Happy birthday, America! Time to totally overhaul your tax code
Both parties are thinking way too small. We don't need higher income taxes, or slightly lower income taxes. We need zero income taxes.


Anti-tax protesters hold signs during a rally on the National Mall in Washington, April 15, 2010. April 15 is the deadline for U.S. citizens to file their annual income tax paperwork

  • Title:

    Progressive Consumption Taxation
  • Format:

  • Hardcover ISBN:

  • Buy the Book

Article Highlights

  • Economic growth is impeded by the income tax's penalty on saving and investment.

    Tweet This

  • Taxing savings properly is critical to America’s future.

    Tweet This

  • The X tax is a progressive consumption tax that would promote growth and maintain fairness.

    Tweet This

  • The Bradford X tax is a game-changing idea – an efficient, fair & simple tax that will build a prosperous future for America.

    Tweet This

  • Economic research suggests that consumption taxation is likely to boost the economy's long-run output by several percent.

    Tweet This

Although the need for tax reform has never been greater, today's tax policy debate is trapped in partisan gridlock, as Republicans call for tax cuts to promote economic growth and Democrats counter that the rich must pay their fair share. Many Americans reject the terms of this debate, insisting on a tax system that promotes both growth and fairness. Fortunately, we can achieve this goal by returning to the innovative thinking of the late Princeton economist David Bradford. In 1986, he proposed a progressive consumption tax named the X tax that removes the income tax's impediment to growth while maintaining progressivity.

Economic growth is impeded by the income tax's penalty on saving and investment. Under today's income tax system, people who save to spend later in life may be taxed many times on their saving - first on the income they save and then on the returns to their savings over time. In contrast, those who spend today are taxed only once. The use of consumption taxation would avoid this disparity - everyone would be taxed once, regardless of when they spend. This bias against saving and for current consumption is a fundamental flaw embedded in the income tax.

Taxing saving properly is critical to America's future. Savings are the life-blood of economic growth because they finance investment in plant, equipment, and technological innovation. Economic research suggests that a switch to consumption taxation is likely to boost the economy's long-run output by several percent.

When people hear "consumption tax," they usually think of regressive sales taxes and value added taxes collected at the cash register. In fact, replacing the income tax with those taxes would sacrifice fairness for growth, unacceptably shifting the tax burden to those who are less well off.

The X tax, in contrast, is a progressive consumption tax that would both promote growth and maintain fairness.


The X tax has two components. Individuals file annual tax returns and pay tax on their wages. There are higher tax brackets for workers with higher wages and lower brackets for low-paid workers. Exemptions and credits can be included to add further progressivity or meet other policy objectives. Business firms are taxed on their cash flow at a flat rate equal to the rate on the highest-paid workers.

At first glance, the X tax looks a lot like an income tax. But, two key features make it a consumption tax.

On the individual side, interest, dividends, capital gains, and other income from saving are tax-exempt, eliminating today's tax penalty on those who save. On the business side, firms immediately write off all of their investment rather than depreciating them over a period of years. This up-front write-off exactly offsets the tax penalty for new investments, although the tax system still pulls in revenue from investments made before the X tax was adopted and those with extra-high returns.

Because the X tax doesn't penalize saving and investment, it is a consumption tax. But, it's definitely not a sales tax, because it doesn't tax all consumers at the same rate. The highest-paid workers pay the top rate. Investors who saved before the X tax was adopted and those who earn extra-high returns are taxed at the same rate through the business tax. Middle-class workers pay lower tax rates and those at the bottom of the economic spectrum pay nothing.

The X tax design also promotes simplicity. Individuals report only the wages listed on their W-2s, not their harder-to-measure income from saving. And, the up-front investment write-off banishes depreciation, inventory accounting, and a host of other complications from business tax returns.

Of course, any tax reform faces some challenges. There are difficult questions about how to transition to the new system and the tax rules that will apply to pensions, housing, international trade, financial institutions, and so on. Reform proposals often gloss over these issues, but no reform will be seriously considered until these concerns are addressed. In our new book about the X tax, we offer concrete answers to these questions, explaining how to make the X tax a reality.

The Bradford X tax is a game-changing idea - an efficient, fair, and simple tax that will help build a prosperous future for the American people.

Alan D. Viard is a resident scholar at the American Enterprise Institute. Robert Carroll is a principal with Ernst &Young LLP's Quantitative Economics and Statistics group. They are the authors of Progressive Consumption Taxation: The X Tax Revisited, just published by AEI Press. 


Also Visit
AEIdeas Blog The American Magazine
About the Author


Alan D.

What's new on AEI

Love people, not pleasure
image Oval Office lacks resolve on Ukraine
image Middle East Morass: A public opinion rundown of Iraq, Iran, and more
image Verizon's Inspire Her Mind ad and the facts they didn't tell you
AEI on Facebook
Events Calendar
  • 21
  • 22
  • 23
  • 24
  • 25
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.

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