Toward a Consumption Tax, and Beyond

This paper investigates the extent to which the US income tax system of 2004 collects tax on capital income, and the implications of extending tax-preferred savings accounts. The paper applies a methodology originally proposed in Gordon and Slemrod (1988) and there applied to the US tax system of 1983. The methodology estimates how much tax is collected on capital income by calculating how much tax revenue would change if the tax system were modified to exempt income from capital in present value, specifically by adopting what the Meade Committee Report (1978) called an "R-base tax," while leaving the tax rate structure and tax incentives otherwise unchanged.