Optimising Growth: Theorem of Proper Taxation and Why We Should Prefer Consumption Taxes Over Income Taxes

A. The Theorem of Proper Taxation

The Theorem of Proper Taxation consists of four assertions:

1) The purpose of national taxation is to control inflation.

2) The only time money causes inflation is when it is spent.

3) Therefore, the only time nationwide taxes should affect is when money is spent.

4) Ergo — consumption taxes are far preferable to income taxes.

B. Every government has an obligation to organise its methods to the maximum advantage of its citizens. Tax policy can affect growth and should be organized to promote the well-being of the citizens.

C. Arguments

1) It can be argued that income tax also reduces inflation by lowering demand. However:

- Income tax deprives the owner of the income of that capital before it is necessary. This may diminish investment as well, as the income earner has less to invest in stocks and bonds.

- Income tax heinously inflicts accountancy on every income earner, not just public corporations, which must account.

- Wholly unnecessary inflictions and deprivations are bad policy.

- Income tax prematurely reduces demand. Economies are cyclical, sometimes too hot, sometimes too cold. When they are too hot, interest rates can be raised. When they are too cold, it can be a struggle to raise demand. A consumption tax is a dynamic easily adjusted entity that can be used to control demand as needed.

- Premature capital deprivation and unnecessary demand reduction may reduce GDP growth.

2) Some might argue that Income Tax has value because it is an instrument of “Progressivity”, in that, those who earn more pay a larger percentage of the income.

Assuming that is a valid goal, you would also have to assert that Income Tax is the optimal instrument to effect that progressivity. Attempting to make that assertion would likely only reveal a lack of imagination. After all, consumption taxes can be progressive as well. Other tools can also implement progressivity.

If you attempt too many roles for one tool, you may end up with only moderate success in each role. Better to have economic policies optimise the economy and separate progressive policies optimise progressivity.

3) The Theorem of Proper Taxation only applies to fully sovereign countries with their own currency, because they can print all the money they need and are restrained only by inflation.

Any nation that does not have its own currency must tax to fund, not just control inflation. Such nations are not fully sovereign and, while they may have the government and military of a nation, they have the economy of a province. While these subsovereign entities will still benefit from taxing spending, they suffer the funding constraints of a province while also dealing with a far off disinterested central bank — not a good bargain unless well engineered.)

4) Some might argue that profits can be moved offshore to escape consumption taxes. This is true, which is why a mechanism is needed to capture a portion of the capital moved offshore in a way that supports the economy. That mechanism is a Balanced Capital Transfer Law, described here:

https://trillionstrillions.medium.com/promoting-growth-how-to-support-domestic-industries-and-control-capital-flows-with-capital-22c3c74cb552

In summary, if we abolish income taxes and tax only consumption and capital exports we will have a more robust economy.

References:

https://scholar.harvard.edu/files/mankiw/files/optimal_taxation_in_theory.pdf