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1 Erica York, et al., How Taxing Consumption Would Improve Long-Term Opportunity and Well-Being for Families and Children 1 (2023)

handle is hein.taxfoundation/hwtxgcnwd0001 and id is 1 raw text is: *0TAX FOUNDATION HowTaxing ConsumptionWould Improve Long-TermOpportunityandWell-Beingfor Families and Children Erica York Senior Economist, Research Manager Garrett Watson Senior Policy Analyst, Modeling Manager Alex Durante Economist Huaqun Li Senior Economist October 2023 Key Findings • Improvements in the long-run standard of living largely depend on peoples' willingness to work and their ability to invest in capital. Tax policy has a significant effect on removing barriers to work and investment. • All tax systems contain features that discourage work and investment, thus imposing economic costs that reduce living standards. Additionally, taxes impose administrative costs for the government and compliance costs for taxpayers. • Two major types of taxes include income taxes, which generally tax people when they earn money and when they see changes in net worth such as returns from saving and investment, and consumption taxes, which generally tax people when they spend money. • Income taxes impose steeper economic costs, and often steeper administrative and compliance costs, than consumption taxes. They place a higher tax burden on saving and investment. They also impose significant administrative and compliance costs that undermine the large anti-poverty pro- grams for families and children administered through the tax code. Moving to a consumption tax would end the tax bias against saving and investment and provide an opportunity to greatly simplify anti-poverty programs embedded in the tax code. • We model two revenue-neutral consumption tax reform options: replacing the corporate income tax with a 6.4 percent value-added tax and replacing the corporate and individual income tax with a busi- ness profits and progressive household compensation tax. Both options would replace major individu- al tax credits with a flat credit per filer and dependent. • Both options result in higher economic output and higher after-tax income for lower-income house- holds and families while raising roughly the same amount of tax revenue for the federal government in the long run, illustrating that pro-growth tax reform can raise long-run living standards. The Tax Foundation is the world's leading nonpartisan tax policy 501 (c)(3) nonprofit. For over 80 years, our mission has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity. TAX FOUNDATION 1325 G STREET, NW, SUITE 950, WASHINGTON, DC 20005 202-464-6200 1 laxfoundation.org