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The Benefits of a Progressive Consumption Tax

Many economists already favor a consumption-based tax system for raising revenue on grounds of efficiency and simplicity. In an environment where wealth inequality is rising inexorably, the case for doing so has become increasingly compelling.

CAMBRIDGE – Is it time for the United States to consider switching from income tax to a progressive consumption tax as a way of addressing growing wealth inequality? Many economists have long favored a consumption-based tax system for raising revenue on the grounds of efficiency and simplicity. However, despite occasional vocal adherents, it has never gained political traction. Is it time to think again?

One of the main objections is that switching systems would require a potentially complex transition to avoid penalizing existing wealth holders, who would be taxed when they try to spend accumulated savings on which they had already paid income taxes. Yet, in an environment where wealth inequality is rising inexorably, that drawback may be a virtue. Moreover, a great strength of a consumption tax system is that it does not tax saving, and also gives firms more incentive to invest.

Certainly, there are other, more straightforward ideas for tackling wealth inequality. US Senator Elizabeth Warren has proposed an ultra-millionaire tax on the 75,000 wealthiest American households, which would amount to a 2% annual wealth tax for those with more than $50 million, rising to 3% for billionaires. Warren’s bold proposal has set off an intense debate among economists on just how much revenue it would bring in. Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley – heavy hitters in the inequality literature – have endorsed Warren’s plan, estimating that it would raise nearly $3 trillion over ten years. A number of prominent ultra-rich are also on board.

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