Cato Institute Welcomes Panel's Consumption Tax Proposal

by Mike Godfrey, Tax-News.com, Washington

21 October 2005

The Cato Institute, the free market think-tank, has welcomed the Presidential tax panel's proposal for a consumption-based tax plan, describing it as a "huge leap forward" from the current income tax system in terms of both fairness and simplicity.

After meeting for the final time before submitting its report to Treasury Secretary John Snow in November, the tax panel announced two options for reform of the US tax code. Under the first option, the current income tax system would be streamlined, double taxation of dividend income eliminated, foreign sourced corporate income taxed on a territorial basis and personal income tax brackets cut from six to four; the other option would scrap most of the income tax and install a consumption-based tax system.

While many of the measures under the first option are likely to encourage investment and boost US competitiveness generally, Chris Edwards, Director of Tax Policy at the Cato Institute believes that the income tax proposal does not go far enough to alleviate the tax burden on companies. "For example, the proposed 32 percent corporate rate would still be higher than the 28 percent average corporate tax rate in Europe," observed Mr Edwards.

On the other hand, the panel's consumption-based proposal would be "vastly simpler" than the current corporate income tax, according to Mr Edwards.

It resembles resembles the Steve Forbes flat tax in its basic structure, he says, except that it has multiple rates on individuals rather than a single rate. The business part of the consumption-based plan is a "cash-flow" tax which would replace today's complex depreciation system with simple "expensing", or immediate write-off, of investments and be levied on a territorial basis.

"As some of the panelists noted, expensing would spur rising investment in factories and machines, increase worker productivity, and raise wages," observed Mr Edwards.

"This plan would represent a huge leap over the current income tax in terms of simplicity and economic efficiency," he added.

Recommended