A Consumption Tax Would Be Fair and Efficient

Congress has the power to design a tax system to fund the necessary functions of government. It also has a responsibility to design a tax system that is fair and efficient. A flat consumption tax is the least economically destructive tax system. Relative to the current income tax system, a consumption tax has the potential to increase economic growth substantially.

The term consumption tax should not be confused with an additional tax in line with the current system. Rather, Congress should implement a consumption-based tax system to replace the current, broken system. There are a number of consumption tax systems. Any tax plan that does not double-tax saving and investment is a consumption tax, including a flat tax, the New Flat Tax, a national retail sales tax, and a business transfer tax.

One of the biggest reasons why replacing the current hybrid income-consumption system with a consumption tax would be a tremendous boon for the economy is it would eliminate the heavy taxation that the current system places on investment. One of the ways a consumption tax eliminates that heavy burden is by not taxing capital gains and dividends. Many observers argue that the lack of such taxes is an enormous giveaway to the rich. However, a consumption tax is an entirely different method of taxation than the current system.

A reform plan that establishes a consumption tax should be evaluated on its merit independent of the current system. A consumption tax can both encourage much stronger economic growth and apply a fair and equitable tax burden without applying a tax on capital gains and dividends.