State and Local Fiscal Policy
Thinking Outside the Box?
Edited by Sally Wallace
Extract
Sally Wallace INTRODUCTION Since 1985, there have been numerous calls for flat taxes in the US and abroad. These calls have led to substantial rethinking of income taxes for the first time in many years. Flat tax reforms often call for an income tax system that limits deductions, exemptions and credits, and imposes one statutory tax rate. In some countries, flat tax reforms have integrated the corporate and individual income taxes. Flat tax reforms have simplified the structure of the income tax in countries such as Jamaica, Estonia, Russia and Lithuania. While the flat rate income tax reforms of Jamaica, Estonia, Russia and other countries have their merits, they are aimed at simplifying the tax system through elimination of various exemptions and deductions, and by simplifying the tax rate structure. They do not fundamentally change the base of taxation. There is, however, another type of income tax reform (which, unluckily, is also referred to as flat tax reform) that stems from a long-standing debate over the merits of a general consumption tax versus a broad-based income tax. This kind of reform fundamentally changes the base of taxation from realized income (wages, realized capital gains, interest income and the like) to consumption. It may be accomplished using a reporting mechanism that is similar to an income tax, but one which exempts savings from taxation. In the United States, there have been numerous consumption tax proposals at the federal government level. Hall and Rabushka (1983, 1995) proposed a direct consumption tax for...
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