Senator Cardin Proposes Reform With a Consumption Tax

Senator Ben Cardin (D-MD) introduced the Progressive Consumption Tax Act last week that would reform the tax code and change the way that tax revenue is collected, introducing a nationwide consumption tax. The additional revenue generated would be used to cut the corporate rate in half and eliminate the income tax for three-quarters of households.

Cardin describes his the bill as a "comprehensive, progressive, pro-growth" proposal. As he explains:

Credible tax reform is critical to America’s economic competitiveness. Every other developed country in the world, including all other Organisation for Economic Cooperation and Development (OECD) countries, have a consumption tax. The Progressive Consumption Tax Act puts this country on a level playing field with other nations by providing for a broad-based progressive consumption tax, or PCT, at a rate of 10 percent.  The PCT would generate revenue by taxing goods and services, rather than income.

Cardin's plan would adopt a 10 percent tax on most goods and services. However, both businesses and individuals would pay far less in income taxes, and most individuals would not owe any income tax. 

For the individual income tax, a single person earning less than $50,000 or a couple earning less than $100,000 would not owe any taxes. According to the Tax Policy Center, approximately 75 percent of taxpayers had cash income below this threshold in 2013. Above that level, there would be three brackets – 15, 25, and 28 percent – instead of the current seven brackets that max out at 39.6 percent. Taxpayers in the top bracket would see only a small reduction in taxes on income they spend, since the new income tax rate would be 28 percent plus 10 percent on consumption spending. However, any income that goes into savings and investment would not be subject to this additional 10 percent tax.

Many of the deductions and credits currently available to individual taxpayers would be repealed, including the lower rate on capital gains and the alternative minimum tax. Those that the plan would keep – the state & local tax deduction, the mortgage interest deduction, the charitable deduction, and health & retirement benefits – would only be relevant to taxpayers with high enough income to owe tax. The refundable credits, like the Earned Income Tax Credit and Child Tax Credit, would be replaced by larger rebates based on income and family size, which would "practically eliminate the consumption tax burden for lower- and moderate-income families," according to Cardin's office.

On the other side, the corporate rate is cut in half, to 17%. Corporate and other business tax preferences are not reduced.

Top Rates Under Progressive Consumption Tax Act
For individuals 39.6%*  28% + 10% consumption
For non-corporate businesses 39.6% 28%
For corporations 35%  17%

*This table only counts the statutory marginal tax rates, and not "hidden rates" from the phaseout of tax expenditures.

There's no available revenue estimate, so it's not immediately clear whether this tax reform would raise or lower total revenues. However, Cardin's press release implies that the final consumption tax rate might be changed based on the revenue score, but the final rate would almost certainly be below the OECD average.

To alleviate concerns that the consumption tax might turn into a money machine, the bill includes a "revenue circuit breaker" that provides taxpayer refunds if revenues from the new consumption tax exceed 10 percent of GDP.

We applaud this new addition to the tax reform discussion. Although Congress is wrapping up for this year, policymakers should restart discussions to reform the tax code next year, when they will benefit from having more ideas on the table.