The X Tax

11.30.12

Let's Talk About X Baby

Video screenshot

David Brooks calls for the "X" tax:

Under the X Tax, you wouldn’t pay the consumption tax at the cash register. Businesses would be taxed on their cash flow, taking an immediate deduction for investments rather than depreciating them over time. Households would pay tax at progressive rates on their wages but would not pay tax on income from savings.

The X Tax effectively taxes the money you spend right now and rewards savings and investment. The government could raise a chunk of revenue this way and significantly boost growth with little or no change in how tax burdens are distributed between rich and poor. Most economists vastly prefer consumption taxes to income taxes.

Brooks is onto something here, although he's hardly the first conservative to weigh the X Tax's advantages. The X Tax has previously been praised by Ramesh Ponnuru, Jim Pethokoukis, Josh Barro (yes, I know he no longer self-identifies as such, but so be it), and Alan Viard (Brooks' source). And by all means, let me know about others. I'm happy to update the list.

The short story here is that any big tax reform will need to meet Brooks' metrics of raising revenue while encouraging economic growth. That isn't happening, at least in a meaningful manner, with simple tweaks to the income tax. A VAT is a way to get there, and if an X Tax is a necessary accomodation along the way to preserve equity and fairness, I'm all aboard.

Per the above video, did you really think I was going to not post the video after David Brooks used the headline "Let's Talk About X" in the New York Times?