Thinking Outside the Box?
- Studies in Fiscal Federalism and State–local Finance series
Edited by Sally Wallace
Comments on ‘Can Georgia move from income tax to consumption tax?’ William J. Smith This chapter describes the theoretical justification and a practical route for repurposing a personal and corporate income tax into a single flat consumption tax. The author uses Georgia as a case study for the potential for such a tax reform. In 2006, Georgia’s personal and corporate income tax revenues comprised 54.1 percent of total state revenues, or about $8.8 billion, thus Georgia appears to be a reasonable candidate for such a transition. Particular attention is focused on describing a revenue-neutral shift from the current combination of corporate and individual income taxes to a substantially integrated single-rate consumption-based tax. Although the chapter focuses on Georgia, the author suggests that a consumption tax could be effectively administered within the corporate and personal income tax structures that currently exist in many states. The move to a flat consumption-based tax would have several key benefits for a state. Not only would the move simplify the rate structure, limit deductions, exemptions and credits, but it would also fundamentally change the tax base from realized income to consumption. According to the author, the basic administrative aspects of the tax would remain substantially unchanged from the current income tax; however, savings would be exempted from taxation. Currently, state and federal income taxes include savings (interest) income in the tax base, thus penalizing individuals who forgo current for future consumption by taxing income generated from saved post-tax earnings. Under the proposed system, individuals...
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