What is the single biggest problem with the tax code? It’s not the complexity, bad as that is. The biggest problem is that it rewards consumption and punishes savings and investment.
You can’t fundamentally address that problem within the 1986 paradigm. You can address it only through a consumption tax. …
But isn’t a consumption tax regressive since poor people spend a bigger share of their incomes than rich people? The late David F. Bradford of Princeton University effectively solved that problem with his so-called X Tax, which has recently been championed by Alan D. Viard of the American Enterprise Institute and others. Under the X Tax, you wouldn’t pay the consumption tax at the cash register. Businesses would be taxed on their cash flow, taking an immediate deduction for investments rather than depreciating them over time. Households would pay tax at progressive rates on their wages but would not pay tax on income from savings.
The X Tax effectively taxes the money you spend right now and rewards savings and investment. The government could raise a chunk of revenue this way and significantly boost growth with little or no change in how tax burdens are distributed between rich and poor. Most economists vastly prefer consumption taxes to income taxes.
This is true pro-growth tax reform for the real world. Most flat taxes are consumption taxes, this just adds a progressive component so that, like, a) it might actually pass a Congress that is not 100% Republican, and b) not either be totally regressive or a huge revenue loser.
The only big drawback with the X tax is that by not taxing investment income at the individual or household level, it makes it look like people who consume out of their past investments pay no tax. But that is an “optical illusion” as Viard explains: