List of References
Altig, David, et al., 1997, “Simulating U.S. Tax Reform,” National Bureau of Economic Research: Cambridge, Working Paper No. 6248 (October).
Bernheim, Douglas, 1996, “Rethinking Saving Incentives,” in Fiscal Policy: Lessons From Economic Research, edited by Alan Auerbach, MIT Press: Cambridge.
Hall, Robert E. and Alvin Rabushka, 1995, The Flat Tax, Hoover Institution Press, Stanford University: Stanford, California (second edition).
McLure, Charles E., 1987a, The Value-Added Tax: Key to Deficit Reduction? American Enterprise Institute for Public Policy Research, Washington D.C.
Shah, Saurin and Christopher Towe, 1995, “A U.S. Valued-Added Tax—A Review of the Issues,” IMF Paper on Policy Analysis and Assessment (PPAA/95/8) (June).
Slemrod, Joel and Jon Bakija, 1996, “Taxing Ourselves: A Citizen’s Guide to the Great Debate Over Tax Reform,” The-MIT Press: Cambridge.
Prepared by Michael Leidy and Stephen Tokarick.
In recognition of the complexity of the income tax system, the U.S. House of Representatives in June 1998 passed the Tax Code Termination Act which would sunset the entire income tax code by 2003, but only if Congress has acted by then to adopt a new system.
“Rent seeking” refers to the activities of interest groups to influence legislation (or political directives) supportive of member incomes.
One obstacle to tax reform is that many of the provisions in the existing tax code have been capitalized into asset prices (e.g., the mortgage interest deduction) and cannot be removed without inflicting serious losses.
The simulations hold government spending and revenues constant. Tax rates fall as the base is widened.
Currently, only Alaska, Delaware, Montana, New Hampshire, and Oregon have no general broad-based retail sales taxes in place.
McLure (1987a, p. 154) concludes that a joint system of independent state retail sales taxes and a federal VAT should be eliminated from serious consideration.
The case of Canada is instructive in this regard, where efforts to harmonize provincial sales taxes with the federal VAT (the goods and services tax) have resulted so far in just three provinces reaching agreement.
Alternatively, Slemrod and Bakija (1996, p. 82–83) in describing such “transitional equity” problems, suggest that elderly people (the group with the most accumulated financial assets) might be granted an exemption from the sales tax, perhaps by way of an elderly “exemption card.” They point out, however, that “the elderly exemption card would be valuable indeed. One can imagine making sure your elderly parents buy your next car for you …”
Hall and Rabushka are senior fellows at Stanford University’s Hoover Institution, and Hall is also a professor of economics at Stanford.
The Hall-Rabushka flat tax is in fact equivalent to a pure consumption tax with one rate, and no exemptions or zero-rated items. As Hall and Rabushka (1995, p. 70) explain, “a tax on income with an exemption for saving is in effect a tax on consumption.” McLure (1987, p. 89) observes more specifically that the Hall-Rabushka flat tax is “a particularly ingenious version of the naive subtraction-method VAT.”
Under Hall and Rabushka’s 1995 proposal, a 19 percent flat tax combined with a family allowance of $25,500 for a family of four was estimated to achieve a revenue-neutral replacement of the current system of individual and corporate income taxes.
Hall and Rabushka (1995, p. 60) point out that taxation of business income at the source is merely a means of taxing income that accrues to the owners of businesses. Taxing business income at the source, however, has the advantage of greater simplicity and reduced opportunities for leakage through tax evasion, since there are far fewer businesses to monitor than households with business-related income. It is possible to tax the business income that ultimately accrues to households at the source under the Hall-Rabushka system because only one rate applies, the common flat tax. A system of graduated rates, on the other hand, would require that business income be taxed at the destination (since the tax rate would be destination specific), with all of the implied complexity, tax administration and enforcement costs, and greater leakage from the tax base associated with destination-based taxation.
In 1997, the deductibility of mortgage interest on owner-occupied homes was the single largest tax expenditure totaling $49 billion (0.6 percent of GDP).