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Consumption Taxes: Some Fundamental Transition Issues

  • David F. Bradford

A number of tax reform plans under discussion in the United States would replace the existing hybrid income-based system with a consumption-based system. In this paper I use uniform (single-rate) consumption and income taxes: (a) to explain how the problem of taxing 'old savings' or 'old capital' manifests itself in the shift from an income to a consumption base; (b) to indicate the tradeoffs that must be confronted in dealing with this phenomenon; (c) to show how price level changes that may or may not accompany a transition affect the distribution of gains and losses; (d) to sketch out how a transition might affect interest rates and asset prices (including owner-occupied housing); (e) to explore the case in equity for protecting the tax- free recovery of old savings; and (f) to emphasize the incentive problems that arise if savers and investors anticipate a change in the tax rate in a consumption-based system.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5290.

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Date of creation: Oct 1995
Date of revision:
Publication status: published as Frontiers of Tax Reform, Michael J. Boskin, ed., pp. 123-150, (Stanford, CA: Hoover Institution Press, 1996).
Handle: RePEc:nbr:nberwo:5290
Note: PE
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  1. Christian Keuschnigg, 1991. "The Transition to a Cash Flow Income Tax," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 127(II), pages 113-140, June.
  2. Alan J. Auerbach & Lawrence Kotlikoff, 1980. "National Savings, Economic Welfare, and the Structure of Taxation," Cowles Foundation Discussion Papers 570, Cowles Foundation for Research in Economics, Yale University.
  3. Howitt, Peter & Sinn, Hans-Werner, 1989. "Gradual Reforms of Capital Income Taxation," Munich Reprints in Economics 19370, University of Munich, Department of Economics.
  4. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 73-94, Winter.
  5. Alan J. Auerbach, 1986. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," NBER Working Papers 2103, National Bureau of Economic Research, Inc.
  6. Alan A. Tait, 1991. "Value-Added Tax: Administrative and Policy Issues," IMF Occasional Papers 88, International Monetary Fund.
  7. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  8. David F. Bradford, 1991. "Market Value versus Financial Accounting Measures of National Saving," NBER Chapters, in: National Saving and Economic Performance, pages 15-48 National Bureau of Economic Research, Inc.
  9. Browning, Edgar K, 1978. "The Burden of Taxation," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 649-71, August.
  10. Bradford, D.F., 1989. "Market Value Us. Financial Accounting Measures Of National Saving," Papers 34, Princeton, Woodrow Wilson School - Discussion Paper.
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