Simplifying the Transition to a (Progressive) Consumption Tax
Posted: 8 May 2003
The existing personal income tax is seriously flawed as it is riddled with systematic loopholes. A consumption tax appeals as a way to reduce the current tax avoidance and evasion opportunities. Despite the obvious advantages of consumption taxation, the existing income tax remains in place. Transitional difficulties in shifting from the current tax to a consumption tax help to explain this result. This article discusses how a recently-proposed new form of consumption taxation significantly alleviates these transitional difficulties. Unlike the conventional (cash-flow) consumption tax, the new consumption tax design would maintain tax collections on saved wages. The recent proposal thereby avoids the contentious transition issues arising from the elimination of tax collections on saved wages under the conventional consumption tax.
Keywords: Consumption tax, Income tax
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