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." Under the present system, a great deal of cost and effort is associated with the attempt to measure that accumulation, some of which is taxed over time and other portions of which, such as many capital gains, are taxed only partly or not at all, such as gains on assets which receive a stepped up basis at death and life insurance proceeds. He says "a true accretion-type tax is hardly attainable in practice." He proposes instead a "vast simplification," a consumpti...