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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (24845)	3/3/2005 12:47:15 PM
From: redfish	Respond to of 116555

My college roomate is associate international tax counsel at treasury so he knows a lot about the different tax systems, he thinks the transition to consumption tax would be too gnarly. Apparently you can't just yell ollie ollie in come free and let people off the hook for built in capital gains in their property because in anticipation of the new system everyone would immediately halt selling anything ... so you have to ease out the old system over say 15 years as you ease in the new system, resulting in two completely different tax regimes at the same time. Found this on the web on the transition: The transition: Can we get there from here? Even if a consumption tax is the right system for an economy starting from scratch, it may not be the right way to reform an existing system. The main transition issue is the taxation of "old capital"—capital assets accumulated earlier out of after-tax income whose principal would not have been taxed again under the income tax. Although some transitional treatment of old capital is typically thought to be likely, not having a transition—that is, implicitly taxing old capital again under a consumption tax—is arguably consistent with the three main goals of tax reform: efficiency, equity, and simplicity. Certainly, not having a transition is simpler. The transition rules could be very complex, and the transition period could stretch out for years. Not having a transition is also more efficient. Because future consumption can be financed only from future wages or existing assets, a consumption tax is a tax on future wages and existing assets. A consumption tax that exempts old assets is just a tax on future wages. And the same studies that show that a consumption tax (which taxes all old capital assets) is more efficient than an income tax also show that a wage tax is less efficient than an income tax—because not taxing existing capital requires higher tax rates on wages to raise the same revenue and hence distorts people's work decisions more. So exempting old capital removes any presumption that tax reform would result in a more efficient system. Surely, the strongest argument for exempting old capital from taxes is fairness. The assets have already been taxed once; is it fair to tax them again? The answer may not be as obvious as it seems. First, a onetime implicit tax on existing capital is very progressive. The distribution of such capital is more skewed toward wealthy households than is the distribution of overall wealth, which in turn is more skewed than the distribution of income. Second, within any age group, wealthy households do most of the saving. Because these households would benefit most from eliminating the double taxation on future saving under a consumption tax, it is reasonable that they pay for some of the costs. Third, older households tend to have more assets than younger ones, and taxing existing capital places heavier burdens on older generations. But those older households have received transfers through Social Security and Medicare that far outreach what they have put in. And the vast majority of income and wealth for most elderly households is in the form of future earnings (which have not yet been taxed), housing (which receives extraordinarily preferential treatment under the current tax), pension income (which already receives consumption tax treatment), Social Security benefits (which are not taxed under the flat tax), and Medicare benefits (which are not and would not be taxed). Relatively few elderly households finance much of their living expenses by other assets, and those that do tend to be very well off. taxpolicycenter.org template.cfm?PubID=1000530