Here's how to replace the income tax

Editor’s note: Alan Viard is a resident scholar at the American Enterprise Institute and one of the most respected public finance economists in the nation. He is the co-author of a new book, "Progressive Consumption Taxation." The book explains how the United States can move away from taxing income and toward taxing consumption; and how this new system is both fair and promotes economic growth.

NICK SCHULZ: How would an “X” tax—a progressive consumption tax—work?

ALAN VIARD: Using the fact that national consumption is equal to wages plus business cash flow, the X tax implements consumption taxation in two parts. First, households are taxed on their wages under a progressive rate schedule, with higher tax rates on higher-paid workers and exemptions and tax credits for low-paid workers. Households are not taxed on income from saving. Second, business firms are taxed on their cash flow at a flat rate equal to the rate on the highest-paid workers. Firms are allowed to immediately deduct all of their investment costs rather than depreciating them over a period of years. The X tax design is identical to that of the Hall-Rabushka flat tax, except that the flat tax applies a single tax rate to all wages above an exemption amount, while the X tax features progressive tax rates.

Although the X tax may look like an income tax, it functions as a consumption tax because it does not impose a tax penalty on those who save and invest to consume in the future, relative to those who consume today. The household part of the tax clearly does not penalize saving, because tax is imposed only on wages, not on any income from saving. And the business part of the tax imposes no investment penalty on the margin, because the immediate deduction for investment costs fully offsets the expected taxes on the marginal investment’s future payoffs. The business tax does collect revenue, however, from investments made before the reform was adopted and investments that yield extra returns above those earned by the marginal investment.

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

 

Nick
Schulz

  • Nick Schulz was the DeWitt Wallace Fellow at AEI and editor-in-chief of American.com, AEI's online magazine focusing on business, economics, and public affairs. He writes the “Economics 2.0” column for Forbes.com where he analyzes technology, innovation, entrepreneurship, and economic growth. He is the co-author with Arnold Kling of From Poverty to Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph Over Scarcity. He has been published widely in newspapers and magazines around the country, including The Washington Post, The Wall Street Journal, the Los Angeles Times, USA Today, and Slate.


  • Phone: 202-862-5911
    Email: nick.schulz@aei.org

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