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Switching to consumption tax has pluses
Jones on Georgia

ATLANTA -- The conservative politicians and talk-show hosts calling for a switch to a consumption tax rather than income taxes are on to something, according to a recent study by Georgia State University.

Such a change would bring many benefits, if it could be pulled off. But the study Mark Rider, associate professor of economics, produced for the Fiscal Research Center at GSU's Andrew Young School of Policy Studies, says it's nearly impossible for Georgia to do it.

Rider quotes other studies that estimate switching the entire U.S. tax system could boost the overall economic output by 9 percent. That's because corporate profits would no longer be double taxed -- when the corporation earns them and then when the shareholder receives them -- and would no longer be at a tax disadvantage with corporations in other countries.

That would essentially increase the rate of return on stock, bonds and other aspects of business ownership, which should attract investment funds from abroad, money that can create jobs.

Rider's study, Can Georgia Adopt a General Consumption Tax? lists other benefits as well.

For one thing, the government could have a steady revenue stream that would reduce the temptation to either raise taxes in a recession, cut services or lay off government workers. That's because consumption amounts to a steady 60 percent of the economy when food and medicine are taxed, so the actual rate on such a large base wouldn't have to be high.

He also addresses one of the major objections to a consumption tax from liberals. They consider such a tax harmful to those with low incomes because they have to spend a greater portion of their money on necessities than the rich do.

Rider makes two points about that. First, he said refunds to the poor could give them everything they had paid in taxes. Second, if the rich spend money from either their savings or investment income, they'll be taxed, and so they would wind up paying more than the poor that way, too.

His paper sounds so far like a commercial for The Fair Tax supported by GOP presidential hopeful Herman Cain, WSB-AM talk-show host Neal Bortz and the majority of the tea party crowd.

Rider does see a couple of major hurdles to the state switching to a consumption tax besides the political challenges, such as the expansion of taxes to all services and imposing it on governments and nonprofits.

One reality check is to scale back the size of the projected benefits. It's inaccurate to use estimates for a national consumption tax, he said, because state taxes aren't high enough to figure into most corporate decisions about capital.

The top federal corporate tax rate is 35 percent while Georgia's is just 6 percent, or about 3.9 percent after considering state taxes are deductible from federal taxable income. Eliminating the smaller of the taxes isn't likely to spur Georgia executives toward capital expansions, but it could attract capital from other U.S. companies.

However, the biggest stumbling block for Rider is how to keep out-of-state goods and services out while letting capital in.

Sure, 125 countries already use a consumption tax, but they have their own customs agents and limited points of entry.

Goods from Alabama and Florida, and wherever eBay is, would skate in around the tax through the mail, countless highways or UPS. If the federal government and other states used a consumption tax, they could work out agreements to ensure everyone pays what they owe, but if only Georgia has the tax, it becomes unworkable, according to Rider.

He leaves us with the impression that like many good ideas, such as perpetual-motion machines, flying cars and calorie-free nutrition, the practical application depends on overcoming one giant obstacle.

Now that he's laid it out there, maybe some conservative politician will solve it.

Walter Jones is the bureau chief for the Morris News Service and has been covering state politics since 1998. He can be reached at walter.jones@morris.com or (404) 589-8424.



Web posted on Thursday, June 30, 2011













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