Why Consumption Taxes are Fine

In my last post, I said that it would be good if the US imposed a consumption tax such as the value-added tax (VAT). Critics generally say that these kinds of taxes are bad because they are “regressive.” While it is true that they are regressive under the way that word is generally used, that entire way of thinking about taxes is confused and muddled (as I’ve discussed previously in the case of the Nordics).

The standard response to those who raise the regressivity objection is to say that it just depends on how the proceeds of the consumption tax are spent. This is true, but only because it is true of all taxes. Even progressive taxes are only good if the proceeds are spent well. You could spend them on bad things and even in ways that make inequality worse.

The bigger problem with the regressivity objection, in my view, is that dividing taxes paid by income seems to obscure the more important point. What really matters in all of this is how many dollars you are scraping from poor, middle class, and rich people. Consumption taxes scrape more dollars from people who consume more and it is the rich who consume more.

According to the 2015 Consumer Expenditure Survey, the richest income quintile consumes an average of $110,424 while the poorest income quintile consumes an average of just $24,355.

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A 10 percent consumption tax would thus draw $2,435 from the poorest quintile and $11,042 from the richest quintile. Which is to say that such a tax draws 4.5 times as much money from the rich as the poor.

Whether the money drawn from the consumption tax ultimately reduces inequality does depend on how it is spent, but it is not like it needs to be spent in an especially “progressive” way, i.e. in a way that is heavily targeted towards the poor. Even if you spent this money in a way that benefited all quintiles equally, you’d still see a pretty significant net swing.

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Of course, this graph features a rather simplistic analysis as it assumes consumption does not change at all in response to the tax and benefit reforms. But even if the precise figures would be somewhat different in a real life implementation, the basic pattern of the graph above would still hold.

None of this is to say that a consumption tax is better than other taxes. The US has plenty of room to increase its tax level by upping income taxes, and so that’s a natural place to look. But to say consumption taxes are bad generally is pretty clearly mistaken.

The VAT Tax

A value-added tax (VAT) is a consumption tax. It is not meaningfully different from a sales tax except in the way that it is collected.

Donald Trump is reportedly considering a value-added tax as part of his tax plan. It seems unlikely that such a tax would pass into law given the current Congress. But it’s not a bad idea. In fact, it’s a good idea, which is the opposite of bad.

VATs are common throughout the rich, developed world. Here is how some selected countries break down on their VAT reliance in 2015:

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The US does not have a VAT, but it does have state and local sales taxes. If we bring those in to the picture (and include sales taxes also imposed by the other countries), the picture looks like this:

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No matter how you slice it, it is clear that the US has a lot of room to introduce something like a VAT on the national level. If used to raise revenue to fund good stuff, it would be a helpful complement to the taxes already in place.

Of course, the US lags many of these countries on just about every tax that you can think of. Thus, the US could expand its tax level through other mechanisms as well, including a large increase in income taxes.

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College Degrees for Child Care?

According to the Washington Post, DC is now requiring child care workers to have a college degree:

More than a decade after Washington, D.C., set out to create the most comprehensive public preschool system in the country, the city is directing its attention to overhauling the patchwork of programs that serve infants and toddlers.

The new regulations put the District at the forefront of a national effort to improve the quality of care and education for the youngest learners. City officials want to address an academic achievement gap between children from poor and middle-class families that research shows is already evident by the age of 18 months.

On Twitter, many prominent pundits panned the development, arguing that we shouldn’t make child care even more expensive than it already is. According to the plan’s critics, increasing the educational requirements for being a child carer will likely increase the labor costs associated with hiring child care workers, which will make child care out of reach for more families.

I don’t have a strong opinion on the question of whether child care workers should generally be more educated than they currently are. I know some countries (including Finland) do have various degree requirements for some child care workers. But I couldn’t say how necessary they are for things like child development and high-quality care.

However, even if you think child care workers shouldn’t be required to have a college degree, this particular argument offered by the Twitter critics is one that should be avoided.

Child care workers currently make some of the lowest wages in the country, $9.77 per hour and $20,320 per year at the median, according to the BLS. This level of compensation is unacceptably low and should be higher. After all, even moderate liberals support increasing the minimum wage to $12 per hour, implying a 23% increase in the median wages of child care workers.

To the extent that labor costs for child care make it hard for many families to afford child care, the appropriate response to that is child care subsidies. The labor costs of hiring teachers for K-12 would be intolerably high for many families to afford out of pocket. But we don’t respond to that by saying teachers should be hired without degrees and at very low wages. We respond to that by subsidizing the cost of K-12 education (to $0) so that families can afford it.

Because many families are headed by low-wage workers, you will never make child care affordable by holding down the wages of child care workers. No matter how low you hold them (assuming they are paid at least the minimum wage), there will always be a rather large swath of low-wage families who will not make enough to pay for child care out of their current income.

The question of appropriate credentials and training should be mostly separated from the question of individual affordability. If higher levels of credentials and training can be shown to improve quality substantially (whatever that might mean), then they should be imposed, and any increase in labor costs caused by that imposition should be absorbed through public subsidy.