What if we taxed what people spend, not what they earn?Published: December 24, 2025 9:40am EST Marcelo R Santos, University of Glasgowhttps://theconversation.com/what-if-we-taxed-what-people-spend-not-what-they-earn-272392Link copiedShare articleWhen people talk about tax fairness, the focus is almost always on income. How much the rich earn, how heavily that income should be taxed, and how to make sure lower earners are protected. But there is an older idea that is quietly starting to get attention again. What if taxes were based not on what people earn, but on what they spend?This is more than a technical tweak. A progressive consumption tax – where people who spend more face higher effective rates – can behave very differently from a progressive income tax. And according to economic research I co-authored with fellow researcher Carlos da Costa based on life-cycle behaviour, the consequences may be surprisingly large.At first glance, taxing income and taxing consumption might look similar. If you earn £40,000 and spend £30,000, you could imagine taxing either amount and raising similar revenue. But people do not live one year at a time. They earn very unevenly over their lives – lower wages early in their career, higher wages later – and they tend to save in good years to stabilise their spending in leaner ones.This basic feature of real life makes the choice between taxing income or taxing consumption much more important than it seems.Progressive income taxes increase the marginal tax rate (the percentage applied within someone’s highest tax bracket) as earnings rise. This is designed to redistribute income towards lower earners. But it also creates an unintended effect: people are discouraged from working more in the years when they are most productive because those extra earnings are heavily taxed.Over a lifetime, this discouragement flattens people’s earning patterns and reduces saving. When lots of people make these choices at once, the whole economy ends up with less investment, lower productivity and slower wage growth. These long-run effects are invisible in year-to-year statistics, but they matter greatly for overall prosperity.Uncertain times call for extraordinary news coverage. We’re here to help you understand.Support our workWhat a progressive consumption tax does differentlyA progressive consumption tax takes a different approach. It doesn’t penalise earning more in a particular year. Instead, it taxes people according to how much they spend overall. Someone who earns £70,000 but saves £25,000 would face a lower tax bill than someone who earns £50,000 and spends it all.This creates an incentive to save in high-earning years. While higher saving might sound like it would slow the economy, in the long run it does the opposite. Saving provides the funds that businesses use to invest in new equipment, technology and expansion.Over time, this raises productivity and – crucially – pushes wages up. This mechanism is particularly important for lower-income households, who depend almost entirely on their earnings rather than capital income (from things like property) or investment returns.Our analysis suggests that switching from progressive income taxation to progressive consumption taxation could make households noticeably better off. This could be roughly equivalent to a permanent 10% increase in living standards as a result of rising wages and families being better protected when their incomes fluctuate.A policy reform that both strengthens the economy and improves financial security is rare. From our analysis, it looks like this approach could do both.A common concern is that consumption taxes are regressive. A flat tax on spending would indeed fall more heavily on low-income households who spend all or almost all of the money they have coming in. But progressivity can be built into a consumption-based system.In fact, our work shows that a progressive consumption tax can redistribute as much as a progressive income tax, but with fewer of the distortions that slow growth.Put simply, it is possible to design a consumption-based system that is both fair and efficient. And it wouldn’t necessarily require radical reform. It may sound like a major overhaul, but many of the benefits could be achieved with practical, incremental reforms.woman pushes a shopping trolley with a child in the seat down a supermarket aisle.People on low incomes spend a far greater proportion of their income – a progressive consumption tax could leave them better off. 1000 Words/ShutterstockOne example is income averaging. Instead of taxing each year’s earnings in isolation, consumption tax could be based on a multi-year average. The idea is that a person’s average income over time is a good proxy for how much they consume, since people tend to smooth spending even when earnings fluctuate.Under this approach, taxes would be administered through the income tax system, and people would pay tax in much the same way as they do now. The key difference is that tax brackets would be applied to an income average rather than a single year’s pay. This better reflects how people actually spend over their lifetimes, and it reduces the penalty for working more or earning more in peak years.The information needed to do this already exists in social security records, which track people’s earnings over time. Rather than collecting new data, governments would continue to use these records as they do now, while also using them to calculate income averages across several years as a proxy for how much they spend. No new bureaucracy would be required – it is simply an additional use of information that is already held.But why does this matter now? Most advanced economies face the same long-term pressures: ageing populations, rising fiscal demands, stagnant productivity and intense debate about how to tax “fairly” without discouraging work and investment. These pressures are unlikely to disappear.Rethinking not just how much to tax, but how to tax, offers a different way forward. A system that taxes consumption rather than income is not a silver bullet. But progressive consumption taxation deserves a far more prominent place in the public conversation about how to design a fair and prosperous tax system for the future
Tag: taxes
-
-
Wealth and Income Tax Reform
Modest Wealth Tax (1–2%) on Top 1–2%
A wealth tax of 1–2% on the top 1–2% of Americans would generate hundreds of billions in revenue annually, targeting dormant capital while avoiding disruption of productive investment. With the top 1% holding more wealth than the bottom 90% combined, this tax would help counterbalance systemic inequality without discouraging entrepreneurship.
Income Tax Hike (2–4%) on Top 10–20%
Increasing income tax rates by 2–4 percentage points on the top earners ensures those who gain most from the system reinvest in its health. This group currently benefits from historic wealth appreciation, globalization, and tax avoidance schemes. Modest rate hikes restore balance and fund essential services.
Targeted Spending Cuts
Cap Non-Essential Cuts at 10%
A 10% reduction in discretionary spending (excluding Social Security and healthcare) would streamline government without harming the social safety net. Defense, corporate subsidies, and bureaucracy can absorb smart cuts through modernization and oversight. Social Security and healthcare should be treated as independent programs with their own sustainability paths.
Close Wealth Borrowing Loophole
Tax Personal Consumption Borrowed Against Assets
The ultra-wealthy often borrow against investments to avoid capital gains tax. A progressive consumption tax on borrowed funds used for personal spending closes this loophole, ensuring wealth consumption is taxed fairly, just as working-class consumption is.
Fiscal Discipline Through GDP-Based Budgeting
Anchor Spending to GDP Ratios
Fixing discretionary spending categories as percentages of GDP stabilizes government finances. For example, defense might remain at 3.5% of GDP annually. Congress retains override power during recessions or emergencies. This mechanism minimizes debt-ceiling brinkmanship while allowing automatic fiscal discipline.
Targeted Support for Low-Income Americans
$100 Stipend + $100 in Food Aid
Individuals earning below the median income would receive $100 monthly in cash and $100 in food assistance. This modest supplement reduces economic pressure without bloating the budget. It also avoids the inefficiency of universal basic income by targeting those most in need.
Work Requirements
Requiring part-time work, job training, or volunteer service reinforces the principle of mutual responsibility and maintains political support across the ideological spectrum.
Student Loan Reform
Income-Based Repayment System
Replace student loans with a policy where graduates pay 5–10% of their income for 10 years. The government provides colleges with the net present value of future graduate contributions, incentivizing institutions to prioritize economic value.
Curriculum Reform
Require basic foundational courses while encouraging colleges to align degree programs with real-world economic needs. This avoids overproduction in low-demand fields and raises the value of postsecondary education.
Health Care Reform
Cost Containment Before Expansion
Other nations cover everyone at half the U.S. cost. We must first adopt cost control via:
- Expanding Medicare-style price negotiation to all payers
- Capping administrative costs
- Converting insurance companies into regulated nonprofits
Universal coverage is only feasible if we address these root inefficiencies first. Without cost control, expansion could bankrupt the system.
Election Structure Reform
Replace Plurality Voting with RCV or STAR
The current winner-take-all voting model fuels polarization and discourages new ideas.
- Ranked Choice Voting (RCV): Voters rank candidates, and instant runoffs ensure winners have broad support.
- STAR Voting: Voters score candidates, and the top two enter a runoff where majority support prevails.
These systems reduce spoilers, empower moderates, and foster coalition building.
Campaign Finance Reform
Restore Voter Trust and Reduce Corruption
- Publicly finance campaigns to reduce big donor influence
- Cap political donations and independent expenditures
- Close loopholes for Super PACs and dark money
- Require real-time disclosure of political spending
These measures are essential to ensure democratic legitimacy and reduce regulatory capture.
Housing Access and Regulation
Boarding Houses and Micro-Housing Development
Encourage the development of communal housing with private rooms and shared amenities, priced at 1/3 of residents’ income. This model supports workforce housing in cities and dignified shelter for low-income individuals and families. Government can support via zoning reform, low-interest loans, and public-private partnerships.
Limit Property Accumulation
- Primary residences are tax-exempt
- Second homes taxed at 10% of income produced
- Third at 20%, and increasing to 90% for excess holdings
- Foreign ownership of residential real estate prohibited
These measures prevent speculative hoarding and prioritize housing for residents.
Incentivize Vertical Development
Apply per-building taxes to apartment complexes to encourage vertical over horizontal development, improving density and affordability.
Illegal Immigration and Labor Reform
Rational, Humane, and Enforceable Framework
- Raise minimum wage to $12.50/hour—a historic average that balances inflationary risk with humane compensation
- Cap undocumented worker pay at the same minimum wage
- Grant two-year window for undocumented immigrants to register as guest workers
- Allow employers to house and provide medical care to guest workers
- Enforce E-Verify nationally
- Defer wall construction, but keep the option if enforcement fails
- No constitutional rights or voting privileges for guest workers
- Maintain birthright citizenship, unless legally reconsidered
This balances market need, compassion, and enforcement. It stabilizes immigration flows and protects American labor.
Conclusion
This policy framework reflects a comprehensive and integrated approach to 21st-century governance. It emphasizes:
- Fiscal sustainability
- Economic fairness
- Regulatory discipline
- Political reform
- Social safety without dependency
It bridges partisan divides by rooting each proposal in practical benefits, fairness, and systemic integrity.
We cannot address 21st-century challenges with 20th-century thinking. Restoring the “policy” in politics starts with vision, courage, and a return to principled pragmatism.
-### **Treat Guns Like Cars – Within Reason**Treating guns like cars offers a regulatory framework that balances rights with responsibility.*
**Driver’s License = Firearm License**: You need a license to operate a car after passing written and practical tests. Requiring gun owners to pass safety and competency tests could reduce accidental shootings (approx. 500 per year in the U.S.).*
**Vehicle Registration = Firearm Registration**: Cars must be registered and renewed periodically. A similar model for firearms could help trace weapons used in crimes—important since over **200,000 guns are stolen each year** in the U.S.*
**Insurance**: Auto liability insurance incentivizes safer behavior. Firearm liability insurance could create market-based pressure for secure storage and safe use.>
**Note**: We don’t register cars solely because they’re dangerous but because they’re used in public and have major third-party risks. Guns kept at home for self-defense may not need the same oversight as concealed carry.
—### **Social Security Reform – Shared Sacrifice, Smarter Strategy
**1. **Lift the Payroll Tax Cap** Currently, only income up to **\$168,600 (2024)** is taxed for Social Security. This means someone making \$1M pays the same Social Security tax as someone making \$168k. * **Effect**: Removing the cap could **eliminate 73%** of the projected long-term Social Security funding gap (CRFB, 2023). * It also helps restore fairness; over 90% of earners pay on all their income while the top 5–10% do not.
2. **Modest Benefit Cuts for High Earners** Cutting Social Security benefits by 10% for the top 20% of earners would save money without harming low-income retirees. * Top earners typically have other retirement income streams (401(k)s, IRAs, investments). * The Social Security Administration estimates that **higher-income retirees rely on Social Security for only \~20%** of their income, compared to **90% for low-income seniors**.
3. **Increase Payroll Tax by 2 Percentage Points** The current combined payroll tax rate is **12.4% (6.2% employer, 6.2% employee)**. Raising this to **14.4%** would gradually and broadly shore up the trust fund. * Cost for median income worker (\~\$60k/year): \~\$600/year more. * Would **close around 44% of the solvency gap** if phased in slowly (SSA data).
4.**Invest in Real Estate Rental Funds** Currently, Social Security Trust Funds are invested solely in low-yield Treasury bonds. * Real estate, particularly residential rentals, provides **3–5% annual returns**, plus inflation protection. * A **diversified investment strategy** (like Canada’s pension plan) could yield higrher long-term returns, improving sustainability. * For example, **the Canada Pension Plan Investment Board (CPPIB)** invests in infrastructure and global real estate and earned an average **10-year return of 9.6%** (as of 2023).—
….
The Correlation Between Union Power and Income Inequality
In contemporary American political discourse, the issues of income inequality and the role of labor unions are often debated, with a growing number of voices arguing for a stronger correlation between the two. As illustrated in a recent social media post from Robert Reich, historical data suggests a powerful inverse relationship: as union membership in the United States has declined, the share of national income held by the wealthiest 10 percent has steadily increased. This trend suggests that the weakening of labor unions has been a significant factor in the widening of the wealth gap.
Historically, labor unions served as a crucial counterbalance to corporate power. By organizing and bargaining collectively, unions were able to secure higher wages, better benefits, and safer working conditions for their members. This collective action not only benefited union workers but also exerted upward pressure on wages in non-unionized sectors, as companies sought to remain competitive in the labor market. The graph in question shows that during the period when union membership was at its peak—from the mid-20th century into the 1970s—the share of national income going to the top 10 percent was at its lowest. This period is often referred to as the “golden age” of the American middle class, characterized by broad-based prosperity and reduced income disparity.
However, starting in the latter half of the 20th century, union membership began a long-term decline due to a combination of factors, including political opposition, anti-union legislation, and shifts in the American economy from manufacturing to services. Coincidentally, as union power waned, the share of national income captured by the wealthiest Americans began a sharp ascent. This parallel trend suggests that without the negotiating power of unions, a larger portion of the wealth generated by the economy has flowed to the top, rather than being distributed more broadly to workers.
The argument, therefore, is that a robust union presence is not merely a matter of protecting workers’ rights but is essential for maintaining a more equitable society. If the goal is to address the growing issue of income inequality, then rebuilding and strengthening labor unions may be a critical step. Advocates of this view argue that empowering workers to bargain for a fairer share of profits could help reverse the trend of widening disparity, re-establish a strong middle class, and create a more balanced and just economic system. The graph serves as a powerful piece of evidence in this argument, suggesting that the path to a more equal society may lie in a return to the principles of collective action and worker solidarity that defined a previous era.
The Law of Love 