Assessing Tax Reform

By Henry J. Aaron; Harvey Galper | Go to book overview

CHAPTER FOUR
The Cash Flow income Tax

THE CASH FLOW inocme tax is based on the principle that all income should be taxed once the course of a taxpayer's lifetiem. 1. As noted in chapter 2, income equals earnings from labor plus earnings on accumu- lated wealth or, equivalently, it equals consumption plus additions to net worth. The cash flow income tax described in this chapter is imposed on all comsumption plus transfers to others through gifts or bequests; it is, therefore, an income tax imposed on resources available to the taxpayer over his or her lifetime. Althoug is is an income, it is free of the distortions that plague the annual income tax. As we will show, it handles realizations and accruals correctly; inflation does not distort its tax base; it is neutral between current and future consumption; and integration of the cash flow income taxes for individuals and corporations is natural and automatic.

____________________
1.
An earlier version of this plan appeared as chap. 5, "Reforming the Tax System," Alice M. Rivlin, ed., Economic Choices 1984 ( Brookings, 1984). The interested reader may also wish to consult the following sources: Willian D. Andrews, "A Consumptin- Type or Cash Flow Personal Income Tax," Harvard Law Review, vol. 87 ( April 1974), pp. 11130-88; Anthony B. Atkinson and Joseph E. Stiglitz, Lectures on Public Economics ( McGraw-Hill, 1980), especially chap. 3; David F. Bradford, "The Economics of Tax Policy Toward Savings," in George M. von Furstenberg, ed., The Government and Capital Formation ( Ballinger, 1980): David F. Bradford, "Issues in the Design of Savings and Investment Incentives," in Charles R. Hulten, ed., Depreciation, Inflation, and the Taxation of Income from Capital ( Washington, D.C.: Urban Institute, 1981), pp. 13-47; Robert E. Hall and Alvin Rabushka, Low Tax, Simple Tax, Flat Tax ( McGraw-Hill, 1983); Sven-Olof Lodin, Progressive Expenditure Tax-An Alternative? report of the 1972 Government Commission on Taxation ( Stockhom: Liberförlag, 1978); Peter Mieszkowski, "the advisability and Feasibility of an Expenditure Tax System," in Henry J. Aaron and Michael J. Boskin, eds., the Economics of Taxation ( Brookings, 1980); Joseph A. Pechman, ed., What Should Be Taxed: Income or Expenditure? ( Brookings, 1980); U.S. Department of the Trasury, Blueprints for Basic Tax Reform ( Goverment Printing Office, 1977).

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