Replacing the Federal Income Tax with a Consumption Tax
This paper will examine the possibilities of implementing a national consumption tax as the principal means of raising revenue in the United States, replacing the current federal income tax. The first part of the paper will provide an introduction to the topic, discussing the economic problems which could be addressed by a national consumption tax and a few of the main attributes of consumption taxes. The second part of the paper will outline some of the political and economic arguments in favor of and against consumption taxes. The third part of the paper will discuss how a national consumption tax could alleviate some of the economic problems facing the United States, especially the budget deficit and the national crises in savings and investment. The fourth and fifth parts of the paper will examine in some detail the issues of neutrality and equity with regard to consumption taxes. The sixth part of the paper will discuss the different types of consumption taxes, especially focusing upon the mechanics of value-added taxes, and examine some of the administrative concerns.
The debate over the viability of consumption taxes in the United States has existed since the origins of the country. Although an income tax was adopted by the federal government as the principal means of raising revenue, a consumption tax has long been considered. The philosophy behind consumption taxation has its roots in the writings of Thomas Hobbes, who thought that individuals should be taxed according to the amount of resources they withdraw from society (since these resources are limited). Consumption represents what is withdrawn, while income represents what is contributed to society. Excessive consumption will inhibit economic growth or divert resources from socially desirable uses. Consumption taxation should encourage conservation of these resources.
Consumption taxes can take...