Hastings Law Journal


Recent intellectual and political forces have moved the consumption tax to the forefront of tax policy debate. Because traditional flat-rate consumption taxes, like the VAT, raise serious distributional concerns, tax scholars have responded with suggestions of innovative progressive consumption taxes. Two such proposed taxes-the Hybrid Approach and the X-tax-were independently analyzed in a recent symposium on fundamental tax reform. These two proposals contain striking similarities, as both would tax individuals at progressive rates on their wages with a separate tax on consumption less wages. However, there are significant differences. The Hybrid Approach would impose an individual tax on consumption less wages, while the X-tax contemplates a VAT-like tax on all businesses.

The X-tax and the Hybrid Approach are intriguing proposals as they address the distributional objections to conventional consumption taxes. Standing alone, however, each proposal raises problematic implementation tradeoffs. On the one hand, the X-tax simplifies individual tax reporting compared to the Hybrid Approach and current tax law. On the other hand, the X-tax would change current law significantly more than the Hybrid Approach, thereby exacerbating transition costs. Blending the respective strengths of the X-tax and the Hybrid Approach, this Article proposes a new consumption tax consisting of three parts: a progressive wage tax, a business tax solely on corporations, and a limited individual tax on consumption less wages. This combination minimizes both individual tax reporting and changes to current law, thereby facilitating the transition to a more equitable, efficient, and administrable tax system.

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