Fundamental tax reform is an oft-cited policy priority among legislators, and appeals for tax reform seem to achieve broad support across political parties. Commentary abounds suggesting the current U.S. income tax code is overly complicated, unfair, a drag on the economy, and in need of reform. Disagreements, however, often surface when discussing the specifics of tax reform. Previous legislative debates have focused on changes to the current income tax code, such as changing marginal income tax rates or altering how different types of income are taxed. Although these debates reflect important policy considerations, they focus largely on changes within the current income tax. Alternative discussions around tax reform have suggested fundamentally altering the federal tax base, shifting toward taxing consumption instead of income. Within the current income tax structure, an individual's tax liability is determined as a function of total income. With a consumption tax, however, an individual's tax liability would be determined by total expenditures on goods and services. Income not spent on goods or services, or "savings," would not be taxed. Consumption taxes can take many different forms—which differ in when the tax is collected, how the tax is calculated, and who is responsible for remitting the tax—but they all share the common tax base of consumption. Common consumption tax designs include a value added tax (VAT), a national sales tax (NST), and a consumed-income tax. Consumption taxes are commonplace across the developed world. Among countries in the Organization for Economic Cooperation and Development (OECD), the United States is the only country without a broad-based national-level consumption tax. However, many states have their own consumption taxes in the form of sales taxes. In fact, the OECD encourages countries to shift away from income taxes and toward consumption taxes. The European Union even requires its member countries to implement a VAT. Many of these countries also include personal and corporate income taxes alongside their VATs. Multiple proposals have been introduced in the 114 th Congress to shift revenue collection away from income and toward consumption. H.R. 25 and its companion legislation in the Senate, S. 155 , would replace the income tax with a national retail sales tax, often referred to as a "fair tax." H.R. 1040 would offer taxpayers the ability to opt into a consumed-income tax. This report will provide a survey of consumption taxes and their basic structures, including the VAT, the NST, and the consumed-income tax (also known as a cash-flow tax). After an overview of these tax structures, the report will discuss the effects of consumption taxes on economic efficiency, the distribution of the tax burden, and tax administration. In order to provide goods and services, a government must raise revenue. Generally there are three tax bases from which governments can raise this revenue directly from individuals: income, wages, and consumption. The United States implements taxes on all three of these bases. The first tax base, income, includes all income from both labor and capital (e.g., wages and interest on investments). In the United States, income is taxed through a federal income tax, which applies differential tax rates on income from labor and capital. The second tax base, wages, includes all income that results from labor. The payroll tax, which in part funds the Social Security program, is a type of wage tax. The third tax base, consumption, includes all money spent on goods and services. A number of narrow consumption taxes exist at the federal level, such as the gasoline excise tax. Broader consumption taxes are popular at the state level in the form of sales taxes. State sales taxes are a commonplace consumption tax in the United States. There are differences, however, across states regarding the base to which state sales taxes are applied. For example, many state sales taxes exempt certain necessities from their sales tax base, such as certain medicines under Virginia's state sales tax. A broad and comprehensive consumption tax could be applied to all money spent on goods and services for final consumption. Examples of broader consumption taxes can be found in Europe, where many countries implement national-level consumption taxes referred to as value added taxes (VATs). These taxes generally do not have as many exemptions as consumption taxes in the United States, and therefore have a broader tax base. A broader tax base, other things equal, allows more revenue to be collected with lower tax rates. A consumption and income tax with broad bases can be similar depending on an individual's saving behavior. An individual who saves no money at all would experience no difference between an income and a consumption tax. Without savings, consumption is equal to income. A consumption tax distinguishes itself from an income tax when taxpayers save a portion of their income. For example, under a consumption tax, a taxpayer who makes $100,000 and saves $10,000 a year would only pay taxes on the $90,000 that was spent on goods and services. However, under an income tax the same taxpayer would pay taxes on the full $100,000, whether it was saved or spent. Proponents of a consumption tax argue that by allowing savings to be carried forward tax-free, taxpayers will choose to save more of their income. Economic theory suggests that with a higher level of savings, the productivity of the economy could increase and improve living standards in the long run. The potential economic effects of switching from an income tax system to a consumption tax system are discussed further below (see the " Alternative Tax Bases: Economic Considerations " section). Consumption taxes often differ in how they are implemented, but they all share a common tax base. The implementation of consumption taxes can differ with respect to when the tax is collected, how the tax is calculated, and who is responsible for remitting the tax. Three common consumption tax designs include (1) a value added tax (VAT); (2) a national sales tax (NST), sometimes referred to as a "fair tax"; and (3) a consumed-income tax, also known as a cash-flow tax. The value added of a firm is the difference between a firm's sales and a firm's purchases from all other firms. In other words, a firm's value added is simply the amount of value that a firm contributes to a good or service by applying its factors of production (land, labor, capital, and entrepreneurial ability). A value-added tax is a tax levied at each stage of production on a firm's net value added. There are three accounting methods to calculate and keep track of a VAT throughout the production process. The credit-invoice method is the most popular accounting method for VATs. Under the credit-invoice method, a firm would calculate and collect the VAT on its sales. Next, the firm would compute its VAT liability by subtracting the VAT paid on its inputs from the VAT collected on its sales, and remit the difference to the federal government to satisfy its tax liability. Other accounting methods include the subtraction and addition method. VATs can differ in their tax treatment of capital purchases (plant and equipment). The consumption-type VAT treats capital purchases the same way as the purchase of any other input, which excludes all capital goods purchases from the tax base (i.e., it is equivalent to expensing under an income tax). Two other types of VATs are the income VAT and the gross product VATs. Under an income-type VAT, the VAT paid on the purchases of capital inputs is amortized (credit against the firm's VAT liability) over the expected life of the capital inputs. Under a gross product-type VAT, no deduction for the VAT on purchases of capital inputs is allowed against the firm's VAT liability. Most countries use a consumption-type VAT. A national sales tax (NST), sometimes referred to as a "fair tax," would be a federal consumption tax collected only at the retail level by vendors. The NST would equal a set percentage of the retail price of taxable goods and services. Retail vendors collect the NST and remit the tax revenue to the federal government. The retail price of a good or service equals the sum of the value added at all stages of production. Consequently, a value-added tax and a national sales tax with the same tax rate and tax base would yield the same amount of revenue. Both policymakers and economists generally assume that both types of taxes are fully shifted forward onto consumers; that is, the price to the consumer increases by the full amount of the tax. A number of legislative proposals have been introduced in the 114 th Congress to implement a form of an NST, including H.R. 25 and S. 155 . These proposals would replace the current federal income tax with a 23% tax-inclusive sales tax rate in 2017, or a 29.9% tax exclusive rate, with adjustments to the rate moving forward. Under a consumed-income tax, taxpayers would keep their savings in an account that would be the tax equivalent of a current individual retirement account or IRA. Net contributions to this account (contributions less withdrawals) would be deducted from income to determine the level of consumed income. A tax would then be applied to only an individual's consumed income. In contrast to a VAT or sales tax, policymakers would have the option of applying a progressive rate structure to the level of consumed income. Each individual would be responsible for calculating his or her consumed income and remitting the resulting tax obligation. H.R. 1040 , introduced in the 114 th Congress, would allow taxpayers to elect to file their taxes under a consumed-income tax rather than the personal income tax. The proposal would allow taxpayers to irrevocably elect to be subject to a flat tax, with a 19% tax-inclusive rate the first two years (23.5% tax exclusive rate), and a 17% tax-inclusive rate thereafter (20.5% tax-exclusive rate). Across the world consumption taxes are common, with more than 120 countries using a VAT as a major source of revenue.