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60 Tax L. Rev. 1 (2006-2007)
The Three Goals of Taxation

handle is hein.journals/taxlr60 and id is 9 raw text is: The Three Goals of Taxation REUVEN S. AVI-YONAH* I. INTRODUCTION The current debate in the United States about whether the income tax should be replaced with a consumption tax has been waged on the traditional grounds for evaluating tax policy: efficiency, equity, and administrability. For example, Joseph Bankman and David Weisbach recently argued for the superiority of an ideal consumption tax over an ideal income tax on three grounds: First, that the consumption tax is more efficient because it does not discriminate between current and future consumption,' while both income and consumption taxes have identical effect on work effort. Second, that the consumption tax is at least as good at redistribution as the income tax, and thus can equally satisfy vertical equity.2 Third, that the consumption tax is easier to administer than the income tax because it makes no attempt to tax income from capital and thus can omit many of the vexing complica- tions that arise from such an attempt, like accounting for basis.3 One can agree or disagree with Bankman and Weisbach, and this debate will no doubt go on.4 For the sake of the argument, however, * Irwin I. Cohn Professor of Law, the University of Michigan. I would like to thank Richard Ainsworth, Anne Alstott, Bill Andrews, Steve Bank, Michael Barr, Richard Bird, David Duff, Yosef Edrey, Michael Graetz, Dan Halperin, David Hasen, Jim Hines, Louis Kaplow, Robert Kuttner, Kyle Logue, Yoram Margaliyot, Alex Raskolnikov, Jim Repetti, Diane Ring, Julie Roin, David Schizer, Dan Shaviro, Reed Shuldiner, Joel Slemrod, Jeff Strnad, Dennis Ventry, David Weisbach, and participants in the 2005 Harvard Seminar on Current Research in Taxation and in workshops at the University of Toronto and Tel Aviv University for their helpful comments. 1 Joseph Bankman & David A. Weisbach, The Superiority of an Ideal Consumption Tax over an Ideal Income Tax, 58 Stan. L. Rev. 1413, 1423, 1425 (2006). 2 Id. at 1428-30. 3 Id. at 1418. 4 Part II addresses the argument in regard to redistribution. In regard to efficiency, Bankman and Weisbach rely on a 1976 paper by Atkinson and Stiglitz to argue that it is incorrect to claim that there is a trade-off between reducing the disincentive to save by adopting a consumption tax, and reducing the incentive to work by increasing taxes on wages (to replace revenue lost as a result of exempting income from savings). Id. at 1414, 1420, 1422-28; A.B. Atkinson & J.E. Stiglitz, The Design of Tax Structure: Direct Versus Indirect Taxation, 6 J. Pub. Econ. 55 (1976). For an example of the argument for the trade- off theory, see Jane Gravelle, The Economic Effects of Taxing Capital Income 11-50 (1994). Bankman and Weisbach argue that the trade-off theory is untrue because the tax on income from savings also reduces work effort. Bankman & Weisbach, note 1, at 1422. But it is quite plausible to assume that people systematically value future taxes less than current taxes by more than the time value of money, and, if so, the current tax on wages 1 Imaged with the Permission of N.Y.U. Tax Law Review

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