Economist Robert Frank on the Consumption Tax

Robert Frank describes how replacing the current income tax with a consumption tax might help avoid future problems in the financial sector:

...What's the solution in the financial world?

To start, you can regulate the amount of leverage asset managers could offer. But if you really want to blunt the incentive for investors to squeeze out ever higher returns, scrap the income tax and shift to a much more steeply progressive consumption tax. You would report people's income and savings to the IRS each year. The difference between those numbers is how much they consume.

Tax that instead of taxing people's income, and the government would strengthen the incentive to save and invest, and weaken the incentive to build bigger houses. If other people were building smaller houses, each investor would feel less compelled to take greater risks to keep up.

Wouldn't a consumption tax, which reduces consumer spending, be a drag on economic growth?

The tax should be phased in gradually after the economy recovers. The capital market would direct consumers' extra savings to investors, who would spend the money on capital goods. So total spending would remain the same - and it's total spending that determines output and employment.