Section of Taxation Publications
  VOL. 57
NO. 1
FALL 2003
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
 The U.S. Consumption Tax: Evolution, Not Revolution
Daniel S. Goldberg*

*Professor of Law, University of Maryland School of Law; University of Rochester, A.B. 1968; Harvard Law School, J.D. 1971


Much of the recent discussion in the literature regarding fundamental tax reform has centered around the abandonment of the income tax in favor of a consumption tax. Not as well publicized is that there has been significant movement toward a consumption tax already, through evolution. And, the income tax is likely to move even further in that direction in the coming years. This article focuses on these thoughts and observations and considers their implications for fundamental tax reform.

In general, the tax base under the income tax is the taxpayer's "taxable income," a net income concept. In contrast, the tax base under a consumption tax is the amount consumed. The income tax is usually justified on the basis that income is the best measure of ability to pay and therefore represents the fairest tax base. A consumption tax is also justified on fairness grounds on the argument that consumption is a measure of what the taxpayer is taking out of society, an arguably more appropriate basis to tax than income, which is a measure of what the taxpayer contributes to society. The consumption tax is also rationalized on economic grounds as creating desirable incentives for saving and investing while also being free of distortion in favor of present consumption against future consumption.

The article begins in Part II by explaining the difference between an income tax and a consumption tax and provides the backgrounds of the alternative forms of consumption tax: (1) consumed income, (2) yield exemption, and (3) point of sale taxation.

Part III identifies various tax provisions in the income tax law that reflect a consumption tax, some of which are in the consumed income form and some in the yield exemption form. Several of the provisions are of only recent vintage in the current Internal Revenue Code and reflect the surreptitious nature of the trend from an income tax regime to a consumption tax regime. Part IV considers the positions of both the advocates of the consumption tax and of the income tax as a means of explaining the evolution of the current hybrid system. Part V discusses some implications of the trend and analyzes that phenomenon both from the perspective of a consumption tax advocate and from the perspective of an income tax advocate. Each side may be both happy and unhappy with the resulting camel.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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