Friday, August 13, 2004

The Consumption Tax and the Current Account

Apparently our preznit has been making noise about eliminating income taxes and switching to a consumption tax. While Angry Bear has correctly pointed out that a switch to consumption tax from income tax would impose a huge double taxation burden on those currently with large reserves of savings (retirees) and thus be politically infeasible in the US, a consumption tax is still worth examining. Specifically, the question of the interaction of an income to consumption tax switch with the current account deficit (or possibly surplus in other theoretical locales).

Outside the possibility of default, no effects could be predicted by theory. The increase in the amount required for a borrower to achieve a given level of consumption due to the consumption tax would be offset in the borrower’s higher income due to elimination of income tax. However, there is a material difference when the possibility of default is introduced. With in the case of default under income tax, the creditor shares the burden with government in the form of unpaid tax on income the borrower was supposed to earn to pay off the loan. In the case of a consumption tax, the creditor has paid out the taxes owed on the consumption to the government immediately upon making the loan. The government loses no revenue by the default of the borrower as it would under income tax. This should cause an interest premium for a given amount of borrower consumption at a given level of risk.

The most obvious advantage of this would be to impose an implicit tariff on a current account deficit. There can also be an advantage for a government to ensure that its own expenditures are proportional to the expenditures of its constituents. In a small developing country, if a powerful native NGO receives a loan and begins to spend it on security equipment (that also happens to double as paramilitary gear), it could create a volatile fluctuation in the relative power of that NGO to the government. A consumption tax would mitigate this fluctuation by ensuring the government was able to spend (on a police force build-up) while these NGO’s are spending (on their private armies).

In addition, we must consider that a consumption tax in a period of national dissavings (current account deficit) acts like a loan to the government. If a revenue neutral switch is made from income to consumption tax during a time of dissavings, it probably would cause government deficits to widen as the current account returns to the long run average of zero net surplus/deficit.

That being said, I wouldn’t trust the Bush administration to implement a speed limit increase let alone overhaul the tax system. Someone should come out with an ad saying “Bush thought increasing taxes on seniors X billion dollars is an interesting idea that deserves to be explored seriously.”

Monday, August 02, 2004

What does "Just" mean when a Libertarian says it?

Randy Barnett still has questions about Libertarianism and international relations, so I'll reiterate my point in greater detail.

I said:

Clearly Libertarian society would not work if every individual could opt out of their duty to enforce the "perfect" rights of others while they are so fortunate that their own rights were not presently being violated.

The question of interventionism versus isolationism is really a question of morality versus amorality. A moral person believes that action is required in the presence of injustice, even if that injustice occurs to others. A person who does not believe that he must intervene in a situation where he believes rights are being violated in others is effectively amoral because to him justice is a narrow pursuit of self interest i.e. self defense is their only exercise of "morality".

The reflexivity of amoral libertarianism is no defense. A defense of individualistic libertarianism based on the fact that there are no problems in theory if everyone were to accept this philosophy could be equally applied to Christian or Socialist altruism, and thus is equally invalid.

If Libertarians were to adopt an amoral or anti-violent attitude, a pair of fascists could exterminate an entire country of amoral Libertarians by restricting their genocidal persecutions to minorities consisting of one individual at a time.

Thus, it is imperative that a Libertarian idea of legitimate violence must be extended to include not only self defense, but also defense against a disproportionate distribution of the costs associated with the presence of injustice. In the example above, each moral person could not justly self defend from the prodding of others to assist the person being persecuted by the two fascists, thus assisting in bringing the collective interest more into line with each individual's interests.

Since a sense of justice necessitates acting in the defense of others, and not exclusively for oneself, how could any separation of distance negate that obligation?