August 23, 2012

TAX WHAT YOU DON'T WANT, NOT WHAT YOU DO:

A Bold New Direction : The election's winner will face economic trouble and political deadlock. Here's a way through. (KENNETH SILBER, August 23, 2012, aDVISOR oNE)

First devised in the 1980s by the late Princeton economist David Bradford, the X tax has gotten renewed attention in policy circles lately. A recent book making a detailed case for such a system is Progressive Consumption Taxation: The X Tax Revisited, by economists Robert Carroll and Alan D. Viard (American Enterprise Institute, 2012).

An X tax is a VAT that has been revamped so as to maintain progressivity. As with any VAT, tax is due at every stage of production or distribution. However, as with a progressive income tax, household wages are taxed by brackets; also business cash flow is taxed at that scale's top rate. The burden falls squarely on consumption. Firms can deduct their business investments, and households pay no taxes on interest, dividends and capital gains. All savings, in effect, are getting the advantage of being in a Roth IRA.

As proposed by Carroll and Viard, the X tax would be a broad transformation--replacing personal and corporate income taxes, estate and gift taxes and the Unearned Income Medicare Contribution Tax. It would, however, leave in place other federal taxes, notably the payroll tax (as the authors' focus is on eliminating taxes that penalize saving).

If the new president wants to achieve a truly historic legacy, he might go one step further: replacing the payroll tax with a carbon tax.

Posted by at August 23, 2012 4:22 PM
  

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