The Deceptively Disparate Treatment of Business and Investment Interest Expense Under a Cash-Flow Consumption Tax and a Schanz-Haig-Simons Income Tax

Abstract

A cash-flow consumption tax is assessed annually on individuals. In simplified terms, the base is calculated for each taxpayer by combining the year's gross receipts and savings withdrawals and then subtracting the year's business and investment expenses and the year's additions to savings. Progressive rates are applied to the resulting sum. These computations are intended to confine the cash-flow tax burden to an individual's annual consumption and to remove nonconsumption expenses and current savings from the tax base.By contrast, the base for a theoretically correct Schanz-Haig-Simons (SHS) income tax is each individual's annual consumption plus current additions to savings. Thus current receipts which are otherwise taxable remain in the tax base, even if they are saved, and withdrawals from earlier savings are not currently taxed since they were assessed in a prior year. Stated differently, the SHS tax base has two components-current consumption and current savings (including current appreciation accruing to earlier investments)-whereas a cash-flow consumption tax has only a single component-current consumption