About once per decade going back to at least the 1960s, major reform of the federal tax system gains lots of attention. For example:
- A value-added tax was discussed in the 1960s.
- Treasury issued lengthy reports on major reform in 1977 (Blueprints for Basic Tax Reform, 1/17/77).
- Treasury issued another lengthy report in 1984 (Tax Reform for Fairness, Simplicity, and Economic Growth: The Treasury Department Report to the President, 11/84).
- There were numerous reports and congressional hearings in the 1990s.
- In 2005, President Bush created the President's Advisory Panel on Federal Tax Reform which held numerous hearings and issued a final report in November 2005.
- On 4/15/08, the Senate Finance Committee held a hearing - Tax: Fundamentals in Advance of Reform, to help set the stage for tax reform discussions in 2009.
While the Treasury reports included both a comprehensive income tax proposal and consumption tax proposals, much of the discussion since the 1990s has been on replacing the federal income tax with a consumption tax, such as a flat tax or a national retail sales tax. In the 1990s, then House Ways & Means Committee Chairman Bill Archer talked about also repealing the 16th amendment so the income tax could not grow back. [1995 hearing transcript pg 4]
That's a significant change that raises lots of issues. For example, what kind of transitional relief, if any, should be provided for NOL and credit carryovers remaining upon termination of the income tax? Also, what do states do? If they conform to the federal consumption tax, then most states have two consumption taxes (because they already have a sales tax). That sounds rather regressive. Also, what about individuals who have earned income and saved it so they can spend it later? Isn't that a bit rough to have it taxed a second time under a new tax regime?
But, many people think a consumption tax would better encourage savings and would be less intrusive into your lives since most people would not have to file a federal tax return (unless they own a businesss).
What do you think - should the federal income tax be replaced with some type of consumption tax? Why?
1 comment:
The United States should consider replacing the federal income tax with some type of consumption tax such as a national retail sales tax. In the midst of the country’s worst recession in decades, a national sales tax would contribute to fixing the federal budget deficit while promoting job growth and efficiency in the workforce. Additionally, a national retail sales tax will reduce complexity within the United States tax system that will make it easier for everyone to understand and comply with the rules. The United States savings rate is currently 4% of income (http://www.balancedpolitics.org/national_sales_tax.htm) which is one of the lowest among all other industrialized countries. Replacing the income tax with a national sales tax can improve the savings rate, as individuals would no longer be taxed on their income, but instead on their consumption. As a result individuals will be more motivated to earn income (since they are being taxed less) while being in control of all their spending decisions. Compared to other countries around the world, the United States is falling behind. The last few years have seen the United States lose its share of world GDP while other countries continue to improve and adapt to the changing marketplace. This is partly due to high corporate tax rates as well as the United States inability to keep up with the changing landscape and dynamic of the world. Replacing the income tax with a national sales tax would make the US more aligned with its international competitors and a step closer towards recapturing its dominance in the world.
The current income tax law and its accompanying rules and regulations consist of thousands of pages, which result in a lot of time, money, and effort spent complying with the law. Replacing the income tax would no longer require individuals to file a return as they could spend more time on leisure and other activities. Underreporting of individual income taxes is the largest source of the tax gap which is annually estimated to be over $350 billion. (http://usgovinfo.about.com/od/smallbusiness/a/taxgap.htm)Eliminating the income tax simplifies the system which will lead to a higher compliance rate and decrease in the tax gap in the long run. A national sales tax also addresses some privacy issues and concerns prevalent in the current income tax system. A national sales tax will decrease amount of government intervention among individuals and families so they can live their own private lives. Many other equity and fairness issues may arise especially among low-income individuals. Instituting a “prebate” to coincide with the national sales tax will alleviate some of these concerns and assist low-income individuals and families up to the poverty level from paying minimal to no tax. Overall the United States should replace the federal income tax with some type of consumption tax such as a national sales tax.
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