Economic Effects of a Personal Capital Income Tax Add-On to a Consumption Tax

In this paper, we compare the economic effects of such an approach to tax reform, relative to the enactment of a pure consumption tax such as the Hall and Rabushka (1983, 1995) Flat Tax. For the former approach, we analyze a stylized version of the GIT, which provides for consumption tax treatment at the business level (a cash flow tax on real transactions that allows expensing of all purchases of depreciable equipment and disallows interest deductions), supplemented by an individual-level flat rate tax on interest income, dividends and capital gains.