{ "id": "RL32603", "type": "CRS Report", "typeId": "REPORTS", "number": "RL32603", "active": false, "source": "EveryCRSReport.com, University of North Texas Libraries Government Documents Department", "versions": [ { "source": "EveryCRSReport.com", "id": 341200, "date": "2008-03-14", "retrieved": "2016-04-07T03:35:37.714453", "title": "The Flat Tax, Value-Added Tax, and National Retail Sales Tax: Overview of the Issues", "summary": "The current income tax system is criticized for costly complexity and damage to economic efficiency. Reform suggestions have proliferated, including a national retail sales tax, several versions of a value-added tax (VAT), the much-discussed \u201cFlat Tax\u201d on consumption (the \u201cHall-Rabushka\u201d tax), the \u201cUSA\u201d proposal for a direct consumption tax, and revisions of the income tax. The President has indicated that major tax reform will be a priority item in his second term, and his tax reform commission has included a modified flat tax as one of its options.\nMost reform proposals are based on the notion that switching to a consumption tax base or exempting savings from tax would increase the savings rate and improve economic efficiency. Although theoretical inter-temporal models predict that saving and efficiency would increase, evidence from past tax cuts does not bear out this prediction. Any effect on savings would depend crucially on the transition provisions. It is also argued that these taxes could improve the country\u2019s trade balance. Trade balances, however, depend on capital flows and would be affected by these tax changes only if they do bring about an increase in the U.S. savings rate. There is no reason to expect trade benefits from any of the tax changes per se.\nA broader tax base would have diverse effects on economic sectors. Sectors that might be adversely affected include the non-profit sector (loss of charitable contributions deductions), the state and local sector (loss of state tax deductions, change in their own tax structures), and the health care sector (taxation of fringe benefits). Shifting the tax base from income to consumption, while generally increasing business investment, would differentially affect firms, depending on their growth rate, capital structure, and employee benefit structure. Such a shift would also make investment in pensions, insurance policies, owner-occupied housing, and tax-exempt bonds relatively less attractive.\nThere are macroeconomic problems with a transition to a consumption tax, and these problems are extremely serious for transiting to a system that collects all revenue from business (VAT or retail sales tax). For these tax shifts, avoiding a serious economic contraction would be quite difficult. The flat tax would not have these problems but it can cause significant windfall losses in asset values.\nA flat-rate tax is also intended to simplify the system and reduce compliance and administration costs. Many of the proposals, if kept simple while being enacted, would reduce costs; however, many individual taxpayers are currently under a flat-rate income tax, so their lot would not be much improved. An enacted law, however, might not be as simple as the proposals.\nConsumption taxes also change the distribution of tax burdens, especially on generations. The old consume more of their incomes, and their burden would increase; younger people save more, and their burdens would fall. Higher income individuals would see a reduction in taxes. 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