Special Report No. 52
Executive Summary Representative Dick Armey (R-Texas) and his Senate co-sponsor Richard Shelby (R-Ala.) have formally introduced legislation that proposes to replace the current 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. system with a “flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. .” As proposed, the plan would set the tax rate at 20 percent for two years and then reduce the rate to 17 percent in the third year of enactment.
If the Armey-Shelby plan were enacted in 1996, it could reduce the tax-related burden for the average taxpayer by an estimated 13 .5 percent (from $7,800 to $6,740) and increase federal tax revenues by almost $5 billion. The reduced burden comes from the taxpayer savings that would result from reducing the high paperwork cost associated with the income tax.
The Tax Foundation estimates that the cost of complying with the federal income tax system will cost individuals and businesses about $140 billion in 1996. This high cost is tantamount to a tax surcharge on all taxpayers. A major element of the tax reform debate is the desire for a more simple tax system, and the reduced compliance costs that will accompany greater simplicity. The Armey-Shelby flat tax could reduce the $140 billion surcharge by 94 percent to $8.4 billion.Share