First published on 1/23/23 in the Daily Take newsletter
Good morning! Hope your weekend went well, even with the surprise snow some of us got yesterday. Of course, it shouldn’t have been a surprise – it IS January, after all.
As for me, I’m still absorbing all that I learned at last week’s Kentucky League of Cities Academy for City Officials. (I am finance commissioner for a very small city in east Louisville.) It was two and a half days of information firehose, and exceptionally worthwhile.
But out of the thousands of words in that firehose, one sentence really caught my attention – politically, that is. It was during a discussion of taxes that cities can and cannot impose, and the speaker noted that cities are not allowed to impose their own sales taxes. But, he said, KLC was working on that in the legislature. “We have to stop taxing productivity and start taxing consumption.”
I had heard that phrase before, of course – it is the frame used by conservatives to justify getting rid of income taxes and paying for all of government through sales taxes. And, it’s a very effective frame; whenever I hear it, a part of me thinks “well yes, that makes sense.”
This weekend, though, I started thinking about that phrase, and realized it isn’t really accurate.
Income tax ≠ productivity tax
An income tax doesn’t tax productivity, it taxes income. For many working folks, the two words seem to be identical. I do this work, I make that income. But they are not identical.
Check out the late-night infomercials on “how to get rich.” None of them are about working harder, or being more “productive.” They are all about passive income of one kind or another: rental properties, investments, and so on. Taxing this sort of income isn’t taxing your productivity; it’s taxing your income.
And that’s one purpose of a progressive income tax – taxing not just everyday workers, but also persons who never have to do a “lick of work” the rest of their lives.
A tax that actually taxed productivity would be the value-added tax (VAT), which we don’t have in this country. We also don’t have a true consumption tax, which would tax you based on the difference between the money you took in and what was left of it at the end of the year – in other words, all that you consumed.
So, as good as that frame sounds, it doesn’t match reality. Unfortunately, I haven’t been able to think of a good alternate frame. If you come up with one, let me know so I can share it.
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