Tuesday, September 6, 2005
The current debate on whether the US tax base should be income or consumption has been waged in terms of the traditional criteria for evaluating tax policy -- efficiency, equity and administrability. Proponents of the consumption tax have argued that it is superior to the income tax on all three grounds. If that argument is correct, it is difficult to understand why most countries have both income and consumption taxes, and why countries like the United States adopted the income tax as a substitute for consumption taxes. This paper argues that the debate omits consideration of the goals of taxation in the modern era, which are (1) to raise revenue for government activities, (2) to mitigate unequal distributions of wealth in society, and (3) to regulate private economic activity. When these goals are taken into consideration, it is clear that both income and consumption taxes have a role in modern tax policy, and that the US should follow the path of other developed countries and employ both at the federal level.