Toward a Consumption Tax, and Beyond

18 Pages Posted: 15 May 2006

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Laura Kalambokidis

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics

Jeff Rohaly

Urban Institute

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Date Written: December 2004

Abstract

In this paper we investigate the extent to which the U.S. income tax system of 2004 collects tax on capital income, and the implications of extending tax-preferred savings accounts. We do so by applying a methodology that estimates how much tax is collected on capital income by calculating how much tax revenue would change if the tax system were modified to exempt income from capital in present value - specifically by adopting what the Meade Committee (1978) called an "R-base tax" - while leaving the tax rate structure and tax incentives otherwise unchanged. The difference between actual revenue and revenue under this alternative tax system is a measure of how much tax on capital income is collected under current law. We find that, as of 2004, the U.S. tax system has returned to the situation of the mid-1980s wherein our income tax system raises little revenue from taxing capital income. If extensive tax-free savings accounts were to be introduced, the system would raise almost no revenue from capital income and possibly subsidize, rather than tax, capital income. The main culprit in this state of affairs is the retention of interest deductibility. Although the revenue from taxing capital income is small, the gains that would result from a clean consumption tax have not been attained, as there remain distortions to both saving and investment decisions, and distortions across capital assets, portfolios, corporate financing, and choice of organizational form under the patchwork of provisions that have been adopted.

Keywords: consumption tax, capital income, income tax

JEL Classification: E62

Suggested Citation

Gordon, Roger H. and Kalambokidis, Laura and Rohaly, Jeff and Slemrod, Joel B., Toward a Consumption Tax, and Beyond (December 2004). Ross School of Business Paper No. 915. Available at SSRN: https://ssrn.com/abstract=902447 or http://dx.doi.org/10.2139/ssrn.902447

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Laura Kalambokidis

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics ( email )

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Jeff Rohaly

Urban Institute ( email )

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Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business ( email )

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National Bureau of Economic Research (NBER)

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