week8 - XIII. A. Critique of current system. 1. Tax system...

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1 XIII. TAX REFORM A. Critique of current system. 1. Tax system incredibly complex. a. Built-in incentives. b. Plugging loopholes. c. Rent-seeking by lobbyists and legislators. 2. Involves high compliance costs (record keeping, etc.) 3. Involves excess burden – some feel U.S. rates are too high. 4. Start with assumptions that current system is bad and any alternative must be better (usually ignores how current system got where it is – and assumes will not happen again with new system.) 5. Taxable income is less than ½ of personal income. a. Fundamental reform focuses on expanding the tax base and lowering rates. b. Many reform proposals focus on taxing consumption – to encourage investment and growth. B. Fairness criteria. 1. Horizontal equity: everyone in same circumstances should pay same amount. 2. Vertical equity (ability to pay): people who can afford to pay more should pay more. C. Consumption taxes. 1. Value added tax (VAT); common in Europe. 2. National sales tax. 3. Integrated flat tax – allows for tax on consumption that takes taxpayers circumstances into account; i.e., it can be progressive.
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D. Flat tax proposal. 1. Proposed by Hall and Rabushka; supported in Congress by Dick Armey in late 1990s (House Majority Leader at the time), past presidential candidate Steve Forbes. 2. Classify all income as business income or wages, and tax both equally. 3. Goal is to tax consumption. a. Business tax allows 100 percent write-off of all investment, which removes investment from the tax base. b. Same tax base as a VAT, but can be progressive. 4. Business tax: a. Tax base equals: Total revenues from all sales LESS Purchase of inputs from other firms LESS Wages/salaries LESS Purchase of plant and equipment. b. Interest payments, fringe benefits are NOT deductible. c. Net revenues are taxed at 19 percent (or any other single rate chosen). 5. Wage tax. a. Base: all income from wages, salaries, and pensions. b. Each family is given allowance which is not taxable. c. All income above allowance is taxable at 19 percent (or any other single rate). E. Critique of flat tax.
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This note was uploaded on 06/30/2009 for the course ECON 103 taught by Professor Sandrablack during the Fall '07 term at UCLA.

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week8 - XIII. A. Critique of current system. 1. Tax system...

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