wages (incl fringes) plus profits minus capital investment = consumption.
If you do, the difference between the flat tax and the VAT is administrative. Workers pay tax applied to wage and salary, and business firms pay taxes on profits minus purchases from other firms (including capital goods). In effect, you "prepay" taxes on future consumption.
I prefer 'post-payment' through a 'consumed income tax' (tax base is gross income minus net saving) because it's easier to whack capital gains, and because the equity difference between taxing investment ex ante v. ex post (e.g., after the uncertain gains are realized) strike me as huge. (You can tax estates or inheritance either way.) In the flat tax theoretical framework, you tax capital gains not saved by taxing their 'roots' in corporate profits (net of re-investment), to me very unsatisfying.
Tricky angle of the flat tax is there is no way to get at pre-existing wealth that can become consumption (though some of that was taxed as income). In this sense it is less than a full consumption tax. Conversely, if you enact an instant VAT, you double-tax some income.
>> The classic flat tax, by the way, IS a VAT
>
>But a classic flat tax is on income, while a VAT is on consumption.
>Since the rich consume a smaller proportion of their income than the
>nonrich, a consumption tax is inherently regressive, despite the
>flatness of the rate.
>
>Of course, in the U.S., any move towards a flat tax wouldn't be
>offset by redistribution on the spending side. It would just make the
>fisc reinforce the inequality of market incomes rather than mildly
>negating it.
>
>Doug
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