federal consumption-type taxes

I've started reading A Taxing Blog because, alas, I am a shameless tax nerd.

I'm somewhat familiar with the debate, and have pondered (but not too deeply) the issue of the feds moving to consumption-type taxes instead of income taxes.

the problem I have with this proposal is that it taxes the poor people disproportionately more than the rich.

for instance, with the formula given (income - savings = consumption), you can readily see that the poor will pay tax on their entire income because they have to "consume" their entire income just to survive (i.e. none left for savings, so no deduction is available).

whereas the rich, who consume only a miniscule portion of their income, will be able to stash everything into interest-bearing "savings accounts" and not pay tax on any of it (until, at some point in the distant future it is "consumed", which is not likely).

while I am sympathetic to the argument that our income taxation system is overly complicated and "there ought to be an easier way", I am extremely wary of distributing the tax burden where the poor are taxed on everything they earn (because they consume it all), and the rich are taxed only on what they spend.

for instance, say I come into $1M. I put it in the bank and earn $100K interest for the year. I have $50K of expenses for the year.

under the income tax system, I will pay tax on the $1M + $100K, unless I have some clever investments to take advantage of the deductions.

but under the consumption tax, I will avoid paying tax on $1M principal and the $50K of the interest altogether because it is "savings" and I get a 100% deduction. I will only pay tax on the $50K of my living expenses.

under the consumption tax, I will continue to pay the same amount of tax on my $50K of expenses every single year (because I am somewhat frugal), while my bank balance will increases another $50K every year (or more -- compound interest).

I will never pay a single cent of tax on my $1M, and I will never pay a single cent of tax on the balance of the interest that I earn each year which I manage not to spend. With each passing year, I am taxed at a lesser and lesser percentage of my overall income.

on the flip side, suppose I work really hard and earn $50K for the entire year, but because I have a mortgage, family, car payments, and student loans to repay, I consume the entire $50K to meet my overhead. Under the consumption tax system, I will have to come up with some money to pay the taxes on my $50K, which will leave me something like $5K in the red. I am taxed on 100% of my income every year, with no relief in sight.

(however, under the income tax system, I will get a deduction for my house, my dependents, my student loans, and I will end up about $5K ahead. I will pay taxes only on the income - deductions, which is always going to be less than 100%).

Besides the proportionality issue that troubles me, I also see the system as discouraging investment and business growth (venture capital and the like).

If the consumption tax is based on the formula "income - savings = consumption," then everyone will turn to savings as a way of avoiding taxation. this will only affect people who have disposable income to save (the rich) in the first place. with this kind of setup, one would be very disinclined to subject oneself to taxation by withdrawing money and investing in business because it would be "consumed" upon investment in a new business.

I can also see this structure as discouraging business from investing in research and development, because they will only seek to invest in "sure things" which will generate income equal to or greater than the investment. this will, in turn, affect the progress of science and technology.

so now that I've pondered a bit more on the subject, perhaps I ought to read some articles that give the good reasons for this kind of a system (other than that it seems much easier to administer) before I reject it.

but then again, I don't need to think about this until I do my LLM. I've got a lot of contracts to read before tomorrow.