Question

Critics of the Federal Income Tax often complain about the complexity of the tax law... In fact, former President Jimmy Carter called our tax law "a disgrace" and Albert Einstein threw up his hands in frustration and said that it was too complicated for him to understand. One common suggestion to improve our tax law seems to be that it would be much easier to raise revenue for the Federal government with a national sales tax or a flat income tax with no deductions (based simply on gross income). Please refute these contentions and defend our tax system. Explain how the Income Tax is designed to achieve multiple goals, i.e., social - political - economic - stimulus - incentive - disincentive objectives ..... and that raising revenue for the government is not the only purpose of the income tax law.

Answer 1

From a pure revenue-raising perspective, it is reasonably clear that in the current U.S. context, a consumption tax can be devised that will raise as much revenue as the existing income tax does. While some of the current proposals for a federal consumption tax, such as a national sales tax to be administered by the states, are likely to fall far short of this goal, other proposals (like the flat tax or the cash flow tax) are more likely to fulfill any mandate of revenue neutrality. In fact, consumption taxes have a very good track record in terms of raising revenue. The VAT, specifically, is second only to the individual income tax in its ability to raise revenue in most OECD member countries, and in some it raises more revenue than the income tax. In Western European countries, for example, the individual income tax accounted in 1996-2002 for 32% of total tax revenue, compared with 30% for the VAT.

Thus, I believe the solution is a federal level consumption tax-specifically, a VAT similar to the ones used successfully in all other OECD countries. If this tax is enacted in addition to, and not as a replacement of, the income tax, the revenues under current political conditions are likely to be used for universal entitlement programs like Social Security and Medicare. These programs are far more politically resilient than programs aimed solely at the poor, and are inherently redistributive. Thus, there is little risk that the revenues from the new (regressive) additional consumption tax would not be spent in a progressive fashion-which is not the case if the consumption tax replaced the income tax, because then it would fund the same federal programs as the income tax does now, with no increase in progressivity and no solution for the actuarial deficit of the entitlement programs, other than cutting benefits.