How regressive will a general, single-rate consumption-based tax system be relative to the existing federal income tax system? The popular perception is that the introduction of a national retail sales tax (NRST) or a Hall-Rabushka type flat tax (FT) in place of existing federal income taxes will significantly increase the tax burden on low- and middle-income groups, while decreasing it at the high end of the income distribution. Three reasons are usually given: (1) the progressivity of the rate structure under the individual income tax will be reduced, (2) the elimination of the corporate income tax will lower the effective tax rate on capital income, and (3) the switch to a consumption base will lower taxes on affluent households who typically save a relatively large proportion of their incomes.

The research surveyed in this chapter, including our own recent work, supports the view that a move to consumption-based taxation would shift tax burdens as just described. For example, our results on the introduction of an NRST indicate that flattening the rate structure decreases the tax burden on high-income families. After estimating the proportion of income saved at different levels of income, we find that a consumption-based tax system is regressive relative to a proportional income tax, though significant gains are found only for the very rich.

These results on saving and consumption are obtained using a newly released panel of households from the Survey of Consumer Finances (SCF) for the years 1983–89.