The traditional view of tax holds that consumption taxes fail tax the
yield to capital, whereas income taxes do, leading to John Stuart Mill's
criticism of the income tax as a "double tax" on wealth that is saved. A
better analytic understanding illustrates that there are two types of
consumption taxes. A prepaid consumption or (equivalently) wage tax indeed
ignores the yield to capital. But a consistent progressive postpaid
consumption tax gets at such yield, at the individual level, when but only
when the returns to capital are used to elevate lifestyles in material
terms. Such a tax allows "ordinary" savings that move around labor
earnings, in constant dollar terms, to different periods of an
individual's life, such as times of retirement or heightened medical or
educational needs. Because a progressive postpaid consumption tax falls on
the yield to capital at the right time-when its use at the individual
level becomes manifest-all other taxes on capital, such as capital gains,
gift and estate, and corporate income taxes, can and should be repealed,
in the name of fairness.
Who Really Benefits from Consumption Tax Cuts? Evidence from a Large VAT Reform in France