The Consumption Tax - to Be or Not to Be

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The Consumption Tax - To Be or Not to Be

With the unification of East and West Germany, 1992 establishment of the European Economic Community (EC) and emergence of the Pacific Rim countries, America as a nation must quickly position itself to secure trade opportunities, financial security and competitiveness within changing world markets. Saddled with a looming budget deficit, recessionary pressures, floundering financial institutions and growing domestic demands, such positioning appears easier to discuss than to actually accomplish.

No longer are the traditional "quick fix" measures of reduced congressional spending and income tax rate increases viable or effective solutions. Confronted with the nation's desire for tax fairness and the contradicting need for additional revenues, congressional leaders have been forced to tinker and adjust practically every revenue raising alternative, no matter how small.

Late last year, Congress passed the Omnibus Budget Reconciliation Act of 1990 (OBRA), the eighth tax reform bill since 1980. In an effort to alleviate and rectify our nation's deteriorating financial health, congressional leaders did everything short of significantly raising the income tax rate. In enacting the 1990 budget, legislators increased the nine cent per gallon gasoline tax to 14 cents per gallon, imposed a 10% tax on the retail price of certain luxury goods, raised the per pack tax on cigarettes to 20 cents in '91 and 24 cents in '93, doubled the tax on beer to 32 cents per six pack, raised the rate on distilled spirits by $1 per proof gallon and the rate on table wine by 18 cents per bottle. They permanently extended an expiring 3% excise tax on telephones, adjusted personal exemptions, eliminated the tax "bubble" and increased the top rate to 31%, increased the alternative minimum tax for individuals and even raised the tax on airline tickets. Despite these extensive efforts, the deficit has again exceeded budgeted considerations and appears to require additional offsetting.

Today, accountants, business owners and taxpayers alike wonder where the 102nd Congress will turn for additional federal funding. Throughout the coming months, congressional leaders will seek to finance the nation's domestic programs and activities, negotiate tax treaties and trade agreements (with old and new world markets), finance necessary military initiatives and contain if not reduce a growing deficit. Where will the revenue come from?

Whispers within the corridors of the Capitol indicate that many congressional representatives candidly believe a value-added-tax (VAT) or consumption tax is an inevitable solution. VAT is a tax imposed on the value added at each stage in the production and distribution of goods and services. While few congressional leaders are presently willing to stand before their counterparts and argue the merits of a VAT, many have said that it is just a matter of time before the state of the nation dictates a responsive course of action.

Simple in concept, a consumption tax is a method of obtaining revenue without taxing savings twice. The income tax taxes savings twice, once when it is included in an income tax base and once as the yield on accumulated savings. Under this theory, a person should be taxed on what he or she uses (consumes) rather than what he or she does not use (saves). Proponents contend that a consumption tax would increase savings, leading to the greater availability of funds for financial investment, faster growing capital stock and ultimately economic growth.

Opponents, on the other hand, argue that as the consumption tax taxes consumption, lower income earners will be taxed higher, as typically lower income earners spend proportionally larger percentages of their incomes on goods and services. Therefore, critics conclude, the tax is regressive and unfair.

A consumption tax of some form appears to be the most alluring prospect for many congressional leaders. …