TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, May 10, 2012

Carroll & Viard: Progressive Consumption Taxation: The X-Tax Revisited

ProgressiveRobert Carroll (Ernst & Young, Washington, D.C.) & Alan D. Viard (American Enterprise Institute), Progressive Consumption Taxation: The X-Tax Revisited (AEI Press June 2012):

The United States is alone among industrialized countries in having no broad-based consumption tax at the national level. Yet, economic analysis suggests that consumption taxation is likely to be superior to income taxation, because it does not penalize saving and investment. This book proposes to completely replace the income tax system with a progressive consumption tax. This approach avoids the problems arising from the adoption of a consumption tax alongside the income tax and also avoids the distributional problems posed by regressive consumption taxes, such as the VAT.

This book argues that the Bradford X tax, developed by the late David Bradford, offers the best form of progressive consumption taxation. The X tax modifies the VAT, so that it no longer imposes a flat-rate tax on all consumption. It splits the value-added tax base, which equals aggregate consumption, into two components, wages and business cash flow. The X tax achieves progressivity by applying graduated tax rates to wages and a high flat tax rate to business cash flow, which reflects consumption financed from wealth accumulated prior to the reform and from above-normal business investment returns, which largely accrue to well-off households.

Because the X tax is relatively unfamiliar, however, there is concern about how it can be implemented. This book sets forth solutions to commonly perceived problems concerning the taxation of pensions and fringe benefits, business firms, financial intermediaries, international transactions, owner-occupied housing, state and local governments, and nonprofit institutions, and the transition. By adopting these approaches, the United States can move to a progressive tax system that no longer penalizes saving and investment.

Daniel Shaviro (NYU), Excellent New Book on Progressive Consumption Taxation:

This book does a great job of explaining both the rationale for enacting an X-tax, and how it might actually work.

In some other universe, or perhaps some other part of our universe, perhaps in the far end of the Gamma Quadrant, I would like to think that there is a world much like our own, except that enacting a progressive consumption tax is actually a feasible left-right compromise that one could imagine really happening. It truly has potential Clintonian Third Way merits, although it has never gotten very far politically. The left gets progressivity comparable to that under present law, but much more transparently and at a far lower efficiency cost. The right gets exemption for the part of capital income that it may be sensible to want to exempt that is, for the "normal" return to waiting. Everyone ought to be happy.

But here on planet Earth things took a very different turn, perhaps starting in the early 1990s. Plus, despite its considerable policy merits, the X-tax may somehow fail to be sufficiently salient and reasonable-looking to an ill-informed public. So I personally believe that it is not going anywhere, and I have not for several years devoted significant intellectual effort to examining or emphasizing it.

Still, this is an excellent book that deserves a wide readership. Special comment to readers on the left: however suspicious you might be of other publications emanating from AEI and/or the Tax Foundation, this is one that you should classify as straight-shooting and worthy of your time.

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We learned in 1993 that comprehensive tax reform is far from permanent. Whatever deal the parties make is purely temporary and not politically stable.

Hence it would be foolish for either party to agree to any tax reform without fully considering the other party's likely agenda to modify the tax system over the ensuing years. Instead, each party should employ a minimax strategy, choosing the tax system whose most unfavorable variant is the least distasteful.

For new tax systems it's difficult to estimate how far the other party could push the parameters. Each of the systems may have been secretly designed for ease of change in one direction or the other. For the current tax system the battle lines are well-known, with tax rates moving back and forth within an historical range (provided that one ignores top rates paid by an insignificant number of filers).

For both parties, the devil they know is preferable to the risk of having the other party score a breakaway touchdown following agreement on a new tax system. The parties will not voluntarily run this risk until the alternative looks even riskier. We will have to be facing an immediate fiscal meltdown.

Posted by: AMTbuff | May 10, 2012 2:09:28 PM

That's what we need, yet one more tax!

No, what we need is less spending by politicians buying our votes.

Posted by: Elmer Stoup | May 11, 2012 6:30:04 AM