Regressive, distortionary pseudo-consumption taxation

A lot of tax policy folks across the political spectrum see great potential advantages in consumption taxation.  By excluding the normal risk-free return to saving (which is all that gets distinctively excluded, compared to an income tax, in theoretical textbook models), it can achieve greater efficiency and economic growth. Plus, it is more readily made neutral between assets, because expensing for everything is easier to figure out than correct economic cost recovery for everything. Plus, it needn't have a realization problem (although one does have the problem of rate changes that can destroy inter-temporal neutrality if anticipated).

But many people think that a flat rate consumption tax would be too regressive. This is not just people like me. Hall and Rabushka weren't exactly raging leftists, and they devised a progressive flat tax, made progressive despite the name due to its zero bracket.

Lots of work since then on progressive consumption taxation has established that it has intriguing possibilities. E.g., this could be a consumed income tax in which traditional IRA treatment extends to all saving and dissaving. Or it could be the X-tax, which (depending on the exact model) can be thought of as Hall and Rabushka plus a more progressive rate structure.

I myself feel that rising wealth inequality at the top means that something else has to be done too. This might involve sufficiently effective inheritance taxation. But all that is a topic for another day.

This brings me to the House Republican bill. This would move the tax system closer to a consumption model. It also still has progressive rates. Yet in some ways it is best thought of as regressive, distortionary, fake consumption taxation with huge gouged-out holes in the base that mainly accrue to the super-rich, in effect permitting them to exempt a lot of their consumption from ever being taxed, at least at the top rate.

For example, there's a move towards expensing, but also enough retention of interest deductibility to mix-and-match consumption and income tax models in a wholly inappropriate way that can result in net subsidies for debt-financed investment.

And then there's the ludicrous 25% rate for business owners who happen to be in industries that the House Republicans like, which will cost an estimated $448 billion over ten years - nearly one-third of the entire net revenue loss. That is clearly a very highly motivated provision, but not by any plausible tax policy rationale.

Even less defensible is the movement towards eliminating the estate and gift tax without addressing the tax-free step-up in basis at death. Despite what remains of entity-level corporate taxation, this means that a huge proportion of the consumption enjoyed by the self-made super-rich (such as by borrowing against appreciated assets) will be permanently exempted from taxation of any kind. This would NOT happen under any well-designed and genuine consumption tax.

So we get enhanced inter-asset distortions and inefficiency (such as from inducing massive tax planning) in various respects, plus potentially a steeply falling lifetime net tax rate as one moves from the bottom to the top of the top 1 percent.