Monday, March 07, 2005


Three Views of Tax

University of Southern California - Law School; California Institute of Technology

February 2005

USC Law, Legal Studies Research Paper No. 05-3

Traditional tax policy has been locked in a seemingly all-or-nothing debate between two apparent extremes, income and consumption taxation. But there are three choices of a comprehensive tax system, not two. This is because, under progressive rates, the two canonical types of consumption tax (prepaid and postpaid) are not equivalent, as the traditional view of tax would have them be. Adding in a distinct third view of tax makes clear that the best system for effecting liberal redistribution is not an income tax at all but a specific form of a consumption tax, a consistent progressive postpaid one. And this is, in large part, because such a consumption tax best gets at the yield to capital, in just the way ordinary moral intuitions want to get at it.


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