“Your definition deviates from the definition which I believe is traditional for discussing matters of inequality”

I would not disagree with that as:

1) The change in timing does have income effects,
2) The change in timing has (additional) welfare effects.

However, as I stated my aim wasn’t to discuss inequality – but to use typical definitions of the tax system to illustrate the equity-efficiency trade-off between any “flat” and “progressive” version of a given tax rate.

“Instead, let’s consider the implications of your given definition for donations made to a nonproductive charity”

The non-productive charity is merely a part of the chain between income and consumption. Where the burden of the tax falls depends on the incidence of the tax – not where the tax falls.

So, if a charity gives out all the funds it receives then it does not matter whether the tax is on the consumption of those that receive the donation or on the income of those giving the donation – the real transfer will be the same. That is the only point I’ve attempted to make.

Your definition deviates from the definition which I believe is traditional for discussing matters of inequality. I don’t currently have access to a source for this belief, so I leave it aside for now.

Instead, let’s consider the implications of your given definition for donations made to a nonproductive charity (one which operates on donations alone). If the incidence of GST is measured against the original income stream generating the consumption (rather than against the income stream of the individual doing the consuming), we have the following implications:

1. The incidence of GST on nonproductive charities is zero.

2. In the case where a business donates some of its profits to a nonproductive charity, some GST is incident on the capital of that business, rather than any labour income stream.

Do you agree? Do you see any paradox in either of these?

“Before we get too far from the point, Matt, please would you define precisely what you mean by “progressive tax” and “regressive tax”?”

I take the definition that a flat tax is a tax where the same proportion of lifetime income is paid in tax irrespective of the income level (also note that this does not have to be over the persons lifetime – as long as the accrued income is taxed eventually).

This in no way implies that the welfare consequences of different flat taxes are the same – not at all. For example replacing some flat income tax with a GST rate would disproportionately hurt people who are credit constrained. However, the definition is both common when discussing tax policy and objective, as it is solely a technical definition.

My aim was to illustrate that the movement from a flat GST rate to a GST rate with rebates involves the same type of trade-offs as the movement from a flat income tax to a (technically) progressive income tax.

Before we get too far from the point, Matt, please would you define precisely what you mean by “progressive tax” and “regressive tax”?

It doesn’t matter who is paying the tax along a supply chain, what matters is the incidence of the tax.

So, a person gives to charity to provide a set of real consumption goods for someone – they are giving because they put a value on this other person gaining this consumption. If they pay income tax on that income first then they have a lower nominal income level than in the case of a GST rate. But, in the case of a GST rate the nominal price level is higher than in the case with a nominal income tax.

The value of giving charity to someone is the set of real consumption goods that can be purchased with the goods. So the tax is effectively being paid by the person giving charity.

One thing I would point out is that, eventually, all lifetime income gets taxed in either the GST or income tax case. This makes the tax flat by definition – even though the relative welfare consequences of the taxes (due to timing and the such) will differ heavily.

Note, I did not say that a person pays the same tax over their lifetime – as doing this would ignore the purpose of bequests. A person gives a bequest either because it is delayed saving that they left behind (due to uncertainty about their lifetime) or because they are giving it to someone. Both of these reasons for bequests still end up with income that is going to be consumed (because the ex-ante decision of the person is still based on a motive for inter-temporal consumption) – and so the proportionality holds.

Now, in welfare terms the argument is MILLIONS of times more complicated. But the purpose of the post was to look at one of the trade-offs associated with the tax system – and to say that this trade-off needs to be faced. Saying that we want to maintain the current level of equity but greatly increase efficiency sounds a bit too much like free lunch talk.

@fibby

Hi Fibby,

If the charity was domestic this wouldn’t matter – as the consumption goods purchased by people who receive the charity are taxed at the GST rate.

The issue only exists then if the charity is sent overseas – and it can be solved by taxing charity money heading overseas. Now, if we don’t do that we have to ask – why are we not taxing this charity money? Do we want government (and as a result society) to implicitly donate this charity money overseas (which is what we are doing).

It doesn’t defeat the proportionality argument at all – it merely illustrates something that would be taxed by a proportional system, but isn’t due to the way the government has designed it.

Your argument for the non-regressivity of GST, therefore, is not convincing.