Progressive Consumption Taxes

Posted: 20 Apr 2006

See all articles by Mitchell L. Engler

Mitchell L. Engler

Yeshiva University - Benjamin N. Cardozo School of Law

Abstract

Recent intellectual and political forces have moved the consumption tax to the forefront of tax policy debate. Since traditional flat-rate consumption taxes like the VAT raise serious distributional concerns, tax scholars have responded with innovative progressive consumption taxes. Two such taxes - the Hybrid Approach and the X-tax - were independently analyzed in a recent symposium on fundamental tax reform. These two proposals contain striking similarities. Both would tax individuals at progressive rates on their wages, with a separate tax on consumption less wages. Important differences exist, though, regarding the latter tax. The Hybrid Approach would impose such tax on individuals while the X-tax contemplates a VAT-like tax on all businesses.

The X-tax and the Hybrid Approach are intriguing as they address the distributional objections to conventional consumption taxes. Standing alone, however, each raises problematic implementation tradeoffs. On the one hand, the X-tax simplifies individual tax reporting compared to the Hybrid Approach and current law. On the other hand, the X-tax would change current law significantly more than the Hybrid Approach, thereby exacerbating transition costs. Blending the respective strengths of the X-tax and the Hybrid Approach, I propose a new consumption tax consisting of three parts: a progressive wage tax, a business tax solely on corporations, and a limited individual tax on consumption less wages. This combination minimizes both individual tax reporting and changes to current law, thereby easing the way to a more equitable, efficient, and administrable tax system.

Suggested Citation

Engler, Mitchell L., Progressive Consumption Taxes. Hastings Law Journal, Vol. 57, pp. 55-91, 2005, Available at SSRN: https://ssrn.com/abstract=896799

Mitchell L. Engler (Contact Author)

Yeshiva University - Benjamin N. Cardozo School of Law ( email )

55 Fifth Ave.
New York, NY 10003
United States
(212) 790-0217 (Phone)
(212) 790-0205 (Fax)

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