There is an joke about why America doesn't have a consumption tax:
We can’t get a VAT because conservatives think it raises lots of revenue and liberals think it’s regressive; we’ll get a VAT once conservatives realize it’s regressive and liberals realize it raises tons of revenue.
So it is with a slight bit of irony that AEI has published a book which proposes one way to implement a progressive consumption tax.
An interview from March of this year one of the authors of this plan, Alan D. Viard, explained how this 'X-Tax', would work. In a nutshell, while the mechanisms are similar to an income tax (it taxes wages, and exempts low-wage earners from taxation) the tax explicitly avoids investment or savings:
Households are taxed only on their wages, not on any income from saving, such as interest, dividends or capital gains. Higher tax brackets apply to workers with higher wages. Workers with the lowest wages pay no tax and may receive cash from tax credits. If desired, it would be possible to allow some deductions on tax returns, such as charitable contributions, medical expenses, and state and local taxes.
Businesses, regardless of whether they are corporations, partnerships or sole proprietorships, are taxed on their business cash flow at a high flat rate equal to the tax rate paid by the highest-wage workers. Firms are allowed to immediately deduct all business expenditures, including purchases of equipment and buildings, rather than depreciating them over a period of years. Firms do not deduct interest expense or any other financial outlays.
Although the X tax may look like an income tax, its economic properties make it a consumption tax. The wages on which workers are taxed plus the business cash flow on which firms are taxed add up to consumption. Two key features of the X tax guarantee that it imposes no saving and investment disincentives. First, households are not taxed on income from saving. Second, firms immediately deduct their investment costs, which cancels out, on the margin, the tax later imposed on the proceeds of those investments.
