Assume the federal government replaces the federal income tax with a sales tax placed on consumption...

Assume the federal government replaces the federal income tax with a sales tax placed on consumption expenditures. Analyze the impact of this tax change on taxation efficiency and equity.

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It would definitely be more efficient. The compliance costs with corporate and individual income taxes is large relative to the revenue collected. In fact there are parts of the tax code where compliance is MORE than the amount of tax collected. By definition it would be more equally borne, since almost half of the households don't pay any individual income tax today. It would be a proportionate tax over time because everyone would be taxed the same amount of his consumption. In a snapshot mode, it would be more unequal because savings rates differ. In the longer run, while you can defer the tax until you spend, you cannot avoid it. People with high savings rates would simply pay a lot in retirement.
This latter aspect is a major objection. For someone who is, say, 60, they have been taxed heavily on their INCOME for their entire life, and now this change would tax them AGAIN on the money they have saved and will later spend. That's probably not exactly the definition of "equity".

Rahul Sunny answered 1 year ago

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