CONSUMPTION-BASED TAXES

PROPOSED FLAT TAX AND OTHER CONSUMPTION-BASED TAXES

This research paper examines policy rationale and other arguments for adopting a flat tax or other consumption-based tax system in the United States, as advanced by Professors William Andrews and Robert Hall & Alvin Rabushka, then discusses how the current tax system would be changed if either the USA Tax or the Flat Tax bills (S. 722 and H.R. 2060) which have been introduced in Congress were enacted and finally discusses some of the problems associated with the tax treatment of compensation of employees under the provisions of these bills.

I. Arguments for Adopting a Consumption-Based Tax System.

A major argument for adopting a consumption-based tax system is that it would be simpler, more efficient and easier to administer. Hall & Rabushka call the present tax system "a nightmare of complexity," which they estimate generates per annum direct and indirect compliance and enforcement costs of hundreds of billions of dollars. They claim that their flat tax "would save the taxpayers hundreds of billions of dollars in direct and indirect compliance costs."

Andrews points out that much of the complexity and inefficiency of the present system stems from the difficulties involved in attempting to tax not only personal consumption, but also the accumulation of wealth. He says that "many of the most intractable problems in the personal income tax arise out of the hybrid character of our treatment of accumulation." Unde

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me from the discharge of indebtedness income would be includible in gross income. However, the amount of such discharge is expressly excluded from income under sec. 4(a)(9) "unless the discharge is for services, property or other valuable right." C. Life Insurance Proceeds. Under current law, sec. 101(a), proceeds of life insurance policies are not subject to income tax. These proceeds are viewed as a return of capital since premiums are not deductible. The tax-free buildup in policy values in whole life policies represents a windfall to policy holders. Under the Flat Tax, such proceeds would be totally exempt from income taxation, except for annuities which might form part of retirement benefits, and they would be free of gift and estate taxes, which are repealed by sec. 106. This is totally inconsistent with the theoretical rationale for a flat tax. Under the USA Tax, such proceeds are includible in taxable income, but a deduction is allowed for premiums, thus recapturing for tax purposes the buildup in policy value. Similar treatment is accorded to annuities. Under the USA Tax, the costs of most types of employer-provided insurance would be includible in the employee's income but he or she could deduct that cost as savings

Category: Economics - C