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Learn more about the options below with in-depth analysis of popular options, like changes to the U.S. corporate income tax, policies to help low-income households, ways to boost economic growth, and the most economically efficient options for raising revenue.
Outside of changes aimed at returning to growth, reducing budget deficits, and aiding vulnerable households, the tax code could be simplified and improved. Major, structural tax reform does not happen often and tends to be a once-in-a-generation event. Between major reforms, the tax code tends to get more complex, not less.
Some of the changes in this chapter would improve the horizontal equity of the tax code, moving towards applying the same set of rules for taxpayers that are in similar situations. For example, repealing the individual alternative minimum tax (AMT) would eliminate a second structure under which certain taxpayers face different rules. Implementing full expensing for all capital investments would equalize tax treatment of the different types of costs businesses incur.
The tax code also contains many temporary provisions, which requires taxpayers to frequently check the tax code for changes. Some of the changes in this chapter would improve the stability of the tax code by eliminating temporary tax expenditures and making other components of the tax code permanent.
This chapter illustrates the economic, revenue, and distributional effects of 12 simplifications to the tax code that lawmakers could consider.
- Tax Individual Incomes at a Flat 30% Rate
- Eliminate the Individual Alternative Minimum Tax
- Permanently Eliminate the Pease Limitation on Itemized Deductions
- Make the 2017 Tax Law Standard Deduction, Personal Exemption, and CTC Permanent
- Implement $2,500 per Year Roth-style Universal Savings Accounts
- Eliminate the Net Investment Income Tax
- Enact Full Expensing for All Capital Investment
- Maintain Limitation on Interest Deductibility at 30 Percent of EBITDA
- Eliminate Various Business Tax Expenditures
- Replace the Corporate Income Tax with a 5 Percent Value-Added Tax (VAT)
- Eliminate Estate and Gift Taxes
- Increase Alcohol Excise Taxes to $16 per Proof Gallon and Index to Inflation
Choose a Tax Reform Option
Compare all optionsOption 68Replace the Corporate Income Tax with a 5 Percent Value-Added Tax (VAT)
This option would repeal the current corporate income tax (and its attendant complexities in defining domestic and foreign income) and replace it with a 5 percent Value-Added Tax (VAT), which is a broad-based tax on consumption.
Because the VAT allows businesses to immediately deduct the cost of their investments, this swap would reduce the cost of capital and lead to a larger economy. The option would raise substantial revenue because the VAT has a broader base than the current corporate income tax, covering approximately 63 percent of GDP. Exempting sectors of the economy from the VAT would reduce its revenue-raising potential.
Replacing the corporate income tax with a VAT would be regressive. Over the long term, some of the reductions in after-tax income would be offset by the increase in economic output, but households in the bottom four quintiles would still see a reduction in incomes.
Economic Effects
- +0.4% Gross Domestic Product
- +0.2% Gross National Product
- +2.0% Capital Stock
- +122k Full-Time Equivalent Jobs
- +0.5% Wage Rate
Budgetary Effects
- $2,772.55 Billion Static 10-Year Revenue
- $2,349.32 Billion Dynamic 10-Year Revenue
| Income Group | Percent Change in After Tax Income | ||
|---|---|---|---|
| Conventional, 2022 | Conventional, 2031 | Long Run Dynamic | |
| 0% to 20% | -1.5% | -1.1% | -0.2% |
| 20% to 40% | -1.5% | -1.3% | -0.6% |
| 40% to 60% | -1.5% | -1.2% | -0.4% |
| 60% to 80% | -1.3% | -1.0% | -0.2% |
| 80% to 100% | +0.2% | +0.7% | +2.1% |
| 90% to 95% | -0.8% | -0.5% | +0.5% |
| 95% to 99% | -0.3% | +0.3% | +1.6% |
| 99% to 100% | +2.5% | +3.3% | +5.7% |
| Total | -0.6% | -0.2% | +1.0% |
Options Comparison Table
Tax Reform Option | Long-Run Change in GDP | Full-Time Equivalent Jobs | Wage Rate | Static 10-Year Revenue (billions) | Dynamic 10-Year Revenue (billions) |
|---|---|---|---|---|---|
| 1: Lower Individual Income Tax Rates Across the Board (Lower All Rates by 10%) | +0.9% | 975,398 | +0.1% | -$2,257.31 | -$1,713.77 |
| 2: Lower the Top Marginal Income Tax Rate (25% Top Rate) | +1.1% | 1,033,707 | +0.2% | -$2,209.23 | -$1,673.87 |
| 3: Consolidate Current Brackets into Three: 10 percent, 25 percent, and 35 percent | +1.3% | 1,336,191 | +0.1% | -$2,694.50 | -$2,167.24 |
| 4: Reduce Employer- and Employee-Side Payroll Tax by 1 Percentage Point Split (1 Percentage Point Split) | +0.2% | 179,340 | 0% | -$651.84 | -$545.44 |
| 5: Lower the Top Rate on Capital Gains and Dividends to 15 Percent | < +0.05% | 6,526 | < +0.05% | -$151.11 | -$148.73 |
| 6: Index Capital Gains Realizations to Inflation | < +0.05% | 8,615 | < +0.05% | -$143.65 | -$143.40 |
| 7: Make 100 Percent Bonus Depreciation Permanent | +0.5% | 86,457 | +0.4% | -$213.42 | -$110.19 |
| 8: Implement Neutral Cost Recovery for Structures | +1.2% | 230,766 | +1.0% | -$10.35 | $300.98 |
| 9: Cancel the Amortization of Research and Development Expenses | +0.1% | 19,550 | +0.1% | -$131.30 | -$107.90 |
| 10: Make Section 199A Deduction Permanent | +0.2% | 57,906 | +0.1% | -$438.70 | -$391.20 |
| 11: Lower the Corporate Tax Rate (Lower to 15%) | +0.5% | 100,937 | +0.4% | -$978.94 | -$847.71 |
| 12: Lower the Estate Tax Rate to 30 Percent | < +0.05% | 7,236 | < +0.05% | -$81.94 | -$79.47 |
| 13: Repeal Tariffs Imposed Under Sections 232, 201, and 301 | +0.1% | 82,960 | +0.5% | -$758.99 | -$664.85 |
| 14: Raise Individual Income Tax Rates by 10 Percent | -0.9% | -960,735 | -0.1% | $2,103.78 | $1,515.02 |
| 15: Repeal the Tax Cuts and Jobs Act (TCJA) Individual Tax Changes | 0% | 0 | 0% | $829.72 | $648.75 |
| 16: Revert to Pre-2018 Individual Income Tax Rates on Income Over $400,000 | < -0.05% | 0 | < +0.05% | $107.29 | $85.43 |
| 17: Add a New Bracket of 45 Percent for Income Above $750,000 | -0.2% | -165,888 | -0.1% | $576.22 | $441.05 |
| 18: Create an Additional Flat Individual Income Tax of 5% | -2.1% | -2,220,324 | -0.1% | $6,485.00 | $5,007.21 |
| 19: Eliminate the Child Tax Credit | +0.1% | 99,527 | < +0.05% | $890.72 | $917.22 |
| 20: Reduce the Child Tax Credit to $500 | < +0.05% | 43,923 | < -0.05% | $593.35 | $585.22 |
| 21: Eliminate the Earned Income Tax Credit | +0.2% | 273,081 | < +0.05% | $607.79 | $772.99 |
| 22: Eliminate the Federal Income Tax Deduction for State and Local Taxes | -0.7% | -492,252 | -0.3% | $1,563.55 | $1,283.17 |
| 23: Eliminate the Home Mortgage Interest Deduction | -0.7% | -366,838 | -0.4% | $1,073.53 | $832.83 |
| 24: Lower the Home Mortgage Interest Deduction Cap to $500,000 in Principal | -0.1% | -29,557 | < -0.05% | $147.51 | $132.22 |
| 25: Eliminate the Charitable Deduction | -0.1% | -90,202 | < -0.05% | $747.40 | $694.52 |
| 26: Limit Tax Savings from Itemized Deductions to 28 Percent of Value | -0.1% | -63,819 | < -0.05% | $212.96 | $184.19 |
| 27: Eliminate the Tax Exclusion for Municipal Bond Interest | < -0.05% | -11,152 | < -0.05% | $192.84 | $191.84 |
| 28: Tax Carried Interest as Ordinary Income | < -0.05% | -9,347 | < -0.05% | $20.33 | $18.50 |
| 29: Raise the Top Capital Gains and Dividend Tax Rate to 30% | < -0.05% | -10,024 | < -0.05% | $67.00 | $61.82 |
| 30: Raise Top Capital Gains Rate to 39.6 Percent on Income Above $1 Million | -0.1% | -14,699 | -0.1% | -$123.51 | -$132.92 |
| 31: Eliminate the Exclusion of Capital Gains on Principal Residences | -0.3% | -65,000 | -0.3% | $661.90 | $617.30 |
| 32: Institute a Wealth Tax | -0.8% | -148,638 | -0.7% | $2,194.40 | $1,936.40 |
| 33: Increase Employer- and Employee-side Payroll Tax by 1 Percentage Point Split (1 Percentage Point Split) | -0.2% | -179,965 | 0% | $672.66 | $563.43 |
| 34: Eliminate the Social Security Payroll Tax Cap | -1.2% | -1,299,589 | 0% | $1,546.63 | $1,288.30 |
| 35: Apply the Social Security Payroll Tax to Wages Above $400,000 | -0.2% | -226,014 | 0% | $822.79 | $686.04 |
| 36: Raise the Corporate Income Tax (28% CIT Rate) | -0.7% | -138,309 | -0.6% | $886.27 | $693.90 |
| 37: Institute a Corporate Surtax of 5 Percent | -0.1% | -16,423 | -0.1% | $141.10 | $119.00 |
| 38: Eliminate the Section 199A Deduction | < -0.05% | 0 | < +0.05% | $208.23 | $200.28 |
| 39: Require Amortization of Advertising Expenses over 10 Years | -0.1% | -18,199 | -0.1% | $226.50 | $206.40 |
| 40: Return to Alternative Depreciation Schedule (ADS) | -0.6% | -108,511 | -0.5% | $603.40 | $421.25 |
| 41: Repeal Last-in, First-out (LIFO) Inventory Accounting | < -0.05% | -4,926 | < -0.05% | $60.20 | $56.04 |
| 42: Eliminate 1031 Like-Kind Exchanges | < -0.05% | -2,500 | < -0.05% | $13.84 | $13.63 |
| 43: Enact a 5% Value Added Tax | -1.2% | -930,686 | -4.0% | $6,091.67 | $5,223.56 |
| 44: Return the Estate Tax to Clinton-era Levels | -0.2% | -41,415 | -0.2% | $887.40 | $823.90 |
| 45: Eliminate Step-Up in Basis on Capital Gains | -0.1% | -8,489 | -0.1% | $124.18 | $118.46 |
| 46: Lower the Estate and Gift Tax Exemption Amount to $2 Million | < -0.05% | -5,592 | < -0.05% | $337.20 | $332.10 |
| 47: Increase the Gas Tax by 15 Cents Per Gallon and Inflation Adjust Going Forward | -0.1% | -50,359 | -0.2% | $332.60 | $286.24 |
| 48: Increase the Gas Tax by 35 Cents Per Gallon and Inflation Adjust Going Forward | -0.1% | -103,204 | -0.5% | $758.34 | $653.12 |
| 49: Reinstate the Cadillac Tax | < -0.05% | -37,800 | -0.2% | $247.72 | $215.55 |
| 50: Institute a Carbon Tax ($25 per Ton) | -0.2% | -148,859 | -0.7% | $998.87 | $860.50 |
| 51: Double EITC for Workers without Qualifying Children to $1,075 | < +0.05% | 6,035 | < +0.05% | -$35.52 | -$34.32 |
| 52: Reform the EITC for Married and Unmarried Workers, with and without Children | +0.1% | 96,644 | 0% | -$164.04 | -$105.71 |
| 53: Make Child Tax Credit Fully Refundable | < -0.05% | -15,328 | < -0.05% | -$72.30 | -$92.29 |
| 54: Make Child Tax Credit First Dollar Refundable | < -0.05% | -14,698 | < -0.05% | -$37.00 | -$43.90 |
| 55: Restructure the Child Tax Credit and Earned Income Tax Credit | +0.1% | 86,986 | < -0.05% | -$1,414.40 | -$1,379.00 |
| 56: Increase the Standard Deduction by 25% for All Filing Groups | < +0.05% | 69,883 | < -0.05% | -$622.66 | -$558.51 |
| 57: Restore the Personal Exemption | 0% | 0 | 0% | -$774.40 | -$660.45 |
| 58: Make Charitable Deduction "Above-the-Line" | < -0.05% | 15,697 | < -0.05% | -$289.30 | -$285.42 |
| 59: Tax Individual Incomes at a Flat 30% Rate (20% Flat Tax) | +1.3% | 1,211,491 | +0.3% | $1,148.80 | $1,625.93 |
| 60: Eliminate the Individual Alternative Minimum Tax | -0.1% | -113,171 | 0% | -$395.08 | -$436.17 |
| 61: Permanently Eliminate the Pease Limitation on Itemized Deductions | +0.1% | 77,730 | < +0.05% | -$160.83 | -$125.58 |
| 62: Make the 2017 Tax Law Standard Deduction, Personal Exemption, and CTC Permanent | -0.3% | -167,663 | -0.1% | $154.91 | $71.62 |
| 63: Implement $2,500 per Year Roth-style Universal Savings Accounts | 0% | 748 | 0% | -$15.08 | -$14.99 |
| 64: Eliminate the Net Investment Income Tax | < +0.05% | 8,781 | < +0.05% | -$275.07 | -$271.17 |
| 65: Enact Full Expensing for All Capital Investment | +2.3% | 441,769 | +1.9% | -$1,707.41 | -$1,166.66 |
| 66: Maintain Limitation on Interest Deductibility at 30 Percent of EBITDA | +0.1% | 18,832 | +0.1% | -$65.84 | -$45.90 |
| 67: Eliminate Various Business Tax Expenditures | -0.2% | -33,000 | -0.2% | $985.60 | $926.43 |
| 68: Replace the Corporate Income Tax with a 5 Percent Value-Added Tax (VAT) | +0.4% | 122,000 | +0.5% | $2,772.55 | $2,349.32 |
| 69: Eliminate Estate and Gift Taxes | +0.1% | 21,930 | +0.1% | -$293.90 | -$267.10 |
| 70: Increase Alcohol Excise Taxes to $16 per Proof Gallon and Index to Inflation | < -0.05% | -22,718 | -0.1% | $136.07 | $129.14 |
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