When in his Monday night debate with his Democratic challengers Governor Ted Kulongoski made reference to the state looking toward a "consumption tax" of some sort to help stabilize the state's tax system, a couple of reads on his meaning were possible.
One, which initially we were inclined to accept, relies on the formal view of the term "consumption tax." In its proper sense, a consumption tax is not the same thing as a sales tax; it is a larger category which can include the sales tax but also many other options. A reasonably definition from an economics web site:
A consumption tax—also known as an expenditures tax, consumed-income tax, or cash-flow tax—is a tax on what people spend instead of what they earn. A VAT does that in the same way that a sales tax does. But a true consumption-tax system would entail something much different from simply layering a VAT on top of the current income tax. One way to think of a consumption-tax system is simply as an income tax that allows unlimited deductions for savings and that taxes all withdrawals from savings, much like independent retirement accounts (IRAs) . . .
The theoretical case for a consumption tax actually is a case against the income tax. Champions of a consumption tax argue that the income tax does enormous long-term damage to the economy because it penalizes thrift by taxing away part of the return to saving. This tax wedge results in less saving, less investment, less innovation, and lower living standards than we would enjoy without a tax on saving. In other words, the income tax creates a bias in favor of current consumption at the expense of saving and future consumption.
There are value-added taxes. There are taxes on specific products. There are service taxes. All sorts of options, those and many more, in addition to the conventional sales tax, lie within the sphere of consumption taxes.
So what did Kulongoski mean? (more…)