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Prepared by Elaine Buckberg.
In addition, Senator Lugar has proposed to replace income taxation with a national sales tax. Representative Gephardt has promoted a separate flat tax proposal, and Congress has appointed Mr. Jack Kemp to chair a commission on tax reform.
For mortgage debt up to $100,000 and charitable contributions up to $2,500.
Currently, corporate profits are taxed at graduated rates and the profits of noncorporate businesses such as partnerships are taxed only when distributed as individual income.
The Alternative Minimum Taxes (AMT) also would be repealed along with the Corporate and Personal Income Taxes. Currently, the AMT for corporations is designed to ensure that all corporations pay tax. A corporation’s AMT liability is determined by recalculating taxable income, making adjustments and adding back certain tax preference items. The corporation then owes tax equal to 20 percent of the AMT base, if that liability exceeds its regular tax liability. An AMT also applies to individuals.
Currently, the income from U.S. corporations’ foreign activities is taxable, although tax due to the host country is deductible from the U.S. tax liability.
This assumes that all saving is ultimately converted to assets (no bequests or debt at death), and that the value of an asset is equal to the income stream it is expected to produce:
where pt represents the asset’s price at t, dt represents the dividend paid at time t, and β is a discount factor. If individuals do not consume all their income and instead leave bequests, the bequest will be taxed when it is consumed ultimately by the beneficiary of the bequest.
See Senate bill No. 722, April 25 congressional testimony of Senators Domenici and Nunn (Congressional Record) and Senator Pete V. Domenici (1994).
Under the SEIT, capital income (interest and dividends) would be taxed at the individual level. Under the flat tax rate, capital income would be taxed at the business level.
The Alternative Minimum Tax would be repealed.
If a non-profit organization is engaged in a business activity unrelated to its tax-exempt status, it would be liable for taxes on the income from that activity under either the business cashflow tax or the Unrelated Business Income Tax (UBIT).
GATT prohibits border adjustments for direct taxes like the corporate income tax or the FICA payroll tax.
The following transactions would count as new saving: deposits to bank accounts; purchases of financial assets and equity; payment of life insurance premia; cash contributions to businesses; purchases of real assets, including homes and major home improvements; contributions to pension and profit-sharing plans; and loan repayments. Mortgage principal and interest payments would be deductible in the year those payments were made. Some form of verification would be required to assess the value of a household’s qualifying assets.
Taxpayers would not need to, itemize their deductions to deduct interest payments under the SEIT.
Medical expenses exceeding 7.5 percent of income would be deductible.
In 1991, wages, salaries, and pensions accounted for roughly 90 percent of adjusted gross income (AGI) for individuals with incomes between $30,000 and $70,000, but only 31 percent of AGI for those with incomes of $1 million or higher. See Eisner (1995), p. 10.
As noted above, OTA estimates that to achieve revenue neutrality, Armey’s flat tax would need to be levied at a 24.9 percent rate; if the earned-income tax credit were retained, a 25.8 percent rate would be required.
Source: Congressional Budget Office.
Assuming half of the burden falls on labor income and half on capital income.
Taxable income in excess of $250,000 is taxed at a 39.6 percent rate under current law.
Flat tax proponents argue that their system would be so simple that it would be possible to file business or individual tax returns on a postcard.
However, the SEIT would introduce new distortions. The large gap between business and personal income tax rates (11 percent for business income, from 19 to 40 percent for personal income) may create an incentive for tax rate arbitrage so as to avoid taxation. For example, businesses may retain earnings rather than distributing them as dividends.
Auerbach et al. note that lump sum payments could be used to offset the transitional welfare loss to the elderly of moving to a consumption tax.
If leisure is a superior good, the labor supply curve may be backward bending and higher net-of-tax wages would reduce labor supply. Evidence suggests that this is the case: historically, increases in real wages have reduced hours.