Document Type

Article

Publication Date

2010

Keywords

consumption tax, income tax, estate tax

Abstract

This report proposes replacing the income tax with an electronic, progressive consumption tax that couples a credit-method VAT (modified for wages) with a progressive wage tax. I have called this proposal e-VAT (a convenient contraction for an electronic value added tax), because it is based on a business-level-credit VAT and can be collected automatically and electronically at the point of sale.

The essential advantage of e-VAT over the Hall-Rabushka flat tax is that e-VAT’s use of a credit VAT as its foundation facilitates automatic and electronic collection of the tax. A credit VAT lends itself to electronic monitoring and auditing by the IRS. In contrast, the Hall-Rabushka flat tax uses a subtraction-method VAT and therefore would require annual collection, miring it in 20th century technology. The e-VAT would avoid annual collection, a manual and time-consuming audit process, and reliance on self-reporting by taxpayers, all failings that the flat tax would share with the current income tax.

The report provides an explanation of how the e-VAT system would operate, achieve progressivity, and deal with the problems that currently plague the income tax system like systemic tax cheating and the resulting tax gap. Electronic assessment and collection in an economy likes ours in which most significant transactions are done electronically allow for easy compliance and monitoring by the IRS.

The report also explains how e-VAT would allow for an estate tax that is free from the complaint of the estate tax’s current critics – that it represents a second tax on saved income and is therefore unfair. Under e-VAT, the estate tax would be the only tax on saved income.

In addition, e-VAT is destination based and would be consistent with the taxing method used in virtually the entire industrialized world. As such, it would eliminate the competitive price disadvantage that U.S. exports have compared with VAT-collecting jurisdictions’ manufactured goods. This competitive disadvantage results from the fact that U.S. goods incur, and therefore absorb and include in their prices, the U.S. corporate income tax imposed on the U.S. producers, as well as the VAT owed when the importer sells the U.S. goods in those VAT destinations. Under destination-based e-VAT, as a replacement for the corporate tax, U.S. export goods would not have to include in their prices a U.S. corporate tax on top of the destination-based foreign VAT.

This report is a portion of a book by the author that critically examines the current income tax system. The book describes the shortcomings of the income tax and suggests a consumption tax as a replacement for it. The book then provides background regarding the single-tier alternative consumption taxes that can be assessed and collected at the individual and business levels and observes that the current income tax contains provisions from several of these consumption tax methods, so that a shift to a consumption tax would not be as revolutionary regarding burden-sharing as might appear. The book concludes with the material in this report, proposing e-VAT.

Journal

128 Tax Notes 1351 (2010).

Disciplines

Taxation-Federal Estate and Gift | Taxation-Federal Income | Taxation-State and Local | Tax Law