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Consumption Tax?

Part of Gary Johnson’s tax reform plan is implementation of a national sales tax, what he calls a consumption tax, while he repeals all income tax.

However, a national sales tax is an income tax which not only reduces consumption but also savings and investment. As Rothbard states on pages 1161-1162 in Man, Economy, and State with Power and Market:

“It should be carefully noted that the general sales tax is a conspicuous example of failure to tax consumption.  It is commonly supposed that a sales tax penalizes consumption rather than income or capital.  But we find that the sales tax reduces, not just consumption, but the incomes of original factors.  The general sales tax is an income tax, albeit a rather haphazard one, since there is no way that its impact on income classes can be made uniform. Many “right-wing” economists have advocated general sales taxation, as opposed to income taxation, on the ground that the former taxes consumption but not savings-investment; many “left-wing” economists have opposed sales taxation for the same reason.  Both are mistaken; the sales tax is an income tax, though of more haphazard and uncertain incidence.  The major effect of the general sales tax will be that of the income tax: to reduce the consumption and the savings-investment of the taxpayers.  In fact, since, as we shall see, the income tax by its nature falls more heavily on savings-investment than on consumption, we reach the paradoxical and important conclusion that a tax on consumption will also fall more heavily on savings-investment, in its ultimate incidence.”

Published in Trey Smith