Consumption Expenditure Tax*

The consumption expenditure tax is proposed either to replace or supplement the income tax. The individual income tax and a graduated consumption expenditure tax are alternative methods of taxing people in accordance with ability to pay. In the case of the income tax, the measure of ability to pay is income; in the case of the expenditure tax, the measure is consumption. Some economists believe that the expenditure tax is superior to an income tax because current expenditures reflect normal or permanent income better than current income does. To avoid a reduction of progressivity, the expenditure tax rates would have to be much higher than the income tax rates. On balance, the administrative and compliance problems of a consumption expenditure tax are difficult but probably not insuperable for advanced countries that have effective income tax administration. The transition from the income tax to a consumption tax would create great inequities.