Does the X-Tax Mark the Spot?
51 Pages Posted: 31 Oct 2002
Date Written: September 24, 2002
This paper examines the implementation of two-tier consumption taxes, which are business-level VAT-like taxes with a progressive wage tax at the employee level and a wage credit or deduction at the business level. The focus is on a proposal known as the x-tax. The x-tax has many desirable features and is worth serious attention. Nevertheless, designing a workable two-tier system will be a challenge. The paper examines three issues in particular. First, the x-tax and all two-tier consumption taxes raise implementation problems because they must be origin-based under the GATT yet origin-based systems, it is argued, have significant avoidance problems. Second, the x-tax and most U.S. proposals purport to be based on the subtraction method. The credit invoice model, however, may be more appropriate. Finally, the paper discusses transition.
Keywords: Consumption tax, VAT, tax reform
JEL Classification: K0, K2
Suggested Citation: Suggested Citation