Hot on the heels of the Bowles-Simpson deficit plan released last week, a group at the Bipartisan Policy Center released its own proposal today to address the United States’ growing national debt. The plan from the BPC Debt Reduction task force, headed by former CBO director Alice Rivlin and former Senator Pete Domenici (R-NM) would cut federal spending in many areas, and would dramatically simplify the federal income 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. by lowering rates, eliminating most itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s and replacing others with simplified tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s, and reducing the number of income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s. In what is sure to be a controversial proposal, the plan calls for making up some of this lost revenue by imposing what it calls a “Deficit Reduction Sales TaxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. ” – in other words, a national sales tax imposed on top of existing state and local sales taxes. To combat tax evasion, it is likely that the tax would take the form of a Value-Added Tax, or VAT- a system where a portion of the sales tax is collected at each stage of production, rather than all at the final sale.
According to the document released by BPC, the VAT would be phased in over two years, beginning with a 3% rate in 2012 and a 6.5% rate for 2013 and beyond. BPC states that this would raise $3,048 billion dollars from 2012 to 2020; according to some quick calculations, I estimate that the 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. for the VAT would have to be approximately 29% of GDP – this assumes the BPC rates are tax-exclusive (the standard for sales taxes) and no tax evasion. This would likely include purchases of durable goods, clothes, and gas, among many other things, but would probably exclude purchases that are commonly exempted from sales taxes, such as groceries, health care, housing, and education.
Fortunately, the Tax Foundation has recently released a VAT calculator that allows people to see how this sales tax could affect their household finances. The calculator is highly customizable, allowing users to pick both the tax rate and define the tax base as a percentage of GDP. The user can enter in the values for BPC’s proposed VAT: a 6.5% rate on a tax base of 29% of GDP, and then enter his or her own financial information – the calculator estimates consumption in 21 broad categories and calculates the VAT burden accordingly. In the near future, we will be releasing a modified version of the income tax calculator on mytaxburden.org that includes the various recent tax reform proposals. Since the purpose of this particular VAT is partially to offset revenue losses from income tax cuts, the two tools combined will help taxpayers get a sense of how these proposals affect them.
Update: Robert Dietz from the National Association of Home Builders writes to clarify: “For what it is worth, the proposal, with respect to housing, excludes rental payments, imputed rent for homeowners, that portion of the mortgage interest payment due to financial intermediation, and the purchase of an existing home — but it would include new home sales and remodeling.”Share