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New CRS Report on Flat Tax Proposals and Fundamental Tax Reform

2 min readBy: Andrew Chamberlain

Download Flat Tax Proposals and Fundamental Tax Reform: An Overview

The Congressional Research Service has released an interesting new report, “Flat Tax Proposals and Fundamental Tax Reform: An Overview“. Here’s the summary:

President George W. Bush has stated that taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform is one of his top priorities.
He appointed a nine-member bipartisan panel to study the federal tax code, and
November 1, 2005, this panel proposed two alternatives to reform the code including simplification elements. Consequently, the concept of replacing our current income tax system with a “flat-rate tax” has received renewed congressional interest.

Although referred to as “flat-rate taxes,” many of the recent proposals go much
further than merely adopting a flat-rate tax structure. Some involve significant
income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. broadening whereas others entail changing the tax base from income to consumption.

Proponents of these tax revisions often maintain that they would simplify the tax
system, make the government less intrusive, and create an environment more
conducive to saving. Critics express concern about the distributional consequences and transitional costs of a dramatic change in the tax system.

Most observers believe that the problems and complexities of our current tax system are not primarily related to the number of tax rates but rather stem from difficulties associated with measuring the tax base.

Read the full report here (PDF).

As we’ve written before, growing tax law complexity is almost entirely the result of tax base issues, not the multiple rate structure per se. For an extensive discussion of why, see our 1995 Special Brief, “The Compliance Costs and Regulatory Burden Imposed by Federal Tax Law.”

The most powerful argument for fundamental tax reform is that cleaning up the tax base allows all rates to be lowered—regardless of the rate structure—cutting “deadweight costs” of the tax system for everyone.

Contrary to popular belief, favoring a progressive rate structure is not a good reason to oppose fundamental tax reform. There are consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. plans—such as the Bradford “X Tax“—that combine both broad bases and low rates with a progressive rate structure. Even those wedded to the idea of a progressive rate structure should favor fundamental tax reform that moves us toward a consumption base.