Replacing the Federal Income Tax with a Consumption Tax

Abstract

This chapter describes the various forms of consumption taxes and the general arguments for and against adopting a consumption tax and shows that they are consumption taxes. Reflecting the dominance of the progressive personal income tax in the federal tax system, replacing the entire tax system with a uniform consumption tax would be regressive. State and local governments in the United States have also been concerned about the impact a federal consumption tax would have on their revenue sources as well as their spending. An additional transition cost is the one-time implementation cost of instituting a new tax. The detailed transition rules are designed to prevent the taxation of previously taxed savings and to disallow a tax deduction for shifting old savings into new savings vehicles. In addition, transition rules can have a major impact, essentially turning a consumption tax into a wage tax.