The Case for a Consumption Tax

Connecticut Senate candidate Peter Schiff makes the case that tax revenues should be raised solely by taxes on spending, not from taxes on income.

"We should protect ourselves from Washington: you do not grow an economy by spending, you grow it by saving investing and working hard."

The basic argument made here is that taxing income discourages work and savings, and since work and savings are the true engines of a healthy economy, taxing income creates an unhealthy drag on the economy.

In practical terms and to have the full support of Americans, a tax on spending would come in the form of a federal sales tax (or VAT), which would have to replace (and not be in addition to) the existing system that taxes income.

In order to be revenue neutral, it's possible that in fully moving to a sales tax, the sales tax rate would have to be upwards of 30% or 40%. A rate this high would likely be politically impossible and simply not feasible.

Therefore, moving the federal tax system to a VAT with (say) a 10% rate would be an excellent start to reducing the size and reach of the federal government. Protections would then have to be put in place (perhaps as a Constitutional amendment, including a repeal of the 16th Amendment) to prevent that rate from being increased in future years at the whim of an elected Congress.