Seniors Stand in Way of Both Entitlement and Tax Reform

A consumption tax could gain support of both liberals and conservatives if seniors weren't so opposed to it.


It's common knowledge that the politics of reforming our entitlement system are extremely difficult because seniors are susceptible to demagoguery from both parties.

What I've failed to appreciate is that they are, potentially, a stumbling block to significant tax reform, too.

[Vote: Do the Rich Pay Enough in Taxes?]

To see what I mean, consider the politics of consumption taxation, whose variants include a national sales tax and a value-added tax, or VAT. The idea of taxing consumption rather than income has proponents on both sides of the political spectrum; it's seen as a salutary alternative to what conservatives like (either a regressive flat tax or trickle-down theory) and what liberals like (even higher taxes on the wealthy and corporations).

The idea of enacting some kind of consumption tax enjoys a particularly receptive audience with disaffected moderate conservatives like the Two Davids (Brooks and Frum). My sense from reading these guys is that, privately, they abhor the GOP's opposition to new revenues even more than they let on in public. But old-fashioned liberalism is as unappealing to them as it was in the 1980s. The third way-ness of the consumption tax offers a way around the impasse.

[Peter Roff: Obama's Tax Plan Fails Basic Math]

And so they're dispirited at the retrenchment of both sides. Here is Frum in response to President Obama's deficit-reduction package:

Government needs additional revenue, but it should not be raising taxes on work, saving and investment. Instead of the taxes in the ACA and in the new Obama deficit plan, we should be planning carbon taxes and value-added taxes: consumption taxes, not production taxes. ... Back of the envelope: a 6% VAT would produce as much revenue as flat-out confiscation of 100% of the earnings of everyone who makes more than $1 million a year.

And here is Brooks:

That means when he talks about raising revenue, which he is right to do, he can't really talk about anything substantive. He can't tax gasoline. He can't tax consumption. He can't do a comprehensive tax reform. He has to restrict his tax policy changes to the top 2 percent, and to get any real revenue he's got to hit them in every which way.

I appreciate the desire to think constructively, to cling to sanity. But I'm not sure the Davids have reckoned with how difficult it would be to sell a consumption tax.

[See a collection of political cartoons on the budget and deficit.]

The problematical nature of such a tax was identified long ago by, among other economists, a certain Lawrence H. Summers, in a 1981 paper for the American Economic Review entitled "Capital Taxation and Accumulation: A Life Cycle Growth Model."

The paper is not freely available online, but it appears to have been cited a number of times over the years (see here and here, for instance). As I understand it, Summers' argument was that a consumption tax would benefit everyone in the long run—but in the short run, it posed an intergenerational conflict.

Put simply, seniors would cry foul, and with justification: Why should they, who've earned and saved and paid taxes for decades under the old income-based system, suddenly have to start paying new taxes on goods they consume via retirement income?

At the end of the day, then, we'd have the same problem generating new revenue as we do reforming entitlements: Selling the changes to skeptical and well-organized senior voters.