For the New York Times, David Brooks writes that we need to break free of the income tax paradigm and move toward a consumption tax:
What is the single biggest problem with the tax code? It’s not the complexity, bad as that is. The biggest problem is that it rewards consumption and punishes savings and investment.
You can’t fundamentally address that problem within the 1986 paradigm. You can address it only through a consumption tax. This idea is off the table right now, but reality will inevitably drive us toward it. We have to have a consumption tax if we want to both grow the economy and reduce debt.
But isn’t a consumption tax regressive since poor people spend a bigger share of their incomes than rich people? The late David F. Bradford of Princeton University effectively solved that problem with his so-called X Tax, which has recently been championed by Alan D. Viard of the American Enterprise Institute and others.
Under the X Tax, you wouldn’t pay the consumption tax at the cash register. Businesses would be taxed on their cash flow, taking an immediate deduction for investments rather than depreciating them over time. Households would pay tax at progressive rates on their wages but would not pay tax on income from savings.
The X Tax effectively taxes the money you spend right now and rewards savings and investment. The government could raise a chunk of revenue this way and significantly boost growth with little or no change in how tax burdens are distributed between rich and poor. Most economists vastly prefer consumption taxes to income taxes.
Taxing consumption, as opposed to production, makes a lot of economic sense. The problem is that what Brooks is proposing isn’t just a consumption tax. It’s a consumption tax on top of an income tax.
Americans would still be paying taxes on their income. And they’d be paying the taxes businesses pass on from the taxes on their revenues.
Taxes need to be less complicated. The tax base needs to be broader. And taxes need to stop punishing investment and earnings. But a consumption tax implemented as an income tax is really no consumption tax at all.
And besides, taxes aren’t going to fix the deficit problem, which is driven by spending.