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Is there a way out of our federal budget morass? According to many economists, including Robert Frank,

By replacing federal income taxes with a steeply progressive consumption tax, the United States could erase the federal deficit, stimulate additional savings, pay for valuable public services and reduce overseas borrowing — all without requiring difficult sacrifices from taxpayers.

Here's how it would work:

Under such a tax, people would report not only their income but also their annual savings, as many already do under 401(k) plans and other retirement accounts. A family's annual consumption is simply the difference between its income and its annual savings. That amount, minus a standard deduction - say, $30,000 for a family of four - would be the family's taxable consumption. Rates would start low, like 10 percent. A family that earned $50,000 and saved $5,000 would thus have taxable consumption of $15,000. It would pay only $1,500 in tax. Under the current system of federal income taxes, this family would pay about $3,000 a year.

So that's a net savings to a family that consumes a relatively small amount. How, then, would the Federal budget deficit shrink?

Consider a family that spends $10 million a year and is deciding whether to add a $2 million wing to its mansion. If the top marginal tax rate on consumption were 100 percent, the project would cost $4 million. The additional tax payment would reduce the federal deficit by $2 million. Alternatively, the family could scale back, building only a $1 million addition. Then it would pay $1 million in additional tax and could deposit $2 million in savings. The federal deficit would fall by $1 million, and the additional savings would stimulate investment, promoting growth. Either way, the nation would come out ahead with no real sacrifice required of the wealthy family, because when all build larger houses, the result is merely to redefine what constitutes acceptable housing. With a consumption tax in place, most neighbors would also scale back the new wings on their mansions.

This also addresses the problem of externalities associated with excessive consumption, as outlined in Robert Frank's book, "Falling Behind: How Rising Inequality Harms the Middle Class." Frank argues that "keeping up with the Joneses" causes those in lower income brackets to spend beyond their means:

A progressive consumption tax would also reduce the growing financial pressures confronting middle-class families. Top earners, having received not only the greatest income gains over the last three decades but also substantial tax cuts, have been building larger houses simply because they have more money. Those houses have shifted the frame of reference for people with slightly lower incomes, leading them to build larger as well. The resulting expenditure cascade has affected families at all income levels.

The bottom line is that by taxing bling-bling, we'd be able to end the Federal Income Tax while balancing the budget and paying for basic infrastructure (in addition to education, health care, etc.).

Frank concludes:

Although the Bush tax cuts for the nation’s wealthiest families threaten American economic prosperity, they have done little for their ostensible beneficiaries. When the wealthy spend millions of dollars on ever-more-elaborate coming-of-age parties for their children, they only raise the bar that defines a special occasion. Even purely in terms of self-interest, they and their families would have fared much better if the money had been spent to repair aging bridges and inspect the cargo containers that enter the nation’s ports.

Amen!

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