Question

What do you think about the argument that a broad-based consumption tax can be viewed as an income tax plus a deduction for a net saving.

Answer 1

A statement which says that a broad-based consumption tax can be viewed as an income tax plus a deduction for net saving can be viewed as follows:

This particular statements follows from the definition of comprehensive income as consumption plus the change in net worth. It seems straightforward to conclude that current law’s deviations from a consumption base include:

• tax expenditures under a comprehensive income tax base associated with exemptions and deductions for certain types of income, and
• over payments of tax, or negative tax expenditures, to the extent net saving is not deductible from the tax base. In reality, however, the situation is a bit more complicated as a specific form of consumption tax needs to be chosen as a baseline tax system. Below let's describe the general issues related to a consumption tax baseline, as well as our choice of an X-tax regime for a baseline, and various measurement issues relate to this regime. There are other consumption taxes that could have been selected such as a cash flow tax. But regardless, the common question in all forms of consumption taxation is what happens when the current income tax reference law is modified by removing normal returns to capital from the tax base.