A Critical Look at a Critical Look - Reply to Sanchirico

Author: 
David A. Weisbach

This paper responds to claims made by Chris Sanchirico in his paper, "A Critical Look at the Economic Argument for Taxing only Labor Income." His paper, in part, criticizes the claims we made in "The Superiority of an Ideal Consumption Tax Over an Ideal Income Tax," 58 Stan. L. Rev. 1413 (2006). We show that he makes at least three critical mistakes. First, he systematically confuses a Haig-Simons tax with tax systems that have small positive or negative taxes on capital. Arguments for taxes on capital are not the same as arguments for a Haig-Simons income tax. Second, he argues that our examples are erroneous. While we disagree with his claimed errors, Sanchirico, more importantly, confuses errors in the examples with errors in our arguments which are based on established public finance theorems. He agrees these theorems are correct, which is all that matters. Third, his most striking claim, that our arguments for a consumption tax equally support a tax solely on income from savings, is false. It only works when there is a single type of taxpayer and does not apply to the central case where taxpayers vary by ability. Once we correct these errors, Sanchirico’s only remaining claim is that the underlying public finance theorems have strong assumptions. We agree and spent a substantial portion of our prior paper examining those assumptions to see whether relaxing them restores support for an income tax. It does not. Sanchirico does not provide any arguments to the contrary.