Taking a new look at an old consumption tax
Twenty-five years ago, Princeton economist David Bradford designed what he called the X Tax. The idea鈥揳 progressive consumption tax鈥揼enerated lots of discussion among tax experts. Wonks loved it for its elegant simplicity though there were (and are) real questions about how the tax would work in an increasingly international economy and how it would treat financial services.
David鈥檚 idea never got much attention beyond the world of tax geeks. 聽But Bob Carroll and Alan Viard, in their new book Progressive Consumption Taxation: The X Tax Revisited (AEI Press 2012), are attempting to bring new attention to the design. Bradford, who was a senior Treasury official in the Ford Administration and a top economic advisor to President George H.W. Bush , died in 2005.
The X Tax is a consumption tax, essentially a European-style value added tax with a couple of key innovations. 聽Most important, unlike many consumption taxes, it is progressive. In effect, the X Tax divides consumption into two pieces鈥攚ages and business cash flow. Households are taxed on wages, but unlike a VAT, they pay at progressive rates rather than a single flat rate. Businesses pay one rate on their gross receipts, but get to deduct wages. The top individual rate is equal to the business rate.
Because it is fundamentally progressive, the X Tax聽addresses聽the most common criticism of consumption taxes鈥攖hat they impose a greater burden on low-income households. This happens because people with lower incomes consume more of their money than聽the rich.
There are other ways to solve this problem. The VAT proposed by Mike Graetz, for instance, would give couples a tax exemption of $100,000 (and provide a rebate for those who owe no tax). Graetz, however, still retains both the individual and business income tax while the X Tax completely replaces the existing system. 聽聽聽
Economists will argue over which model makes more sense. But both are worth serious consideration when/if Congress really debates tax reform. Graetz can, and frequently does, speak for himself (with, among other things, great humor). Carroll and Viard deserve a lot of credit for being new voices for Bradford鈥檚 old idea. 聽
It is, btw, fascinating that so much of the debate聽over consumption taxes is among conservatives. These taxes are in extremely bad odor among most Republican politicians these days. Yet, House Budget Committee Chairman Paul Ryan (R-WI) and former GOP presidential hopeful Herman Cain (who could ever forget 9-9-9) both supported versions of such a levy. Bradford, of course, was an aide to GOP presidents.聽Graetz was a top Treasury official for the first President Bush. And Carroll and Viard are both known as conservative tax scholars. 聽聽聽
Bradford understood how controversial consumption taxes can be鈥攖hat鈥檚 why he called his idea an X Tax. But whatever you want to label it, his design is worth consideration. There few new聽ideas in tax policy, so聽it never hurts to聽revisit one of the old ones. Thanks to Bob Carroll and Alan Viard for doing so.
