• Background: Most efficient form of taxation, value-added, can be made progressive
• Pro Argument: resolves issues associated with taxes and growing retired population, income tax evasion, illegal immigration
• Country Comparison: Japan implemented consumption tax with poor combination of reforms.
• Recent Legislative Activity: Pres. Bush's advisory group on tax reform

Background

A consumption tax is a form of value-added tax where taxes are levied on consumption rather than income. Consumption taxes would eliminate taxes levied on investments because the proceeds from the assets are taxed when spent. Some economists argue that consumption taxes are a more efficient form of taxation than on wealth, capital, property or income. As a value-added tax, which are taxes on exchanges, it distorts incentives to invest, save and work less than the aforementioned forms of taxation. Unlike sales tax, it can be made progressive by using exemptions, graduated rates, deductions, rebates, et cetera. Sales taxes are levied at a single flat-rate and cannot account for differences in income, running the risk of burdening low-income earners. A consumption taxes that is structured like a sales tax would be regressive and carry with it a variety of social and economic consequences. Efficiency is gained by raising progressive value-added taxes while lowering other taxes because the latter is usually levied on only a portion of the population but spending is on the entire population. Value-added taxes are applied to nearly everybody thus resolving issues associated with aging populations and income tax evasion.

Pro Argument

• In most developed countries, the retired population is growing as the baby-boomer generation ages and lives longer than any previous generation. The working population has shrunk and cannot support the expected number of retirees without massive hikes in income taxes. The consumption tax spreads the burden of taxation over the entire population without relying on a disproportionately small working population.
• It also has the potential to address issues of income tax evasion and issues concerning illegal immigrants not paying their share of taxes.
• A consumption tax taxes those who consume the most (the rich) while fairly taxing the poor.
• Eliminating the income tax for the consumption tax means that the rich would no longer be able to scheme around taxes; the rich would be taxed on what they spend.
• Savings would go up as people would benefit from putting money away.
• The current income tax is primarily an "on your honor" system; a consumption tax would be more difficult to fool.
• Depending on the taxes that are eliminated when a consumption tax is imposed a whole new debate opens up, but if the corporate tax were eliminated, large US firms would no longer have any incentive to hide their profits overseas

Con Argument

• The US economy is what it is because we are a consumption economy; if consumption is taxed, we could quickly see a change in spending.

Country Comparison

• Japan imposed a high national consumption tax in 1997 in an effort to improve public finances. It was accompanied by increases in personal income tax and business taxes as well as cuts in public spending. This combination of fiscal reform proved disastrous given their aging population causing a prolonged economic slowdown.

Recent Legislative Activity

• Georgia Republican John Linder introduced the idea to Congress as the Fair Tax bill in July 1999. The bill would replace the Internal Revenue Service and all federal income taxes, payroll taxes, corporate taxes, capital gains taxes, gift taxes, and estate taxes with a national retail sales tax on all new goods and services.The Fair Tax legislation was introduced by Republican Senator Saxby Chambliss in the Senate. It has not been voted on.
• In 2005, president Bush set up an advisory panel to address tax reform. A progressive consumption tax that included a tax on investments was one proposal. This proposal was not implemented.