a number of guises. The most familiar one is the retail sales tax. This tax is levied on the sales of goods and services as they are purchased by the final consumer. The tax is generally added to the purchase price of the good so the consumer is generally presumed to directly bear the burden of the tax. The second most common version of the consumption tax is the value-added tax (VAT). As will be briefly explained below, the VAT is levied at each stage of the production-distribution process and is paid by the producers and distributors of the goods. Since this cost is generally passed on to the final consumers in the form of higher prices, the consumers indirectly bear the burden of this tax.
Arguments For and Against Consumption Taxation
There are four basic reasons for the recent interest in switching to a consumption tax. First, the income tax reform in 1986 did not accomplish what its proponents wanted it to. It failed to address the fundamental problem of income taxation in an inflationary economy, a failure which will continue to trouble both taxpayers and government in future years. The complexities of the reform act reflected many political compromises and the resulting provisions failed to abate the accelerating costs of income tax compliance that burden the economy. Many of the complexities arose out of the confused treatment of interest expense. The home mortgage deduction was kept, while limitations were placed upon investment interest and the deduction of passive losses; interest indexing, however, was left out.
Second, the federal deficit has not significantly shrunk and the policymakers of both parties in both houses of Congress refuse to seriously address the problem of federal spending. In fact, many continue to propose new programs, such as for infrastructure and the extension of health insurance to the uninsured, which will require even more sources of federal funds. This means that at the c...