Replacing the Federal Income Tax with a Postpaid Consumption Tax: Preliminary Thoughts Regarding a Government Matching Program for Wealthy Investors and a New Tax Policy Lens

32 Pages Posted: 30 Oct 2006

See all articles by J. Clifton Fleming

J. Clifton Fleming

Brigham Young University - J. Reuben Clark Law School

Abstract

In recent years, proposals have been made to replace the federal income tax with a postpaid consumption tax - that is, a federal value added tax ("VAT"), a federal retail sales tax ("RST"), or a federal cash-flow (consumed income) tax. Because these taxes can be constructed so that they are indistinguishable at the level of the ultimate consumer in terms of their principal effects, and because a prominent recent proposal is the RST approach, I have written this article in terms of an RST/income tax comparison. The analysis, however, would be mostly the same if the income tax was compared with the other forms of postpaid consumption taxes.

Commentators and analysts have often noted that complete replacement of the federal income tax with a consumption tax regime would cause a substantial downward shifting of the federal tax burden to low and middle income taxpayers. This article, however, does not deal with that important point. Instead, it argues that complete replacement would create an unlimited federal obligation to match all private saving, regardless of the amount or purpose of that saving and regardless of the saver's income level, and that the wealthiest taxpayers would benefit from the largest match. This argument produces a new lens through which to examine other facets of the income tax versus consumption tax debate and this scrutiny shows that a postpaid consumption tax with progressive rates arguably does not impose any greater burden on investment income than a flat-rate postpaid consumption tax and that the wage tax/postpaid consumption tax equivalence is not essential to an understanding of the effects of a postpaid consumption tax. Using the new lens, the article also re-examines familiar matters that are generally related to the debate over whether investment income is taxed once under a comprehensive income tax and not at all under a postpaid consumption tax, or is taxed twice under a comprehensive income tax and once under a postpaid consumption tax. I conclude that within its premises, the income tax does not double-tax investment income.

Keywords: Value Added Tax, Retail Sales Tax, Consumption Taxation, Cash Flow Tax

Suggested Citation

Fleming, J. Clifton, Replacing the Federal Income Tax with a Postpaid Consumption Tax: Preliminary Thoughts Regarding a Government Matching Program for Wealthy Investors and a New Tax Policy Lens. Southern Methodist University Law Review, Vol. 59, p. 617, 2006. Available at SSRN: https://ssrn.com/abstract=940699

J. Clifton Fleming (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

430 JRCB
Brigham Young University
Provo, UT 84602
United States

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