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Transaction Tax

June 4, 2008

Some people advocate the so-called “Consumption Tax” and it does sound good on the surface: “the more you spend and consume, the more you pay taxes”. However, in reading Coase’s famous 1937 article “The nature of the firm”, I stumbled upon this paragraph:

“…exchange transactions on a market and the same transactions organised within a firm are often treated differently by Governments or other bodies with regulatory powers. If we consider the operation of a sales tax, it is clear that it is a tax on market transactions and not on the same transactions organised within a firm. Now since these are alternative methods of “organisation” – by the price mechanism or by the entrepreneur – such a regulation would bring into existence firms which otherwise would have no raison d’être.”

So the danger, it would seem, of the Consumption Tax is that it would be highly distortionary for the process of economic organization, would discourage the creation of new markets, middlemen, arbitrageurs, Coasian deals, etc…It doesn’t sound good.

Update: I shouldn’t have said “some people advocate the so-called consumption tax…”, but “most economists do”. The point is that a consumption tax wouldn’t penalize savings (as opposed to income taxes) and it wouldn’t necessarily need to be implemented through a sales tax. Although, any tax system will distort something and will give governments a creepy amount of excuses for spying into our lives etc… etc…

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From → Economics, Planning, Taxes

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