US Tax Reform Plan: A Consumed Income Tax

[Sapphire Capital]

A Consumed Income Tax: A Fair and Simple Plan for Tax Reform

Edward J. Mccaffery
USC Gould School of Law


July 28, 2008

USC CLEO Research Paper No. C08-12
USC Law Legal Studies Paper No. 08-16

Abstract:
These are slides from a presentation to the President's Advisory Panel on Tax Reform, given in Washington D.C. on May 11, 2005, updated, with additional slides, and sources at the end. The principal goal is to summarize the mechanics and analytics of a consumed or cash-flow income tax, a progressive spending tax, based on a rearrangement of the Haig Simons identity, Income = Consumption Savings, to generate Consumption = Income - Savings. A consistent spending tax simply features unlimited deductions for savings, along the lines of traditional Individual Retirement Accounts (IRAs), plus the inclusion of debt as a cash-flow input (the fatal flaw of the 1990s USA Tax Plan was its failure to include debt in the tax base). Progressive rates can be maintained, even increased.

The critical point is that such a progressive postpaid consumption, cash-flow or (all equivalently) spending tax is not equivalent to a wage tax, and does not systematically exempt the yield to savings from the tax base. Instead, a consistent progressive spending tax stands between an income tax, which double taxes all savings, and a prepaid consumption, yield exempt, or (all equivalently) wage tax, which never taxes any savings. A consistent progressive spending tax taxes the yield to capital when (but only when) it is used to elevate material lifestyles, not when capital transactions (savings, investing, borrowing) are used to smooth out, in time, a taxpayer's labor market earnings. This is an attractive ideal, as argued at greater length in McCaffery 2005a.

It is also noted that such a progressive spending tax is a normatively attractive "hybrid," in that it taxes some but not all savings, and in a principled and appealing way, in contrast to the flawed practice of engrafting consumption tax elements (of either sort, pre or post paid) onto an income tax base. See McCaffery 2005b.

papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1183583_code49181.pdf?abstractid=1183583&mirid=2

[Sapphire Capital]

Ten Facts About Fundamental Tax Reform

Edward J. Mccaffery
USC Gould School of Law



Tax Notes, December 2003
USC Center in Law, Economics and Organization Research Paper No. C08-15
USC Legal Studies Research Paper No. 08-19


Abstract:
This is a written version of testimony given to the Joint Economic Committee in November, 2003, subsequently published in Tax Notes. Meaningful simplification is possible, but depends on fundamental tax reform. Fundamental tax reform must start with the tax base, logically distinct from tax rates. Under progressive marginal rates, the two standard forms of consumption tax, prepaid, yield-exempt or (all equivalently) wage, and postpaid, cash-flow or (all equivalently) spending, are not equivalent. Actual tax policy today is drifting towards a flat wage tax, which never includes the yield to capital in the base. A more liberal answer is a progressive spending tax, which does tax the yield to capital, under just the right conditions: when but only when this yield facilitates higher material lifestyles. Hence such a tax stands between an income tax, which double taxes all savings, and a wage tax, which taxes none. A consistent progressive spending tax also generates great simplification, because all further taxes on capital, such as the corporate income or gift and estate taxes, can be reduced or repealed, and all rules about capital gains, losses, realization, recognition and so on become moot. Even further simplification can obtain by substituting another form of spending tax, such as a VAT or a national retail sales tax, plus a rebate for the two lowest brackets of the progressive spending tax, leaving a supplemental spending tax only for the wealthy, such as households spending over $100,000 per year.

papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1192266_code49181.pdf?abstractid=1192266&mirid=2