Tax Policy Center | Urban Institute and Brookings Institution

Using a VAT to Reform the Income Tax

Eric Toder, Jim Nunns, Joseph Rosenberg

Published: January 27, 2012
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Abstract

In 100 Million Unnecessary Returns, Columbia University law professor Michael J. Graetz proposed a sweeping reform of the federal tax system that is intended to simplify the tax system, improve economic incentives, and maintain fairness. The Graetz proposal would remove most current taxpayers from the income tax rolls, reform the corporate income tax, significantly reduce the top individual and corporate rates, and adopt a value-added tax (VAT). This paper describes the Graetz proposal in detail and analyzes its effects on federal revenues, spending and the deficit, the distribution of tax burdens, economic incentives, and tax administrative and compliance costs.

The text below is an excerpt from the complete document. Read the entire report in PDF format. The executive summary is available here. UPDATE: Tables for 2013 are available here.


I. Introduction

A sweeping reform of the federal tax system has been proposed by Michael J. Graetz, Professor Emeritus of Law at Yale University and currently Professor of Law at Columbia University.1 The proposal is intended to simplify the tax system, improve economic incentives, and maintain fairness. To achieve these goals, Graetz's plan would remove most current taxpayers from the income tax rolls, reform the corporate income tax, significantly reduce the top individual and corporate rates, and adopt a value-added tax (VAT) as the principal tax paid by most Americans. Payroll, estate and gift taxes would not change.

This paper describes the Graetz proposal in detail and analyzes its effects on federal revenues, spending and the deficit, the distribution of the tax burden, marginal tax rates and other incentives, and the tax system's administrative and compliance costs. The proposal is analyzed relative to the Tax Policy Center (TPC) "Current Policy Baseline," which assumes permanent extension of the 2001, 2003, and 2010 tax cuts (except for the one-year payroll tax reduction), continuation of the 2011 AMT exemption amounts (indexed for inflation) and extension of the 2011 estate tax exemption of $5 million (indexed for inflation) and top rate of 35 percent. The analysis assumes the proposal will be effective in 2015 and be deficit neutral..

End of excerpt. The entire report with graphs and footnotes is available in PDF format.


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