Congress is considering several bills that would replace the federal income tax system with one that is consumption based. All the proposals share the goals of increasing savings and investments, simplifying the tax system, enhancing the international competitiveness of the U.S. economy, and raising sufficient revenue to pay for federal spending. The tax treatment of the financial sector of the economy is critically important to the efficacy of these proposals.

But financial services are a special kind of animal in the economy, and seemingly common-sense taxation approaches raise issues of equity, tax administration, and unintended economic consequences. Peter R. Merrill skillfully examines the issues involved in this complex problem and offers useful and well-supported conclusions.

Taxation of Financial Services under a Consumption Tax is one in a series of new AEI studies on topics relating to fundamental tax reform. These topics include transition problems in moving to a consumption tax, the effects of reducing taxes on individuals' work effort, issues in the taxation of financial services, and international issues in consumption taxation, among others. A list of publications in this series appears inside.

Peter R. Merrill is a principal with Price Waterhouse's Washington National Tax Service. He was formerly the chief economist of the Joint Committee on Taxation of the U.S. Congress.