural limit to this and therefore businesses will absorb the majority of any excise tax.
Rothbard also takes to task those conservatives and supply-siders who advocate “revenue neutral” tax schemes or suggest that a certain tax rate or method will increase tax receipts. Neither of these should be advocated by anyone claiming to reduce the size and scope of government. Suggesting the government should not lose any revenue after a tax reform proves that nothing really gets reformed except the extent to which the taxpayers are robbed by the State. And to that point, no one can claim to want to reign in government while simultaneously promoting a tax that increases government funding. Because, as Rothbard observes: “the real problem and proper focus should be on the amount that any given individual is obliged to surrender to the State.”