Uneasy Compromise: Problems of a Hybrid Income-Consumption Tax

Uneasy Compromise: Problems of a Hybrid Income-Consumption Tax

Uneasy Compromise: Problems of a Hybrid Income-Consumption Tax

Uneasy Compromise: Problems of a Hybrid Income-Consumption Tax

Excerpt

For decades, U.S. tax experts have been debating whether the nation would be better served by an income tax or by a consumption tax. Both taxes apply to total household resources and both taxes can be levied at graduated rates. The essential difference is that the consumption tax exempts saving, while an income tax does not. In practice, all tax systems are mixed or "hybrid" systems that contain both income tax and consumption tax features. Although legislators have reasons for enacting such mixtures, they result in inequities, inefficiencies, and abuse. This book deals with the difficult issues raised by a hybrid tax system and the solutions to those problems.

The Hybrid Tax System

Analysts have recognized that despite their names, neither the "personal income tax" nor the "corporation income tax" is a true income tax. For a variety of reasons, practical and political, Congress has repeatedly shied away from any attempt to tax such major elements of income as accrued but unrealized capital gains. It has also exempted such important elements of both income and consumption as employer- financed health insurance and term life insurance. And certain elements of the personal income tax--notably the treatment of qualified pensions, individual retirement accounts, Keogh plans, and other tax-sheltered saving--resemble the rules that would apply under a consumption tax. In addition, Congress on its own initiative and with the consent of successive administrations has enacted a host of special-purpose credits, deductions, and allowances for reasons that had no basis in the principles of either income or consumption taxation.

In combination, these provisions drastically narrowed the tax base.

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