Professor McNulty suggests that one of the most interesting tax policy debates during recent decades has been that related to proposals to replace the U.S. Federal Income Tax with re consumption tax or "consumed income tax," a "cash-flow" tax or, more recently, a "Flat Tax." Conducted by public finance, legal tax-policy, and tar-theory scholars, the discussion has challenged the merits of income taxation on grounds of fairness, economic allocative efficiency, welfare, and simplicity. In this Essay, Professor McNulty examines the issues, surveys some of the literature, evaluates the arguments, and concludes that the case has not been made for replacing the income tax even with a national, broad-based possibly personalized and progressive consumption tax. He briefly reviews the history of income taxation in the twentieth century in the United States, explains the meaning of flat-rate taxation, the taxation of consumption or consumed income, and the so-called "Flat Tax" proposals of the 1980s and 1990s, as well as Value Added Tax (VAT) and retail sales tax possibilities. Professor McNulty explains the time-value-of-money criticisms of an accretion-model income tax based on the von Schanz-Haig-Simons conception of income, and he also summarizes the arguments for replacement on the basis of fairness and economic efficiency. He considers international and federalism aspects and particularly the transitional problems associated with replacement. Professor McNulty then concludes that replacement would not be advisable, that an income tax in theory probably is preferable to a consumption tax, and that our admittedly "hybrid" income tax, while in need of improvement, has robustly withstood the twentieth-century criticisms and should remain the principal national tax. He suggests that adding a national consumption tax, such as a low rate VAT or retail sales tax, to the national tax system as so many of our industrialized trading partners have done, would somewhat reduce dependence on (or the rates of) income taxation and would seem more attractive as a major tax policy change.
