“The Rising Cost of Adequate”

My reading these days is done in snatches on the bus, but while stuck in traffic last week, I finished Robert Frank’s brilliant small book Falling Behind: How Rising Inequality Harms the Middle Class.

Frank opens with an intriguing thought experiment:

You’re given the choice between two worlds: World A in which you own a 4,000 square foot house but everyone else owns a 6,000 square foot house and World B, in which you own a 3,000 square foot house but everyone else lives in a 2,000 square foot house.

According to “the standard, neoclassical model of choice”, Frank argues, World A, in which everyone can consume more, is the obvious logical choice.

Yet most people, when asked, choose World B.

In chapters whimsically illustrated by graphs, photos, and cartoons, Frank demonstrates that there is much more at stake here than simple envy or greed. He acknowledges the psychic reality: that with ever-more lavish consumption at the higher ranks, the costs of simply “adequate” has risen, and the bar at which people feel relative deprivation is set ever higher (even while he also argues that owning many things does not make the wealthy happier).

Yet in times of limited access to important goods, decisions about buying a house are also decisions about whether one’s children will attend the best schools or merely mediocre schools, whether streets will be in good repair, whether drinking water will be clean, whether fire fighters will be well-equipped.

And as long as a relatively small number of people at the top of the income ladder can easily afford to outbid most everyone else for access to homes where all of these services can be taken for granted, those clamoring for their place on the rungs below will find themselves paying ever more for housing (and for cars that will be safe in collisions with the luxury vehicles of the wealthy, and for interview clothes that will position them as “one of us” on first impression).

The consequences, Frank argues, are that the middle class is working longer hours, commuting longer from more “affordable” neighborhoods, going further into debt, and withdrawing their support for public services so that more of their income can go to personal consumption rather than to taxes.

With sales of $2000 watches growing at double digit rates, Frank suggests, taxing consumption rather than income could help to level the playing field. Persons who might otherwise build an 80,000 square foot house, he argues, would suffer little if they instead lived in 60,000 square feet, but dampening the competitive frenzy for owning The Most could free up resources for rebuilding a crumbling national infrastructure, for reinvesting in public education, for personal leisure among the frenzied workforce.

I find his argument compelling, and a welcome perspective to deliberations about inequality that are more conventionally framed only in moral terms.

But I am certainly not an economist. So I wonder: is a consumption tax workable? Are there arguments against a consumption tax that Frank is missing? Are there other viable options for ending the frenzy of competitive consumption?

4 thoughts on ““The Rising Cost of Adequate”

  1. Ian November 3, 2007 / 8:48 pm

    The FairTax Act of 2007 is a progressive consumption tax that will un-tax all citizen-families’ spending up to the poverty level. As you may be aware, it has become a major campaign issue, as witnessed by its discussion during a Republican debate on “This Week with Geo. Stephanopoulos” ( http://snipurl.com/stephanopoulosdebate ).

    There is no reasonable equity of distribution under the current INCOME tax system. What’s more, the income tax code has become a tinkerer’s paradise for 53% of the lobbyists who game it in Washington DC. It’s a lucrative business, and the U.S. TAXPAYER pays for ALL of it in higher prices (a hidden tax which is incomprehensible to the average working person).

    Prices AFTER FairTax would look SIMILAR to prices BEFORE FairTax – NOT 30% HIGHER – as opponents contend; competition would see to it. The FairTax rate on new items would be 29.9% (on the new, reduced cost of items because business isn’t taxed under FairTax – thus lowering retail prices by 20% to 30%), or 23% of the “tax inclusive” price tag – this is the way INCOME TAX is figured (parts of the total dollar).

    The effective tax rate percentages, that different income groups would pay under a FairTax consumption tax, are calculated by crediting the monthly “prebate” (rebate of tax on necessities) against all likely monthly spending of citizen families (1 member, and greater based on figures established by the Dept. of HHS – a single person receiving ~$200/mo. A family of four receiving ~$500, in addition to family earners receiving their WHOLE paycheck). Prof.’s Kotlikoff and Rapson (10/06) have concluded,

    (From study: http://snipurl.com/kotcomparetaxrates ) “…the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

    “Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax.”

    Further,

    (From study: http://snipurl.com/kotftmacromicro ) “…once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there’s a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent.”

    It’s well past time to scrap the tax code ( http://snipr.com/scrapthecode ) and pay for government the way that America’s working men and women are paid – when something is sold.

    (Permission is granted to reproduce in whole or part. – Ian)

  2. stephanie jones November 8, 2007 / 12:23 pm

    This is such a fascinating topic, and something I have only recently started to really consider. Without doing a massive search on the internet, does anyone know about politicians, presidential candidates, and/or activist groups working toward fair tax policies?

    I’m revealing my ignorance here, but who are the opponents and why? (I could guess, of course, but hate to make stereotypical assumptions about anyone)

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