This Is One Unsuspected Reason Americans Consume So Much

_{Packaged food aisles at a Fred Meyer hypermarket in Portland, Oregon - Wikipedia}

Senator Rand Paul is not afraid of radical proposals. He is now running for President with a plan to replace all of today’s federal taxes with a flat tax on personal income plus a 14.5 percent value added tax – a tax on personal consumption he calls a “business activity tax.” Such a consumption tax would actually move revenue collection in the United States closer to a model used by other rich countries. This wasn’t Senator Paul’s goal, but a consumption tax could also help in reducing the nation’s troublesome over-use of both food and fuel. History suggests, however, that America will not make this move.

From the earliest days of the Republic, Americans have succeeded in opposing heavy taxation. Federal, state, and local taxes in America equal just 25 percent of the nation’s gross domestic product (GDP), which is well below the 34 percent average for all rich countries. Contributing to this low tax rate overall has been the nation’s strong aversion to taxes on personal consumption. Other nations impose significant taxes in retail sales, but America does not. All of the member nations of the European Union tax personal consumption using what is called a “value added tax” (or VAT), set at a minimum standard rate of 15 percent – almost identical to Senator Paul’s suggested rate. Since 1989, Japan has also taxed personal consumption, at a rate projected now to increase to 10 percent. Even Canada taxes personal consumption, with a 5 percent Goods and Services Tax. In America, small sales taxes are imposed by most individual states, but only on some goods (for example, not on groceries) and generally at a low level. The average effective sales tax rate for all 50 states in combination is below 2 percent. As a consequence only 8 percent of America’s tax revenues derive from taxes on consumption, versus a 21 percent average for the rich countries as a whole.

These low consumption taxes in America are in part an accident of historical timing. When federal revenue needs began to grow rapidly early in the twentieth century, adding a federal tax on personal consumption was not an attractive option because some states were already using that revenue instrument. Yet the bigger barrier was America’s populist political culture, which traditionally rejects taxes that might be regressive on the poor and the middle class. Taxes on consumption place a heavier burden on the poor because they must spend a larger share of their income on consumables. When the federal government first considered a national sales tax – in 1941, as one possible way to help cover the anticipated costs of wartime mobilization – President Franklin D. Roosevelt rejected the idea because, he said, “It falls more heavily on the poor; it is, in fact, a ‘spare the rich’ tax.”

A federal value added tax could raise a great deal of revenue, so in that sense it should be attractive to tax-and-spend liberals, yet those same liberals reject it as regressive. Meanwhile, small-government conservatives reject it because they don’t want to give more revenue to the state. This bipartisan refusal to adopt a federal sales tax persists into the modern era. In 2010, Representative Paul Ryan (R-Wis) proposed an 8.5 percent VAT, but the Senate responded by adopting a nonbinding resolution in a bipartisan 85-13 vote, stating: “it is the sense of the Senate that the VAT is a massive tax increase that will cripple families on fixed income….” Representative Ryan responded by shelving the proposal.

America’s cultural aversion to taxing consumables can be celebrated as progressive, yet it has a serious down side. It has helped lead our nation toward an excessive consumption of both food and fossil fuel, pushing America toward both an obesity crisis and an unusually high level of greenhouse gas emissions.

Combined federal and state tax rates on petroleum consumption in the United States are only one sixth the level in France, and one-seventh the level in Italy, Norway, and the Netherlands. Gasoline taxes in the United States are less than one eighth the average in Western Europe. These consumption tax differentials go a long way toward explaining why CO2 emissions per capita in the United States are more than twice as high as the average in the European Union. Likewise for food. Grocery purchases are scarcely taxed at all in the United States, while in Europe they are subject to VAT rates as high as 25 percent in Sweden and Denmark. This helps to explain why average consumer food prices in the European Union have been 30 percent higher than in the United States. This has helped drive the prevalence of obesity in the United States to a level more than twice as high as on the Continent of Europe.

Some liberals in America favor higher consumption taxes on both caloric soda and fossil fuels to reduce obesity and to pursue climate change mitigation. It is a political irony that these so-called “progressives” have always been defeated by a national awareness that such taxes are fundamentally regressive. In March 2009, Berkshire Hathaway CEO Warren Buffett (an early supporter of Barack Obama) criticized the higher energy costs a Democratic cap-and-trade policy would bring as “pretty regressive,” and the White House was never able to deny this troublesome aspect of the plan. Asked about Buffett’s remark, Obama’s press secretary could only say the president looked forward to working with Congress to solve this problem. Giving up on cap-and-trade proved to be the solution.

Senator Paul’s new proposal for a consumption tax will thus go nowhere, despite the value it might have for containing our nation’s over-consumption habits. When it comes to consumption, liberals and conservatives in America both implicitly support a continuation of excess.