Arnold Kling is a respected libertarian economist who has worked at the Cato Institute. In a post for TCS Daily titled Bleeding-Heart Libertarianism, Kling makes an argument for a negative consumption tax for all individuals. The thesis is simple and elegent, but does have some problems. I highlight five major ones that come to mind.
- Fraud: If everyone poor people received a very large lump sum transfer (on the order of $20,000) for some individuals, there would be large incentives to lie about the amount of consumption that occurred. Would people invent fake Social Security numbers to get 2 rebates?
- Healthcare: Kling would eliminate Medicaid and Medicare. While I do not believe these are ridiculous ideas, he does not create a system which all individuals would be compelled to buy some form of insurance. Kling simply assumes that hospitals will turn away individuals who cannot pay, yet American society has not reached the point where it will allow its hospitals to turn away patients in need.
- Black markets: If taxes are based on large consumption taxes, would this lead to the creation of large black markets?
- Immigration: Would immigrants also receive a very large tax rebate? If this is true, then immigrants from poorer countries would move to the U.S. to receive the generous tax benefits available here. If immigrants are not eligible for the tax deduction, when would they become eligible? Currently, immigrants are eligible for some tax deductions (eg: the standard deduction for each child, business expenses, etc.) but not others (eg: the EITC).
- Inefficient Taxation: Optimal tax theory generally says that the government should tax goods with inelastic demand more than goods with elastic demand. For instance, one should tax cigarettes because of its inelastic demand. While a general taxation may be wise to reduce government market interference, deadweight loss could be reduced by targeting taxes.