Taxonomy of the Tax on MeLooks like the Treasury Department is toying with the idea of implementing a consumption tax to replace the income tax. Ideally, that's a great idea. The current system, which effectively double taxes interest income (you get taxed once on the principal and then again on the interest itself), discourages savings and investment relative to consumption. I have heard some libertarians oppose switching to a consumption tax on grounds that it biases people against consumption in contravention to their true time preferences. But this argument is analytically incorrect, for the reason indicated parenthetically above. Paradoxical as it may sound, the consumption tax is neutral to the savings-consumption trade-off, whereas the income tax is biased.
However, I'm less than sanguine about the administration's planned approach. Instead of a straight-up sales tax, or a 100% income-tax deduction for savings and investment, they are leaning toward a value-added tax (VAT). The problem with a VAT is that it's not the least bit transparent. When consumers go to the store and buy goods, they will observe only the tax on the last bit of value added to their goods by the retailer; they will not see the accumulated effect of the tax on all the intermediate stages of the good. That's a bad idea. Taxpayers should regularly be made aware of exactly how many pounds of flesh they must hand over to the government, if only to know how pissed off they should be.