Here's how to replace the income tax

Editor’s note: Alan Viard is a resident scholar at the American Enterprise Institute and one of the most respected public finance economists in the nation. He is the co-author of a new book, "Progressive Consumption Taxation." The book explains how the United States can move away from taxing income and toward taxing consumption; and how this new system is both fair and promotes economic growth.

NICK SCHULZ: How would an “X” tax—a progressive consumption tax—work?

ALAN VIARD: Using the fact that national consumption is equal to wages plus business cash flow, the X tax implements consumption taxation in two parts. First, households are taxed on their wages under a progressive rate schedule, with higher tax rates on higher-paid workers and exemptions and tax credits for low-paid workers. Households are not taxed on income from saving. Second, business firms are taxed on their cash flow at a flat rate equal to the rate on the highest-paid workers. Firms are allowed to immediately deduct all of their investment costs rather than depreciating them over a period of years. The X tax design is identical to that of the Hall-Rabushka flat tax, except that the flat tax applies a single tax rate to all wages above an exemption amount, while the X tax features progressive tax rates.

Although the X tax may look like an income tax, it functions as a consumption tax because it does not impose a tax penalty on those who save and invest to consume in the future, relative to those who consume today. The household part of the tax clearly does not penalize saving, because tax is imposed only on wages, not on any income from saving. And the business part of the tax imposes no investment penalty on the margin, because the immediate deduction for investment costs fully offsets the expected taxes on the marginal investment’s future payoffs. The business tax does collect revenue, however, from investments made before the reform was adopted and investments that yield extra returns above those earned by the marginal investment.

Read the full article at The American website.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alan D.
Viard

 

Nick
Schulz

What's new on AEI

Four years of Dodd-Frank damage
image Dodd-Frank, financial institutions, and public opinion
image Time for an Anwar Sadat moment in the Middle East
image Freedom of the skies at risk
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Event Registration is Closed
Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Event Registration is Closed
Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.