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39 Tax Foundation's Tax Review 1 (1978)

handle is hein.tera/tafoutaxt0042 and id is 1 raw text is: 5 gA FUJEIlM(I5ull a Tax Review JANUARY 1978 Vol. XXXIX, No. 1 Taxing Consumption, Not Production: Expenditure Instead of Income Taxation By C. Lowell Harriss The present method of taxation ... operates upon energy, and industry, and skill, and thrift, like a fine upon those qualities. If I have worked harder and built myself a good house while you have been con- tented to live in a hovel, the tax-gatherer now comes annually to make me pay a penalty for my energy and industry, by taxing me more than you. If I have saved while you wasted, I am mulct, while you are exempt. If a man builds a ship we make him pay for his temerity, as though he had done an injury to the state, if a railroad be opened, down comes the tax- collector upon it, as though it were a public nuisance; if a manu factory be erected we levy upon it an an- nual sum which would go far toward making a hand- some profit. We say we want capital, but if any one accumulates it, or bring it among us, we charge him for it as though we were giving him a privilege. We punish with a tax the man who covers barren fields with ripening grain, we fine him who puts up ma- chinery, and him who drains a swamp * These words, written just a century ago, hit at the perverse nature of incentives created by the tax system then. The imessage remains valid-and to a multiple. Today's income taxes have incentive ef- fects which are foolish, inhumane, anti-social, and destructive of good things we all seek. An alternative deserves discussion. People would be taxed-and at progressive rates-on their ex- penditures rather than on their income. Not a sales tax as we know it from use by the states. Not a set of excise taxes at varying rates-5 percent on shoes and 50 percent on fine jewelry. Not a hidden tax on gross sales or on value added. The Federal government's direct tax would fall on a family's, or an individual's, total expenditures dhiring the year. This tax would be much like the income tax we know except that (1) the amounts the family saves would be exempt while (2) expendi- tires paid for out of capital (past savings) would be included. Families would not be expected to keep track of expenditures. They would calculate spend- ing by accounting for cash receipts and cash outlays. This Issue In Brief Individuals paid $158 billion in Federal per-.. sonal income taxes in 1977 and another $25 bil- lion in state and local income taxes. At best, today's income taxes have perverse incentive effects, penalizing those who work longer, produce more in goods and services, and save more. In this article, Professor Harriss describes how an alternative form of taxation would work-a tax levied, at progressive rates, on the expenditures of individuals rather than on their incomes. *11enry GeorgaPogesuslPuel (NewtYork: Bsowrt Schul- kenhacli Emudation, 1942). p. 4:34. Copyright 1978 Iy Tax Fmoulation, Ine., 50 locke/clier Plaza, New York, N.Y. 10020. (212) 582-0880 1

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