More on alternative taxation systems…

I recently posted a Fortune magazine article where Bill Gates of Microsoft and Robert Frank of Cornell advocate a progressive consumption tax system to combat the widening wealth gap. A commentator on LinkedIn suggested I posted the article in jest. I assure you I did not. Allow me to explain.

I agree the “keeping up with the Joneses” mentality is flawed. However, Robert Reich (Aftershock) makes a valid point about the “broken bargain” in America. The bargain: labor leads to “an increase of purchasing power on the part of all the people (Eccles).” That bargain does appear to be broken. The income gap is a at record levels and expanding every day. I believe that fact is irrefutable (LA Times article, USA Today article, among others).

How to fix widening wealth inequality, or whether to fix it at all, is up for debate. Personally, I believe it needs fixing. Reich identifies economic and political threats of growing inequality. Economic: without a flourishing middle class America can not consume what it is capable of producing. This translates into low growth, recessions, bubbles & bursting, etc.

On the political side, we already see inequality-induced manifestations of instability: Occupy Wall Street, Tea Party extremism, protests about police killing unarmed black people (one person chocked to death over $6 in cigarette taxes?), cutting of pension payouts to retirees by 1/3, etc.

No one has a monopoly on the truth. No one. Bill Gates and Robert Frank believe a progressive consumption tax system will work. The LinkedIn commentator disagrees. I thought the progressive consumption tax was an interesting idea but I agree with the commentator: by itself a progressive consumption tax system is not a silver bullet. Reich believes in a reverse income tax system among other prescriptions. Others have suggested taxing wealth not income, flat income taxes, etc.

I presume very few believe the status quo (complicated loophole-ridden consumption and income tax system) leads to a flourishing middle class. The few that like the status quo are those (the 1%) that benefit the most from the status quo. See my Cadence of Finance presentation for more on the widening wealth gap, ineffectiveness of the current tax system, and other (possibly more important) contributing factors.

The widening inequality issue is complicated and will not be solved on LinkedIn nor this week. Hopefully authentic dialogue, where no one believes they have a monopoly on the truth, occurs in the right places so the middle class is restored in America. I agree with Reich on this one: America’s greatness is unsustainable without a flourishing middle class. The status quo is not working.

Ideas anyone?

-Dr. Moore

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