The Consequences of Undoing the Federal Income Tax

Abstract

Although economists have long trumpeted the benefits of "economically neutral" tax systems, Congress has always used the income tax code to help favoured groups and to encourage certain activities. This essay identifies and evaluates a few of the myriad dislocations that would be brought about by the repeal of the federal income tax and its replacement with some form of consumption tax. In particular, the essay examines the political quandaries such a repeal will create in the areas of employer-provided health care and pension benefits, owner-occupied housing, and state and local government financing.