OK in the comments on previous posts it is clear that a lot of readers didn’t get the point I was making originally, that there is a legitimate sense in which an income tax hurts individuals more than a comparable consumption tax. So let me take another stab at it. (It should go without saying that this analysis doesn’t mean I’m “for” a consumption tax, especially since–in practice–we’d end up with both an income and consumption tax.)
First, let me point out that it’s not true that you can gauge the harm of a tax by simply looking at how much revenue the government derives from it. Some people thought, “If, by construction, we’re comparing a consumption tax to an income tax that keeps government revenue constant, then aren’t they equally harmful?” But no, that’s not right. At an income tax rate of 100%, the government wouldn’t take in any revenue, but it would devastate the economy as all transactions went into the black market and many activities simply disappeared. At an income tax rate of 0%, the government wouldn’t take in any revenue either. I didn’t just prove that those two outcomes are equivalent, as far as taxpayers are concerned.
Second and more to the point: In general, if the government is going to extract $x from you as a taxpayer, you don’t want them putting additional constraints on how you finance the blow. If you owe the government $x per year, the best thing (from your POV) is a head tax; the government says, “Do what you want with your income and spending decisions, but you owe us $x or else we kill you” (or whatever).
Now suppose instead, the government said, “Over the course of the year, keep track of how much money you spend on food. We will keep y% of those dollars, before they reach the grocer.” The government then picks y% so that, after you adjust to the new situation, they end up taking $x total from you each year.
Assuming such a y exists, so that you end up in a new equilibrium, spending enough on food so that $x still goes to the government, then you are probably worse off than before. (For sure you would be, if you were the only person this happened to. Then food prices would be basically the same, and you’d bear the full brunt of the food tax.) Because of the y% tax, on the margin food is now pricier to you (compared to other things) than it was before. So in addition to taking $x from you, the government has pushed you artificially out of buying as much food as you would have, even in the alternate scenario where you were down $x. You could always match your spending decisions that you implement when the government imposes no constraints, but you probably won’t since they probably have you spending too much on food.
If it’s still not clicking, try flipping it. Suppose the government were going to give you $12,000 in cash, or a $12,000 voucher that had to be spent on food from the grocery store and that couldn’t be transferred to another party. You would clearly prefer the cash, because you could always spend it all on grocery store food if you wanted. But, you could use it on other things too.
So if you generally get the above logic, then realize that’s what’s going on with an income vs. consumption tax. A consumption tax is worse than a head tax; the former artificially penalizes using labor and other productive factors to earn an income, rather than “consuming” them through leisure or idleness (which is not taxed as “consumption”).
But, an income tax is even worse than a consumption tax. Not only does an income tax ding you when you sell your labor or rent out your productive factors for money, but then if you want to spend it on future consumption (as opposed to present consumption), it dings you again, because the vehicle you use is to invest it (in a bond, share of stock, etc.) and then the income tax hits you when you earn interest, dividends, or capital gains in the future period.
Just as the food tax in our above example made food artificially expensive, so too does an income tax make future consumption artificially more expensive relative to present consumption. So if the percentages are designed by construction to extract the same total revenue, then an income tax is worse than a consumption tax in the sense that it pulls out the same $$ but also puts another artificial restriction on your behavior.