A Different Kind of Millionaire Tax

Taxes discourage behavior. But the announcement of new taxes can theoretically stimulate that behavior. For example, if I tell my roommate that starting today I'm going to make him pay me one dollar for every box of cereal he buys (maybe I'm sick of all the Special K crumbs in the living room), he'll buy less cereal. But if I tell him I'm going to start charging that tax tomorrow, he'll hit up CVS immediately to pick up ten boxes of Special K before the tax starts.

That's part of the thinking behind Robert Frank's crazy idea to tax high levels of consumption. In his millionaire tax plan, the top one percent of the country making more than $1 million per household would be subject to a tax if they spend more than $500,000 a year. Spending would be calculated as the difference between income and savings as reported to the IRS. Announce the imminent surtax now and rich people accelerate their spending to beat the tax. More spending means more employer profits, which means more hires. If you make the surtax counter-cyclical -- that is, say it will go into effect when unemployment dips below 6 percent and sunsets when unemployment rises above 7 percent again -- it could theoretically juice spending when the economy needs a jolt of demand and tame spending when the economy is running hot.

What's not to like? Joe Rosenberg of the Urban Institute, who's done research on the implications of a value added tax (which is like a national consumption tax, except it would affect all American spenders) says he doesn't think this plan is particularly feasible. "It seems almost impossible to administer," Rosenberg said. "It's basically trying to estimate consumption from income minus savings but that's not workable for a lot of reasons. For one, not all income shows up on the tax reform, like unrealized capital gains."

Broadly what Frank is calling for is a progressive tax on consumption. Advocates for a VAT acknowledge that a broad-based consumption tax is naturally regressive because it taxes a greater percent of wages from the poor, who spend rather than save more of their earnings. That's why most VAT plans include tax rebates to offset the impact of higher prices on low-income families. Frank's plan is like a VAT for rich people. But whereas a VAT is collected at various stages along the production chain by taxing the "value added" at each stage, a millionaire consumption tax on spending higher than $500,000 can only be implementing after taxes and savings have been reported. Gaming would be rampant. In sum, I agree with Frank that the United States should look at a consumption tax to increase tax revenue and offset other tax cuts like corporate income, but I also agree with Rosenberg's opinion that a millionaire tax is the wrong strategy to backdoor our way into taxing consumption.