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A Consumption-Type or Cash Flow Personal Income Tax

William D. Andrews
Harvard Law Review
Vol. 87, No. 6 (Apr., 1974), pp. 1113-1188
DOI: 10.2307/1340076
Stable URL: http://www.jstor.org/stable/1340076
Page Count: 76
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A Consumption-Type or Cash Flow Personal Income Tax
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Abstract

According to the prevailing ideal, taxable personal income should equal total accretion, which is the sum of personal consumption plus accumulation. Professor Andrews asserts that the worst inequity, distortion, and complexity in the present tax, and the most intractable difficulties in approaching the accretion ideal, have essentially to do with the accumulation component of accretion. He therefore urges that consideration be given to an alternative ideal in which personal taxable income would be computed on a simple cash flow basis to reflect only personal consumption, accumulation in the form of business and investment assets being comprehensively eliminated. Professor Andrews shows how pursuit of this goal would produce a substantial net simplification of the tax, as well as a fairer and more efficient distribution of tax burdens. He concludes by making several more particular recommendations, suggested by a study of the consumption ideal, for immediate improvements in the existing tax. These include cash flow accounting for loan proceeds to curb tax shelter abuses; nontaxation of reinvested capital gains, but taxation of net disinvestment at ordinary income rates; a zero basis for inherited business and investment property; and a supplemental cash flow tax for high-income taxpayers coupled with a sharp reduction of top rates on regular taxable income.

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