What if we taxed what people spend, not what they earn? |
When people talk about tax fairness, the focus is almost always on income. How much the rich earn, how heavily that income should be taxed, and how to make sure lower earners are protected. But there is an older idea that is quietly starting to get attention again. What if taxes were based not on what people earn, but on what they spend?
This is more than a technical tweak. A progressive consumption tax – where people who spend more face higher effective rates – can behave very differently from a progressive income tax. And according to economic research I co-authored with fellow researcher Carlos da Costa based on life-cycle behaviour, the consequences may be surprisingly large.
At first glance, taxing income and taxing consumption might look similar. If you earn £40,000 and spend £30,000, you could imagine taxing either amount and raising similar revenue. But people do not live one year at a time. They earn very unevenly over their lives – lower wages early in their career, higher wages later – and they tend to save in good years to stabilise their spending in leaner ones.
This basic feature of real life makes the choice between taxing income or taxing consumption much more important than it seems.
Progressive income taxes increase the marginal tax rate (the percentage applied within someone’s highest tax........