The Case for an Income Tax

Recent studies by the US Treasury Department and the Meade Committee in Britain have one thing in common. They recommend a progressive tax on personal consumption as an alternative to the income tax and discuss of the practical problems of substituting consumption for income as the tax base. These studies suggest that replacing the income tax with an expenditure tax is now being considered a serious possibility. Advocates for the expenditure tax base their arguments on considerations of equity, administrative convenience and economic efficiency. The article examines the merits of these arguments, with a focus on four important non-economic issues in the debate between expenditure and income taxation: 1. whether an income tax imposes double taxation on savings, 2. how income compares with other bases for taxation in terms of fairness, 3. whether ability to pay is a meaningful test of fairness in a tax base, and 4. whether an expenditure tax will be less difficult than an income tax for the government to administer and more convenient for most taxpayers to pay. It argues that case for replacing the income tax with a spending tax rests on some dubious conclusions, and that the income tax, despite being conceptually less coherent than arguments for spending tax, has worked reasonably well in practice. The costs of replacing the income tax with a spending tax would also be enormous