New CRS Report on Flat Tax Proposals and Fundamental Tax Reform
June 1, 2006
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 tax 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 base 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 tax 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.