Thursday, January 26, 2012
A sweeping reform of the federal tax system has been proposed by Michael J. Graetz, Professor Emeritus of Law at Yale University and currently Professor of Law at Columbia University. The proposal is intended to simplify the tax system, improve economic incentives, and maintain fairness. To achieve these goals, Graetz’s plan would remove most current taxpayers from the income tax rolls, reform the corporate income tax, significantly reduce the top individual and corporate rates, and adopt a value-added tax (VAT) as the principal tax paid by most Americans. Payroll, estate and gift taxes would not change.
This paper describes the Graetz proposal in detail and analyzes its effects on federal revenues, spending and the deficit, the distribution of the tax burden, marginal tax rates and other incentives, and the tax system’s administrative and compliance costs. The proposal is analyzed relative to the Tax Policy Center Current Policy Baseline, which assumes permanent extension of the 2001, 2003, and 2010 tax cuts (except for the one-year payroll tax reduction), continuation of the 2011 AMT exemption amounts (indexed for inflation) and extension of the 2011 estate tax exemption of $5 million (indexed for inflation) and top rate of 35%. The analysis assumes the proposal will be effective in 2015 and be deficit neutral. ...
TPC found that fully implementing a VAT in 2015, with a corporate income tax rate of 15%, that leaves both the deficit and the distribution of the tax burden among income groups substantially unchanged would require:
- A broad-based VAT with a rate of 12.3%
- A marginal income tax rate of 16% for single filers making between $50,000 and $100,000 and joint filers with incomes between $100,000 and $200,000
- A marginal income tax rate of 25.5% for single filers earning more than $100,000 and joint filers with income greater than $200,000