ABSTRACT
The most fundamental reform of taxation is to shift the basis of government revenue from the incomes that people earn to the expenditures that they make. This chapter examines the ramifications of consumption-based taxation and the major alternative approaches to structuring a new consumption-based tax. Under a consumption-based tax, the basic way to cut taxes—legally—is for individuals and families to save more and for companies to invest more. The United States uses consumption taxes to a far lesser degree than most other developed Western nations. There are two major types of consumption-based taxes. One is a "bottom-up" tax on individual purchases of goods and services. The second approach to consumption taxation is a "top-down" variation. Consumption taxes such as the value-added tax (VAT) are levied on the returns to labor equally with the returns on capital. An Unlimited Savings Account would achieve many of the same budgetary and economic benefits associated with a VAT while avoiding its many shortcomings.
