Something subtle but important is happening to the United States tax system. It has been moving toward consumption taxation. At the moment, most federal revenues come from income taxes; that is, taxes on wages and salaries or on business profits. Consumption taxes are different. They are taxes on what people buy in goods and services.
Some consumption taxes are well known, such as state sales taxes. Excise taxes on tobacco products and liquor are another example. With inflation, these have declined sharply over the years. But Congress has not had the gumption to raise them.
There has also been much talk of imposing a value-added tax in the nation, much like that prevalent in Western Europe. This is a tax imposed as a percentage of the value added to a product at each stage of its production. Top staff officials in Congress, however, doubt that such a tax will pass.
These aides, however, do see a strong possibility of the system shifting more to consumption taxes through the back door - indeed, many congressmen may not realize what they are doing or proposing.
Here's how it could happen. Congress would greatly enlarge the amount people can set aside in tax-exempt individual retirement accounts (IRAs). There have already been popular bills for that purpose before Congress. The holders of these accounts would be allowed to draw out the money, paying taxes on the amount withdrawn, at any time, not just at retirement age. The result would be that more and more savings would be set aside in tax-exempt accounts. Taxpayers might as well save on taxes with such accounts, since the money would be accessible at any time. So taxpayers in effect would be paying taxes only on the rest of their ''income,'' which would be the money they used to buy goods and services. So, behold, you have what is called an income tax but is effectively a consumption tax.
To the politician, the best tax system is that which plucks the taxpayer of a portion of his money with the least squawk. That involves trying to make taxes as painless as possible (e.g., withholding them from wages) and ''fair'' (taxing the rich more than the poor).
To the economist, the best tax system is that which does the least harm to the private economy.
Alan J. Auerbach, an economist with the University of Pennsylvania, expresses some concern about the ''somewhat undeserved . . . mystique'' many are giving consumption taxes, ''even though the idea of taxing consumption may have merit.''
In a paper prepared for a seminar of the Lehrman Institute Study Group here last week, Professor Auerbach added: ''It appears almost as if the old adage that 'old taxes are good taxes' has been given a new twist, and that much of the attraction to consumption taxation lies in its apparent novelty.''
Some congressmen have argued that more reliance on consumption taxes would increase savings, and thence make more money available for the business investments that bring a higher standard of living.
Mr. Auerbach's basic point is that there are economic costs and benefits involved in shifting to greater reliance on consumption taxes. These vary according to the design of the tax.
A direct consumption tax, under which taxes would be related to the purchasers of goods and services rather than to the commodities purchased, can be made progressive via higher marginal tax rates (the tax rate on your last dollar earned) on the consumption of those who consume a lot. That would be the case if all savings could be protected by IRAs, leaving only consumption taxed.
But Auerbach notes that the indirect consumption tax, such as a tax on value added, can also be made somewhat progressive by varying the rates at which goods are taxed. In the United Kingdom, some necessities, such as food, are exempt from the tax. The disadvantage is that the varying tax rates distort consumer choices among various commodities, resulting in a loss of economic efficiency. A consumer might choose a nontaxed product even though the taxed product actually served him better.
A problem with a direct consumption tax (enlarged IRAs) is that it would reduce the tax base and thus government revenues. So the government would presumably have to impose higher marginal tax rates on taxable income (only on income received from labor) to make up the lost revenues. This would distort the choice between work and leisure, says Auerbach. In other words, since labor income would be taxed higher, it would make work less attractive. More second-income earners might stay home, rather than work for highly taxed pay.
Auerbach finds that economic research doesn't show whether the benefits from encouraging savings are more or less than the loss from discouraging work.
He spells out several other difficulties in moving to consumption taxation, then concludes that either a consumption tax or a broad-based income tax (with far fewer loopholes) would be preferable to the current taxation ''mess.''