NATIONAL CONSUMPTION TAX.   Term Paper ID:21280 Click to get this paper

Essay Subject: Examines viability of alternative to federal income tax. Economic overview, need for, pros & cons, politics, budget benefits, neutrality & equity, types (value-added & sales), implementation.... More...

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Paper Abstract: Examines viability of alternative to federal income tax. Economic overview, need for, pros & cons, politics, budget benefits, neutrality & equity, types (value-added & sales), implementation. Paper Introduction: Replacing the Federal Income Tax with a National Sales Tax Introduction This paper will examine the possibilities of implementing a national sales tax as the principal means of raising revenue in the United States, replacing the current federal income tax. The first part of the paper will provide an introduction to the topic, discussing the economic problems which could be addressed by a national consumption or sales tax and a few of the main attributes of consumption taxes. The second part of the paper will outline some of the political arguments in favor of and against consumption taxes. The third part of the paper will discuss how a national sales tax could alleviate some of the economic problems facing the United States, especially the budget deficit and the national crises in personal savings and inv Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. The base of anational consumption tax corresponds roughly to the total output of goodsand services in the economy plus imports. Further,when considering a one-year time period, the reduction in regressivity islimited, particularly for low-income households, because the money savedfrom the exclusions is largely offset by higher tax rates on taxedgoods.[21] A second option to overcome the regressivity of a consumption taxwould be a credit which either is flat or diminishes as income rises. Necessities can beexcluded from a consumption tax since they comprise a disproportionallyhigh percentage of the incomes of lower income households. Weidenbaum, David G. Both types of equity may be affectedby the measure of ability to pay and the tax period. Aprogressive tax on current income will place a low burden on a lifetimerich medical student whose income is temporarily low while he or she is inschool. When such individuals are reallypermanently worse off, they will show it by consuming less; they will thenalso pay less consumption tax. In addition, the reduction inregressivity possible from such a remedy is declining because consumptionpatterns for different income levels are becoming more similar. Deficit reduction under the present income tax scheme would requireeither substantially higher tax rates or a broader tax base, including thetaxation of fringe benefits and the limitation of the itemized deductionsfor state and local income and property taxes and for mortgage interest.[7] Excessive reliance on the income tax discourages saving andencourages present consumption. Weidenbaum, D. Income in these households can betemporarily high or low without greatly affecting the households' lifetimeresources or current consumption. Since sales at one stage of the production-distribution process are deductible purchases at the next stage, theaggregate tax base is exactly equal to sales to final customers. In contrast, an income tax affectsthis decision because it taxes saving twice: when it is levied on incomewhich is saved and when it is levied on the returns from savings. Ifthis burden is not relieved through increased tax credits to the elderly,the consumption tax will redistribute income across generations. This means that the percentage ofconsumption paid in taxes by households would be approximately constant asthe level of household consumption rose.[18] If disposable income over a one-year period is used as the measure ofability to pay, as it has been traditionally, then a consumption tax wouldbe viewed as extremely regressive. A household wouldhave no incentive to substitute leisure for work but would have anincentive to increase its working hours in an attempt to maintain it'scurrent living standards.[28] Intergenerational Shift in Burdens Because a consumption tax is an implicit surplus policy, enacting onewould be fiscally conservative. Such a base in 1987 might havetotaled $2.5 trillion; a consumption tax of 3.5% that year could haveraised about the same amount of revenue as the corporate tax with its 34%rate, while a consumption tax rate of 16% could have raised the samerevenue as the individual income tax at the 15% and 28% rates of thatyear.[1 ] Opponents of a sales tax argue that it would eliminate theprogressivity of the present income tax and that it would initially shiftthe tax burden to the older generations who have already paid income tax ontheir earnings and would now be forced to pay a second large tax on theirearnings as they consumed them during retirement. For example, person A earns3 when young and 7 when old, while person B earns 7 when young and 3 when old. The problemwith such exclusions is that their administrative, compliance, andneutrality costs are very high; the lost revenue must be made up fromhigher rates on other commodities. First, the income tax reform in 1986 didnot accomplish what its proponents wanted it to. Any additional taxes on income or wealth wouldundermine the claimed advantages of exempting investment and savings fromtaxation. The tax is generally added to the purchase price ofthe good so the consumer is generally presumed to directly bear the burdenof the tax. The U.S. First, a consumptiontax would not alter decisions concerning which goods to buy because allwould be taxed at the same rate. Since the rate of taxation is fixed tothe price of goods or services, everyone pays the same rate; thus, thepercentage of disposable income paid in tax would decrease rapidly asdisposable income rose.[19] If disposable income over a lifetime is the measure of ability topay, however, then a consumption tax would only be mildly regressive.Lower and middle income households consume nearly all savings over theirlifetimes. Throughout the paper, consumption taxes and sales taxes will bereferred to interchangeably, except where specifically differentiated. The fifth part ofthe paper will discuss the economic neutrality of consumption taxes andtouch upon the possible administrative concerns of enacting a consumptiontax. This system would obviate the need fortying credits to the present income tax system on an individual basis. While there are several ways, such as throughexemptions for necessities or through tax offsets, to eliminate theregressivity at the bottom end of the wealth distribution, it is difficultto achieve progressive taxation at the upper levels of income or wealth bytaxing only consumption. Thus, by taxing consumption directly orindirectly (through a VAT) the government effectively taxes the presentvalue of current and future resources, which is a better measure of abilityto pay for most Americans than is current income.[14] The argument that a consumption tax is regressive is made withreference to current income, rather than the present value of resources.While it is true that under a consumption tax those with temporarily lowcurrent income will exhibit a higher ratio of taxes to income than thosewhose current income is temporarily high, measured against lifetime income(the present value of resources) the same consumption tax would lookproportional, and possibly even progressive. In contrast, all therevenue from proportional labor, capital income, and income taxes distortssome margin of choice, whether it be the work-leisure decision or theconsumption-saving decision. Christian, Jr., The Value-Added Tax: Orthodoxy and New Thinking, 42 (1989).[3]Graetz, Revisiting the Income Tax vs. A sales tax would improve theefficiency of the economy by eliminating the various economic distortionswhich have arisen under the income tax system. The philosophy behindconsumption taxation has its roots in the writings of Thomas Hobbes, whothought that individuals should be taxed according to the amount ofresources they withdraw from society (since these resources are limited).Consumption represents what is withdrawn, while income represents what iscontributed to society. Consumption Tax Debate, 57 Tax Notes 1437, 1438 (1992).[4]Id.[5]Id.[6]Id. Thethird major household decision, the work-leisure decision, would beaffected by a consumption tax. Christian, Jr, eds.), 1-16. It failed to address thefundamental problem of income taxation in an inflationary economy, afailure which will continue to trouble both taxpayers and government infuture years. investment rate has also long been lower than that ofother countries, with the Japanese private investment rate averaging 2.5times greater than that of the U.S. Replacing the Federal Income Tax with a National Sales Tax Introduction This paper will examine the possibilities of implementing a nationalsales tax as the principal means of raising revenue in the United States,replacing the current federal income tax. averageof 3.6% net savings rate in the decade of the 198 s compares poorly withthe 1 .2% rate of West Germany and the 17.8% rate of Japan during the sameperiod. Consumption Tax Debate. A sales tax wouldencourage savings and investment, two things which have been discouragedunder the income tax system. Instead,an eligible household would submit a simple form in order to receive arefund. The value-added can be calculated as the differencebetween sales and purchases of inputs. The debate over the viability of consumption taxes in the UnitedStates has existed since the origins of the country. Second, there has long been concernthat consumption taxes are unfair because they do not take into account thetaxpayers' ability to pay taxes resulting from the accumulation of capitalor of income from capital. Although critics of a sales tax, and consumption taxes in general,argue that it is regressive, placing inordinate burdens on lower incomehouseholds, they are mistaken. The first part of the paper willprovide an introduction to the topic, discussing the economic problemswhich could be addressed by a national consumption or sales tax and a fewof the main attributes of consumption taxes. The main administrative problemwith a retail sales tax would be enforcing compliance, since sales oftentake the form of cash transactions with little paperwork.[33] Conclusion A retail sales tax would alleviate many of the economic problemswhich arise from the income tax system. In calculating the relative distortions of aconsumption tax, one must be careful not to confuse economic efficiencywith economic redistribution (the notion that efficiency is not theweighing of the gains to winners against the losses to losers fromswitching tax structures, but asking whether the winners could more fullycompensate the losers through a change in the tax structure).[26] Because revenue is collected through a lump-sum tax on wealth, aconsumption tax will be much less distortionary than a proportional incometax or a proportional wage tax. In The Value-Added Tax: Orthodoxy and New Thinking (Murray L. High incomehouseholds, on the other hand, tend to have net saving over theirlifetimes; thus, they would pay a lower proportion of their disposableincomes in consumption tax than lower income groups.[2 ] Options which might relieve this regressivity include exclusions andmultiple rates, credit, and earmarking of tax revenue. The second part of the paperwill outline some of the political arguments in favor of and againstconsumption taxes. at 454.[23]Id.[24]Id at 455.[25]Id.[26]Kotlikoff, supra note 13, at 242.[27]Bickley, supra note 12, at 455; Kotlikoff, supra note 13, at 241-42.[28]Bickley, supra note 12, at 455.[29]Kotlikoff, supra note 13, at 242.[3 ]Id.[31]Id.[32]McLure, supra note 7, at 1 3-1 4.[33]Id. trading partnersrely upon consumption taxes, while the U.S. Shifting to Consumption as a Federal Tax Base: An Overview. The complexities of the reform act reflected many politicalcompromises and the resulting provisions failed to abate the acceleratingcosts of income tax compliance that burden the economy. In low and middle income households, almost all income is consumedover the lifetimes of these households; thus, households with the samelifetime incomes would have the same levels of consumption and pay the sameamount of consumption tax. Thereason for this is that a sales tax is a form of consumption tax and almostall consumption taxes have the same advantages and disadvantages. While leisure would not be taxed, thereturns from work would be taxed when spent on goods. The most familiar,and the one which is the subject of this paper, is the retail sales tax.This tax is levied on the sales of goods and services as they are purchasedby the final consumer. Horizontal equity concerns the degree to which households with thesame ability to pay are taxed equally. Second, thefederal deficit has not significantly shrunk and the policymakers of bothparties in both houses of Congress refuse to seriously address the problemof federal spending. If combined with a tax credit under the federal income tax, a consumptiontax could certainly add to the progressivity of the U.S. -----------------------[1]Schenk, Value-Added Tax: Does the Consumption Tax Have a Place in the Federal Tax System?, 7 Virginia Tax Rev. 2 7, 223-24 (1987).[2]Raboy & Massa, Who Bears the Burden of Consumption Taxes?, in M. Raboy, & Ernest S. While this may be a reasonable reference in a world wheretaxpayers live for only a year or are cash constrained in theirconsumption, it is not a reasonable reference variable for the U.S., wherethe majority of taxpayers can expect to live for many years in the futureand are not cash constrained. Thus, a consumption tax would not be horizontally equitablefor high income households.[25] Neutrality From an economic viewpoint, a neutral source of government revenue ispreferred, a neutral source being one which affects or distorts economicdecisions the least. Raboy, & E. Studies have shown that a redistribution from an older generation to ayounger one alters savings. BibliographyBickley, James M. The administrative burden of enacting and enforcing a national retailsales tax would not be very great, although enforcing compliance would be agreater problem than with a value-added tax. The old, with fewer years left to live, tendto consume more than younger generations and generations not yet born.This means that if the government takes money from a younger person andgives it to an older person, the older person will increase his currentconsumption by a greater amount than that by which the younger person willcut back on his current consumption. To the extent that thereis inequity in the consumption tax, this can be remedied by theintroduction of certain measures, such as refunds or exemptions fornecessities, although these will skew the overall economic neutrality ofthe tax. This has led to an overvalued dollar, making it extremelydifficult for American business, whether in farming, mining, ormanufacturing, to compete in the world markets. 7 Virginia Tax Review 2 7-3 1 (1987).Weidenbaum, Murray L., & Christian, Ernest S., Jr. The poor saving rate in the United States hasresulted in a weak dollar and an overreliance on foreign investment withinthe United States. This means that additional federal revenues will berequired.[3] Third, the globalization of capital markets, with their rapidtransfers of capital across borders, has made it more difficult for anycountry to impose substantial taxes on capital income requires convergencebetween the tax systems of the developed countries. In addition, there would beno necessity for refunds under a retail sales tax, as there is under aVAT.[32] Problems with a retail sales tax include the treatment of capitalgoods which are used by businesses in the production of other goods.Exemptions would have to be granted to either specific items or specificfirms who purchase such items as capital. Taxingconsumption is equivalent to taxing current and future labor income plusinitial wealth. A tax on consumption does the opposite. utilizes an income tax. The revenue produced by a sales tax could potentiallyreduce the budget deficit and reverse the transfer of wealth from theyounger generations to the older generations. Similarly, executives who are between jobs may have a temporarilylow income but tend to be lifetime rich. McLure, supra note 7, at 15-16; Bickley, The Value-Added Tax: Concepts, Issues, and Experience, 47 Tax Notes 447, 448 (199 ).[13]Kotlikoff, The Case for the Value-Added Tax, 39 Tax Notes 239, 241 (1988).[14]Id.[15]Id.[16]Id.[17]Id.[18]Bickley, supra note 12, at 453.[19]Id at 453; Bradford, What Are Consumption Taxes and Who Pays for Them?, 39 Tax Notes 383, 389 (1988).[2 ]Bickley, supra note 12, at 453; Bradford, supra note 19, at 389.[21]Bickley, supra note 12, at 453.[22]Id. The third part of the paper will discuss how a nationalsales tax could alleviate some of the economic problems facing the UnitedStates, especially the budget deficit and the national crises in personalsavings and investment. Public familiarity with asales tax in particular would alleviate widespread confusion of consumptiontaxes in general. Consumption taxation has longbeen a staple of state and local taxation and many fear that the federalgovernment would usurp the role of the state and local governments inenacting a national consumption tax. The second most common version of the consumption tax is thevalue-added tax (VAT). Since this cost is generallypassed on to the final consumers in the form of higher prices, theconsumers indirectly bear the burden of this tax.[2] Political Arguments For and Against Consumption Taxation There are four basic political reasons for the recent interest inswitching to a consumption tax. The lack ofprogressivity has been overstated, however, as progressivity should bemeasured in terms of lifetime income, rather than annual income. A consumptiontax, unless accompanied by additional tax relief to the elderly, will placea larger tax burden on the elderly than an income tax, since they are theprimary owners of assets[17] There are two types of equity: vertical and horizontal. Although such a transition would result in a radical departurefrom present financial arrangements, this is necessary for thetransformation of the tangled provisions of the tax code into a clear andsimple tax system. A stand-alone system would probably encourage low-incomehouseholds to file for a refund but the administrative and compliance costswould be high.[22] Consumption tax revenues might also be earmarked to finance anincrease in income tests transfers. Third, there are fears that a consumption taxwould impose its greatest burden on the lower-earning, higher consumptionyears of youth and old age. 57 Tax Notes 1437-42 (1992).Kotlikoff, Lawrence J. Boston: Kluwer Academic Publishers, 1989. The tax is collected as goods andservices pass through the sequential stages of the production-distributionprocess, rather than entirely on the final sale to consumers, as under theretail sales tax. Tax Notes Today (April 13, 1993) (Unpublished copy of speech before Cato Institute Seminar).McLure, Charles E. A consumption tax places a larger taxburden on older generations who are alive at the time it is introduced. Consequently, lifetime consumption and lifetime income areapproximately equal for the majority of households. The fourth part of the paper will examine in somedetail the issue of equity with regard to consumption taxes, payingparticular attention to the argument over progressivity. U.S. and the German rate averaging 2/3 timesgreater.[5] There are several reasons for the resistance to consumption taxation. While a sales tax wouldresult in distortions of its own, the net impact would be an overallreduction in the misallocation of economic resources.[9] A consumption tax has the potential for raising very large amounts ofrevenue, larger than those raised through income taxation. is currentlybelow the savings rates of virtually all OECD nations, and the U.S. McLure, The Value-added Tax: Key to Deficit Reduction?, 1 -11 (1987).[8]Id at 11.[9]Kotlikoff, The Economic Impact of Replacing Federal Income Taxes with a Sales Tax, Tax Notes Today April 15, 1993, at 2.[1 ]Weidenbaum & Christian, Jr., Shifting to Consumption as a Federal Tax Base: An Overview, in M. A substantial reduction ofthe deficit is needed to bring the value of the dollar to a more realisticlevel. tax structure whenmeasured in reference to the present value of resources. As will be briefly explained below, the VAT islevied at each stage of the production-distribution process and is paid bythe producers and distributors of the goods. Althoughthe income of a particular household may be low, this situation can oftenbe temporary and the lifetime resources can be high. E. Aconsumption-based tax could be levied on the personal expenditures ofhouseholds (such as through a cash-flow-based tax on consumption) or itcould be levied on transactions, such as through a VAT or other form ofgeneral sales tax.[8] There are several ways in which a switch to a national sales tax fromthe current income tax could have a positive effect on the nationaleconomy. A sales tax has the potential ofraising more revenue than an income tax system while allowing individualsto reduce their taxes by reducing their consumption. One equityconcern, however, is the treatment of different generations. E. For a lifetimeperiod, however, a consumption tax would have a high degree of horizontalequity. While the implicit taxation of labor income distorts thework-leisure decision, the implicit taxation of initial wealth is simply alump-sum tax with no distortionary consequences. Alternatively, a stand-alone credit system could beestablished which would not require an eligible household to file an incometax return in order to obtain a refund for consumption tax paid. 39 Tax Notes 383-91 (1988).Graetz, Michael J. Verticalequity refers to the tax treatment of households with different abilitiesto pay. Such anintergenerational redistribution from the initial old to the initial youngis the exact opposite of the kind of redistribution which has beenoccurring as a result of the continuing budget deficit.[29] Switching from an income tax to a consumption tax is likely toincrease saving and investment, although the process will take a long time. Value-added taxation is a means of collecting a general salestax on consumer goods and services. Weidenbaum, David G. Value-Added Tax: Does the Consumption Tax Have a Place in the Federal Tax System? 47 Tax Notes 447-66 (199 ).Bradford, David F. A national sales tax might be clear and simple enoughto end congressional adjusting of the tax code. With the private savings rate remaining flat since 1982,the nation has been forced to borrow large amounts from abroad and become adebtor nation. Sucha credit could work in one of two ways. are low comparedto those of our international competitors. Certain aspects of the retail sales tax would actuallypresent less of a problem than similar aspects of a value-added tax. Assuming there are no cash restraints, both will consume thesame amount when young (5 ) and the same amount when old (5 ); both willalso pay the same amount of consumption tax when young and when old. The Case for the Value-Added Tax. Political pressures would existto exempt services from a retail sales tax (most are exempt under state andlocal schemes), even though the taxation of such services is necessary forthe maintenance of economic neutrality. What Are Consumption Taxes and Who Pays for Them? The Value-added Tax: Key to Deficit Reduction? Boston: Kluwer Academic Publishers, 1989.Schenk, Alan. An income taxthat taxed all capital and labor income at the same rate would be similarlyregressive, since individuals with very large levels of assets would faceno tax on their initial principal. Raboy, & Ernest S. A much better measure of ability to pay is the presentvalue of household resources over the lifetime of the household. at 1439-4 .[7]C. Christian, Jr., eds.), 39-68. Although an incometax was adopted by the federal government as the principal means of raisingrevenue, a consumption tax has long been considered. Such a reduction, however,would depend upon political decisions against spending the additionalrevenue. A consumption tax,on the other hand, measures ability to pay by the present value ofresources, since a household is more likely to consume at a rate based uponits resources, rather than its annual income. Second, a consumption tax would notaffect the saving-consumption decision because saving would be taxed onlyonce: when it is spent on consumption. This conclusion is derivedfrom the fact that households with the same level of consumption would payapproximately the same amount of tax at all levels of consumption.[24] If disposable income is used as the measure of ability to pay, thehorizontal equity of the consumption tax would depend on the time period.For a one-year time period, a flat rate consumption tax would be veryinequitable since households with the same level of disposable incomeinvariably have widely differing levels of consumption. Vertical Equity If consumption is used as a measure of ability to pay then a singlerate VAT or sales tax with a broad base would be approximately proportionalregardless of the time period. First, governors and mayors are wary of the federal government enteringthe domain of state and local governments. Who Bears the Burden of Consumption Taxes?. Because of the generational differences in marginalpropensities to consume, this redistribution will increase the country'scurrent consumption and decrease its saving. In contrast, if thegovernment switches from an income tax to a consumption tax, thusredistributing from initial old generations to young generations as well asthe unborn generations, the studies predict a crowding of saving andinvestment.[31] Administrative Concerns Enacting a retail sales tax would be somewhat simpler than enacting aVAT because the public is already largely familiar with such a tax.Exemption of certain items would be easier under a retail sales tax thanunder a VAT because a firm selling both exempt and non-exempt items wouldnot have to allocate costs between the two categories and the problem ofovertaxation which arises when the chain of exemptions is broken under aVAT would not exist under a retail sales tax. If the present value of resources (PVR) is considered the appropriatebase against which to measure the progressivity of alternate taxstructures, then a flat rate consumption tax is neither regressive norprogressive, but proportional. High-income households with equal incomes, onthe other hand, differ in their levels of consumption over the period oftheir lifetimes and, consequently, in the amounts of consumption tax whichwould be paid. Theratio of taxes paid to lifetime resources will be the same for both.[15] Because a consumption tax partly represents a wealth tax, it is moreprogressive than a proportional income tax or a proportional labor incometax. Raboy, & E. Excessive consumption will inhibit economic growthor divert resources from socially desirable uses. collects only 17% of all federal, state, and localrevenues from consumption taxes, with the federal government's share beingextremely small.[4] Fourth, rates of savings and investment in the U.S. The higher value of total currentconsumption translates into less total saving.[3 ] When the government temporarily cuts income tax it effectively takessome money from young and future generations and gives it to current oldgenerations. The net rate of nationalsavings as a percentage of Gross Domestic Product in the U.S. A variety of studies have shown thattaxing consumption is more efficient than taxing wage or capital income bythemselves, or both capital and wage income through an income tax. In The Value-Added Tax: Orthodoxy and New Thinking (Murray L. Revisiting the Income Tax vs. Consequently, under a proportionalincome tax the very wealthy, including those who have inherited large sums,face smaller tax burdens than, when measured relative to their PVR, than dothose whose PVR consists mainly of current and future labor earnings.[16] In the U.S., where fully taxing all income from assets has proveddifficult, the introduction of a consumption tax would provide anadditional tax instrument to tax the asset component of lifetime resources. Christian, Jr., The Value-Added Tax: Orthodoxy and New Thinking, 4 (1989).[11]Kotlikoff, supra note 9, at 3.[12]C. Consumption taxationshould encourage conservation of these resources.[1] Consumption taxes can take a number of guises. Weidenbaum, D. Onthe other hand, most households with low incomes do not currently receivetransfers and would not be protected by this proposal.[23] Horizontal Equity If the ability to pay is measured by consumption then a single-rateconsumption tax with a broad base would be horizontally equitable foreither a one-year period or a lifetime period. In these cases, anincome tax places a small burden on such a household, since annual incomeis a poor measure of that household's ability to pay. The Value-Added Tax: Concepts, Issues, and Experience. The Economic Impact of Replacing Federal Income Taxes with a Sales Tax. Those households which havefew resources will not consume as much and therefore not pay as much intaxes as a household which has greater resources. Washington D.C.: American Enterprise Institute of Public Policy Research, 1987.Raboy, David G., and Massa, Cliff. A sales tax would utilizethe tax base, consumption, which is most conducive to growth of saving,investment, labor supply, and output. Finally, conservatives fear the revenue-raising capacity of suchtaxes: such a tax at the federal level would allow the collection ofenormous sums of revenue simply by increasing rates over time, facilitatingthe unbridled expansion of government spending.[6] How a Retail Sales Tax Could Alleviate Economic Problems The budget deficit has become the most serious problem facing theUnited States. This is especially true in the case ofvery wealthy families, whose resources are little affected by the highs andlows of their current annual income.[13] Using current income as a reference base can actually lead topolicies that reduce rather than enhance the degree of tax equity. First, an individual could applyit against his or her federal income tax liability, lowering liability on adollar-for-dollar basis; this credit system would assume that an income taxsystem remains. 39 Tax Notes 239- 44 (1988).--------. Arguments that consumption taxes areregressive are based upon analyses which measure ability to pay againstannual income. at 1 5-1 6. In other words, value added issimply the amount of value a firm contributes to a good or service byapplying its factors of production (land, labor, capital, andentrepreneurial ability). TheOECD countries collect about 3 % of their tax revenues from consumptiontaxes, but the U.S. Thus thetotal of VAT payments at all the stages would be equal to the amountcollected directly on sales to consumers under the retail sales tax.[12] Equity Static, as opposed to intertemporal, economic thinking has led to thepersistent practice of measuring the progressivity of taxes relative tocurrent income. As for the second concern, the elderly couldbe compensated directly, such as by raising their social securitybenefits.[11] Value-Added Taxation Although this paper is concerned with retail sales taxation, it isworthwhile to briefly discuss the value-added tax (VAT) since the effectsof a VAT are generally considered to be almost identical to those of asales tax. Thus, a consumption tax with a single rateover time is relatively neutral, especially when compared with othersources of revenue.[27] Two out of the three major decisions normally made by householdswould not be affected by a flat rate consumption tax. Since allincome is consumed at some point, a sales tax could be made progressivewith a refundable tax credit. In contrast, a proportional labor incometax is regressive when measured against PVR, since those with very largelevels of assets, and hence PVR, face no explicit or implicit taxation oneither their initial wealth or the income from that wealth. 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