Should Capital Income Be Subject to Consumption-Based Taxation?

Abstract

In 2005, the report of the President’s Advisory Panel on Federal Tax Reform proposed two alternative approaches to tax reform. If implemented, both plans would move the tax system farther away from the full taxation of capital income that is the hallmark of a true income tax. However, the panel did not recommend enacting a true consumption tax — instead, both proposals are hybrid income-consumption taxes. The report thus highlights the uncertainty regarding the appropriate tax treatment of capital income, the focus of this book. This chapter examines the central issue the panel faced — whether to implement full-scale consumption-based taxation of capital income.