J. Clifton Fleming Jr., 𝘙𝘦𝘱𝘭𝘢𝘤𝘪𝘯𝘨 𝘵𝘩𝘦 𝘍𝘦𝘥𝘦𝘳𝘢𝘭 𝘐𝘯𝘤𝘰𝘮𝘦 𝘛𝘢𝘹 𝘸𝘪𝘵𝘩 𝘢 𝘗𝘰𝘴𝘵𝘱𝘢𝘪𝘥 𝘊𝘰𝘯𝘴𝘶𝘮𝘱𝘵𝘪𝘰𝘯 𝘛𝘢𝘹: 𝘗𝘳𝘦𝘭𝘪𝘮𝘪𝘯𝘢𝘳𝘺 𝘛𝘩𝘰𝘶𝘨𝘩𝘵𝘴 𝘙𝘦𝘨𝘢𝘳𝘥𝘪𝘯𝘨 𝘢 𝘎𝘰𝘷𝘦𝘳𝘯𝘮𝘦𝘯𝘵 𝘔𝘢𝘵𝘤𝘩𝘪𝘯𝘨 𝘗𝘳𝘰𝘨𝘳𝘢𝘮 𝘧𝘰𝘳 𝘞𝘦𝘢𝘭𝘵𝘩𝘺 𝘐𝘯𝘷𝘦𝘴𝘵𝘰𝘳𝘴 𝘢𝘯𝘥 𝘢 𝘕𝘦𝘸 𝘛𝘢𝘹 𝘗𝘰𝘭𝘪𝘤𝘺 𝘓𝘦𝘯𝘴, 59 SMU L. Rᴇᴠ. 617 (2006).
In recent years, proposals have been made to replace the federal income tax with a postpaid consumption tax - that is, a federal value added tax ("VAT"), a federal retail sales tax ("RST"), or a federal cash-flow (consumed income) tax. Because these taxes can be constructed so that they are indistinguishable at the level of the ultimate consumer in terms of their principal effects, and because a prominent recent proposal is the RST approach, I have written this article in terms of an RST/income tax comparison. The analysis, however, would be mostly the same if the income tax was compared with the other forms of postpaid consumption taxes. Commentators and analysts have often noted that complete replacement of the federal income tax with a consumption tax regime would cause a substantial downward shifting of the federal tax burden to low and middle income taxpayers. This article, however, does not deal with that important point. Instead, it argues that complete replacement would create an unlimited federal obligation to match all private saving, regardless of the amount or purpose of that saving and regardless of the saver's income level, and that the wealthiest taxpayers would benefit from the largest match. This argument produces a new lens through which to examine other facets of the income tax versus consumption tax debate and this scrutiny shows that a postpaid consumption tax with progressive rates arguably does not impose any greater burden on investment income than a flat-rate postpaid consumption tax and that the wage tax/postpaid consumption tax equivalence is not essential to an understanding of the effects of a postpaid consumption tax. Using the new lens, the article also re-examines familiar matters that are generally related to the debate over whether investment income is taxed once under a comprehensive income tax and not at all under a postpaid consumption tax, or is taxed twice under a comprehensive income tax and once under a postpaid consumption tax. I conclude that within its premises, the income tax does not double-tax investment income.
59 S.M.U. L. Rev.
S.M.U. Law Review