Prospects for Consumption-Based Tax Reform in the United States

It appears that the debate in the US regarding ''fundamental tax reform,'' commonly defined as replacing the existing corporate and individual income tax system with some form of consumption-based taxation, is about to resume in earnest. At the current time, however, the chances for passage of such reform do not seem particularly great. This paper argues that, in addition to political reasons, doubts about the desirability of reform exist because several key economic issues raised by fundamental tax reform are not yet fully resolved. Specifically, before a compelling case for fundamental reform can be made, its advocates must address five key issues -- uncertainty about the economic effects of fundamental tax reform, concern about its distributive effects, uncertainty about the simplicity gains that might be obtained with fundamental reform relative to those under incremental income tax reform, concerns about undesirable transitional effects of fundamental tax reform, and concerns about its unintended side-effects. This paper examines the current state of the debate on each of these five issues.