PROS AND CONS OF FLAT TAXES AND SALES TAXES

This research paper examines the potential advantages and disadvantages from a public policy standpoint of various types of consumption-based taxes which have been proposed to remedy the deficiencies of the current federal tax system. A flat tax, rigorously applied, would be far superior to the present system because it would be simpler, fairer, a more efficient way of collecting public revenues and consistent with optimizing economic growth. However, it would benefit disproportionately higher income individual taxpayers, certain property owners and business generally and impose crushing burdens on lower income and many middle income taxpayers who depend on personal services income for maintaining their way of life and who consume most of their income. Proposed variants of the flat tax would ease its regressive features; however, they might not produce the necessary revenues at the tax rates currently proposed and might also lead to further complexity and inequities in the tax code. The two leading types of sales taxes, a value-added tax (VAT) and a retail sales tax, would tax consumption transactions rather than income at the source. Seemingly as easy or easier to collect as a flat tax, a national VAT or retail sales tax would have even more regressive effects than a flat tax, diminish state tax revenues and offer opportunities for tax avoidance.

Deficiencies of the Current Tax System

During the last several years, a gre

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the premiums are deductible. Since it taxes a person on his consumption, the flat tax would yield the highest tax savings to higher income taxpayers because they currently are subject to higher rates (up to 39.6 percent on taxable income over $256,500) and because they are currently taxed at various rates on their income and gains from savings and investments. Without some exemptions and deductions, a flat tax would have an especially regressive impact on lower income taxpayers who save and invest little and consume a higher percentage of their income, out of necessity. Andrews argues that if "the primary, intended, real effect of any general-revenue raising tax is to . . . curtail [private] consumption, then it is presumptively fair and efficient to distribute the burden of tax proportionately or progressively in relation to levels of consumption." Bradford says that such a tax would violate the principle of vertical equity or the concept that "those with better circumstances should bear more of the tax burden." Most proposals in current circulation would allow threshold exemptions and deductions for lower income taxpayers. The Armey-Shelby bill would effectively shield the first $33,000 of taxable income of a family

Category: Economics - P