A consumption-based direct tax for countries in transition from socialism

This paper suggests a consumption-based direct tax, referred to here as a simplified alternative tax or SAT, as an alternative to the standard income tax for reforming socialist economies (RSEs). The paper consists of seven sections. Section I serves as an introduction. Section II outlines some of the objectives of tax policy in RSEs and some of the constraints on the achievement of those objectives. Section III provides examples of the overwhelming complexity of the income tax. Section IV explains the basic mechanics of the SAT and contrasts the simplicity of the SAT with the complexity of the income tax. Section V describes the economic advantages of the SAT and section VI discusses some potential problems of the SAT. The final section concludes by stating that the SAT encourages saving and investment in a way that is economically neutral and avoids many of the administrative problems of an income tax.