30 July 2011

Consumption Redistribution

The Money Illusion | Scott Sumner | You can't redistribute income ...

... but you can and should redistribute consumption. Income really is the Achilles heel of the progressive movement. The income statistics simply don’t mean what progressives think they mean–something like “resources available for redistribution.” If you want something closer to resources available, you’d use consumption, or wage income. If you combine wage and capital income in the same aggregate, you are counting the same resources twice. [...]

A rich guy with lots of income has three choices, consumption, savings/investment, and charity. Let’s dispose of charity quickly [...] the real money here is obviously in the consumption/investment categories. You can redistribute consumption from the top 1% and give it to average Americans working in a car factory, or a Walmart. But it’s an illusion to think you can redistribute investment from the top 1%, so that average Americans can have a higher living standard. Where do people think the car factory comes from? Or the Walmart building? BTW, this has nothing to do with trickle-down economics, a theory I reject. This is simple accounting. Money put into investment projects isn’t available to boost living standards for the lower classes, unless you don’t do those investment projects.

So what’s available to be redistributed? Basically consumption (including a modest amount of vanity charity.) And that’s it. Now come back to me with the consumption distribution data, and let’s see what that looks like. I predict that consumption inequality is far lower than income inequality. And that consumption inequality is rising at a far slower rate than income inequality. I’m not saying there’s no problem, but it’s way smaller than the progressives imagine, as the data they use is pure nonsense. Consumption inequality is economic inequality. Income inequality is . . . well it’s meaningless gobbletygoop.
Amen. Just ... yes.

Money is what you have between giving up resources someone else values and getting some resources you value. I care how much stuff people get to have, not how much money.

The more I think about these sorts of issues, the more I conclude that we should have no income taxation at all and shift to all consumption taxes. Sumner says something similar in this post, but also says he would like some payroll taxes. Why is this? Is it as a tax on businesses consuming labor inputs? Don't we have incidence issues to deal with?

Update: My "Amen" is to the "can redistribute consumption," not necessarily to the "should redistribute consumption."  The difference between income and consumption, and the greater importance of the latter, is a very, very, very valuable point.  The "should" stuff is more tenuous.  Not wrong, but unproven and beyond the scope of the current discussion.

That said, if we are going to have redistribution — and as long as we have nation states populated by people, we are — I would much rather have it be along the sorts of lines Sumner advocates than the absurd disaster we have now.


  1. I think he discusses a "payroll tax" in the (implied) context of converting our current income tax system over to a payroll tax system. A payroll tax would definitionally be applied only to wage income, not investment income, and thus it walls itself off into the realm of consumption tax as he defines it.

  2. Hmmm. So it's a practical consideration? If you tax wages through a payroll tax it's politically and bureaucratically tougher to expand it to investment income in the future, compared to the current method of taxing wages? Makes some sense.

    I think I'd rather tax neither investment income nor wage income, and stick to consumption, but okay.