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.

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Alan D.
Viard

 

Nick
Schulz

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