So you wouldn’t be taxed on your interest, dividends and capital gains, but you wouldn’t be allowed a deduction for interest expense.Īnd that’s actually an important distinction. One thing that Bill left out was that under a consumption tax you’d actually pay tax on money you borrowed at the same time. Ray Suarez: Okay, Len Burman, first of all, do you buy that definition? That to the first order of approximation would be a consumption tax. Now one way to think about a consumption tax relative to the existing income tax is suppose we had our current system, but we made IRA contribution limits infinity, so you could put as much as us wanted into an IRA and you could take it out for any reason, all right. And a consumption tax that wouldn’t happen, you would be taxed essentially when you actually spent the money at the store. And the income tax you’re fundamentally taxed when you earn money or when you get interest, dividends, capital gains, and so on. William Gale: What does it tax? A consumption tax essentially taxes people when they spend money. They’re the co-directors of the institutes’ Joint Tax Policy Center, which is non-partisan.Īnd William Gale, why don’t you get us started by just explaining what a consumption tax is, who pays it, what does it tax? And Len Burman is a senior fellow at the Urban Institute. William Gale is a senior fellow at the Brookings Institution. It’s a broad idea that’s also gained favor among some policymakers in Washington.įor a closer look at consumption taxes, what they are and how they might work, I’m joined by two men who study these issues closely. Greenspan said the tax code needed to be simplified and suggested one idea worth considering was implementing some kind of consumption tax. Ray Suarez: The president’s advisory panel on tax reform met for the second time today, this time seeking the input of Fed Chairman Alan Greenspan.

Pros and cons of flat tax rate